A REAL OPTION PRICING APPROACH TO ANALYSE THE HOUSING & DEVELOPMENT BOARD'S MAIN UPGRADING PROGRAMME (MUP) POLICY

Abstract

The Main Upgrading Programme (MUP) is a bold public welfare exercise undertaken by the Housing Development Board (HDB) since 1990s. This heavily subsidised policy aims to enhance the social and economic value of the public housing. It benefits the HDB households at the older HDB housing estates in term of the asset value and quality living environment. A HDB flat owner whose precincts are selected to be upgraded under the MUP is considered to have a call option to upgrade his flat as the option to upgrade is valuable with an opportunity to command a higher resale price in the HDB resale market. This study attempts to estimate the option premiums for upgrading, by ultilising both binomial option pricing model and Samuelson-McKean model. The embedded real option values under the MUP policy are estimated at S$ 10,300 and S$2,000 for a 3-Room HDB flat and a 4-Room HDB flat respectively. It is also found that the government subsidies have a significant impact on the option values. The results may provide HDB flat owner with better assessment of the cost and gain involved and his hold-unlock position.