Resale HDB flats prices may stabilize

Prices of resale HDB flats have increased by 30 per cent over the past two-and-a-half years. With the new stock of build-to-order HDB flats, will prices drop or rise even higher the resale flat market becomes more competitive?

Over the last nine quarters, resale prices for Housing & Development Board (HDB) flats have increased by some 30 per cent, averaging 3.3 per cent per quarter. In Q2, HDB’s resale price index reached an all-time high of 180.3 points. After moderating for two quarters, the median cash-over-valuation (COV) for various flat types in all estates rebounded in Q2, and we are likely to see this trend continue for the rest of the year.

This phenomenon of peaking resale prices, escalating COVs and moderating resale transaction volume is happening at a time when the HDB is putting up for sale its largest stock of Build-to-Order (BTO) flats in recent years. This year, HDB will launch a total of 25,000 new flats, and this is almost 50 per cent more than last year’s 16,700 units. By year-end, HDB would have launched a total of 91,500 units of new flats since 2006, and it is planning to launch another 25,000 units next year.

Artist's impression of Waterway Terraces II HDB BTO flats in Punggol. Image courtesy of HDB.

Supply crunch

While there may not be a shortage of new flats, there seems to be a supply crunch in the resale market, and this may well be the reason for the spike in HDB resale flat prices and their COVs. Some of the possible reasons for the supply crunch are:

Private property prices, especially those of mass market condominiums, have increased beyond the reach of many HDB dwellers who had intended to upgrade. It is not uncommon for three-bedroom apartments in suburban condominium projects to go for above $1 million. This may be a stretch for many HDB dwellers. As such, many of them have postponed their upgrading plans in the interim.
Some 3-bedroom units at Miltonia Residences condominium in Yishun are going for above $1million.
There is a buoyant HDB subletting market, as economic growth and the tight labour market over the last two years have led to increased rental demand and therefore rents. In the past, those who had upgraded to private properties usually sold their HDB flats so that they did not have to service dual mortgages. However, as they can now easily sublet their flats for an attractive return of some 6-8 per cent, many have kept their flats even as they moved over to private property. The rent collected from subletting the flats could well defray the monthly mortgage payments.
Many who upgraded to private property do not want to sell their HDB flats because if they want to buy flats again, they would have to sell their private property. As part of the cooling measures implemented last August, private property owners who buy resale flats will have to sell their private homes within six months of taking possession of the flats. Private homes include overseas residential properties. So, they might as well rent out their flats while they move over to private properties.
You can rent a 3-room HDB flat in Yishun for $1,800 per month. Is that reason enough for you to hold on to your HDB flat?
For home owners servicing existing housing loans and are planning to change dwellings, they are eligible only for a bank loan with a 60 per cent loan-to-value limit should they buy before they sell. Though they would eventually end up with one HDB flat and one housing loan, this cooling measure makes it very inconvenient for genuine home sellers to change properties. Many have thus put off their plans to relocate. The net effect is a supply shortage as fewer flats are being put onto the resale market. As demand for resale flats from upgraders, downgraders, permanent residents (PRs) and private property owners who have cashed out remains strong, resale prices and COVs have continued their upward climb.

The effects of the supply crunch have been further amplified by the irrational mindset among sellers and buyers that have somewhat become ‘market practice’. Supposedly done on a willing seller, willing buyer basis, almost all resale transactions have been negotiated purely on the COV rather than on the price.

A typical resale process starts with the sellers authorising a market valuation for their flat. The valuation report, stating the current market value of the flat, would have taken into account the flat’s condition and recent comparable transactions. However, the sellers would use the valuation as a base to set the asking COV. Interested buyers would then negotiate on the COV.

Should the Median COV prices of resale HDB flats stay accessible to all? Image courtesy of HDB.

The closing price, including the COV, would then be a transaction on which the next valuation report would rely on. Though the next valuation done would inevitably be higher, the next set of sellers and buyers would again be negotiating on the COV rather than price. This irrational trading behaviour has been driving resale prices over the last few years. Many have expressed concern, but it is not feasible to impose any official ban on COVs as this may drive such practices ‘under the table’, causing other undesirable effects. Perhaps it would take a downturn in the HDB resale market to highlight the irrationality of this practice.

Looking ahead, HDB can help by providing current transaction information, and perhaps consider removing the quarterly COV reference table so that sellers and buyers can turn their attention back to negotiating prices, not COVs. The private property market does not have a COV reference table, so why should the HDB market?

Integrated approach

On Aug 15, HDB announced several initiatives to offer more affordable housing options:

Increase in flat supply for first-time home buyers. HDB will be launching 5,500 BTO flats in September and 4,000 BTO flats in November, in a variety of locations such as Punggol, Sengkang, Hougang, Yishun and Jurong East. By conducting larger launches, new flat buyers will have more housing choices. These two launches will bring HDB’s total BTO supply this year to 25,000 flats. Also, HDB will complement the September BTO launch with the launch of at least 2,500 flats under a Sale of Balance Flats Exercise. For next year, HDB will launch another 25,000 BTO flats. Besides new towns such as Punggol, they will be building flats in mature estatessuch as Kallang/Whampoa and Tampines.
Tampines HDB estate will have more new BTO flats joining their ranks in the next couple of years.
Higher income ceilings for citizen households. With effect from Aug 15, HDB raised the monthly income ceiling from $8,000 to $10,000 for citizen households who are purchasing new flats from HDB, purchasing resale flats with the CPF housing grant, or applying for a HDB loan for the purchase of a new or resale flat. However, there was no change to the Design, Build and Sell Scheme income ceiling of $10,000 as the scheme is currently under review and the income ceiling was raised just a year ago. For executive condominiums (ECs), the monthly income ceiling for eligible buyers has increased from $10,000 to $12,000. Eligible first-timer households purchasing ECs will also receive a tiered CPF housing grant. The various changes in income ceilings will give more families the option to choose from a variety of housing. It also facilitates upgrading for existing HDB flat owners.
Higher income ceiling for single citizens. The monthly income ceiling for single citizens buying up to a five-room resale flat under the Single Singapore Citizen Scheme, with a CPF housing grant and HDB loan, has also been increased from $3,000 to $5,000. The CPF housing grant has been increased from $11,000 to $15,000. For single citizens buying a resale flatunder the Joint Singles Scheme as well as those who buy a resale flat with their parents, the monthly income ceiling has been increased from $8,000 to $10,000.
Besides schemes for singles and the elderly, HDB also has a Special Housing Grant for low-income families

Impact on resale market

These measures have just been announced and it is still early days to see their full impact on the resale market. We can expect COVs to cool over time, and this may help to moderate the rate of price increases we are seeing these days. However, as the supply crunch in the resale market still exists, it will take some time for HDB’s new flat supply to reach the market before it will cool. The resale market will still be supported by first-timers and second-timers who need immediate housing, singles, permanent residents as well as private property owners who cashed out of their private homes and are switching to public housing. Although with more new flats, some resale buyers will swing over, we do not expect an exodus. As such, COV transactions will still be there, unless we run into a recession.

Currently, the main threat to the property market is the potential softening of the economy arising from a deterioration in external conditions. If there is a significant slowdown, we may expect demand to moderate, leading to an easing of COVs and resale prices. For now, resale HDB prices will still increase marginally, but as more supply comes on, the overall housing situation should stabilise.

The writer is key executive officer at ERA Realty Network Pte Ltd.

Editor’s Commentary:
The cooling measures have made it harder to flip properties, but have they been more a hindrance than help for those who are looking to downgrade or change property types? How do the prices of resale HDB flats also affect the way property change hands in Singapore’s small but expensive property market?