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Reason Why HDB Resale Flat Prices Will Not Fall Any Time Soon

April 13th, 2012 · No Comments

Why HDB resale flat prices will not fall any time soon

When property agency bosses at a seminar early this month envisaged a 3 to 5 per cent drop in the prices of Housing and Development Board (HDB) resale flats for this year, probably declining up to 10 per cent should economic conditions get worse, it impelled a few potential Singapore property buyers to ask  whether this news  was too good to be true.

The prediction was strengthen by data make public a week later by three major agencies specializing in HDB resale flats. It showed that the overall median cash-over-valuation (COV) amount for all flat types based on last month’s deals has fell in the range of S$4,700 to S$8,000 or by some 20 to 30 per cent in most flat types.

COV is the amount that the buyer of a HDB resale flat pays above the flat’s valuation.

It would be foolish to call a price correction based only on the lessening trend of COV amounts as it has been revealed to widen and narrow several times at different points of the present up-cycle. It may very well expand within the next few months as the COV amounts are not only influenced by demand and supply factors but only by the speed at which the market moves and by other non-market factors.

Even though no concrete numbers were given, main factors quoted for the downward pressure on prices were reduced demand from the falling numbers of foreigners entering Singapore – which naturally contributes to strong demand for rental and resale flats – and the record supply of new flats.

A supply crunch

My argument has always been that the present high resale flat prices have been supported not so much as by demand but by a supply crunch.

The problem of heightened investment demand has already been taken care of by cooling measures imposed on Aug 30, 2010. Under the new rules, those buying a HDB resale flat must sell their private property – including those properties abroad – within a period of six months from purchase. This was to make certain that HDB flats go to owner occupiers first and are not viewed as an investment. Then, an average one in 10 resale flat-buyers own private property.

The record number of new BTO flats launched and the promise of even more has also lessened demand from first-timers a great deal. While resale volumes have dropped by a quarter since then, prices have remained persistently flexible.

Normally, the major supply of new resale flats which matters comes from households who have resided in their new flats for between five (the minimum occupation period is five years) and 10 years. These are the up graders to the private housing market. Ten years is a good measure for households to make out whether they can afford and have the resources to upgrade to a private home. If by the 10th year they have failed to  upgrade, they are doubtless less likely to do so.

Then there are those who upgrade within the HDB housing market. Their numbers are less significant as they do not add to the net supply, contributing to both supply and demand.

If you studied HDB statistics over the years, you will discover that the number of flats constructed for the past  five years between 2003 and 2007 is about three quarters less than the number built over the preceding five-year period between 1998 and 2002.

This means, that on average, there is 75 per cent less new resale supply this year and for the year going back up to 2008. No matter how much you try to discount these numbers, the turn down is substantial and very vital.

Going forward, the numbers built in the next five years from 2008 onwards is not much better until possibly 2017. This is because new supply was ramped only in 2010. This takes into account the two-year construction period and the minimum five-year occupation period.

What about demand?

You can only siphon off so much demand towards new flats. There will always be a core demand consisting PRs, down graders from the private housing market and first timers who require their flats immediately as well as those who are – for personal reasons– fixed in their choice of flat location. In fact, this core demand can only grow should there be more thriving collective sale of private housing developments.

Latest feedback also demonstrate more and more upgraders are keeping their HDB flats – which lessen resale flat supply further – even as they re-locate to their private homes. They feel that if they have enough money to keep them, they will do so as it is not easy to re-enter the HDB resale market once it is sold.

In the meantime, they intend to use the rental income from leasing their resale flats to pay off part of the monthly mortgage of their private property. Most think this is a win-win situation for them.

My conclusion: In the absence of a harsh recession, it is hard to see resale flat prices correcting this year.

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