Soft landing for HDB resale market

By Daryl Chin, The Straits Times, 7 Sep 2013

IS A soft landing in sight for the Housing Board resale market, with the latest round of property measures?

Analysts are saying: Yes - finally. Yesterday, the Singapore Real Estate Exchange (SRX) announced that the overall median cash over valuation hit a four-year low of $18,000 last month.

This is the cash premium buyers pay above the valuation price of a flat.

Overall median HDB resale prices also slipped 0.7 per cent last month, the first time prices have dropped for four consecutive months since January 2006.

The HDB resale market proved quite resistant to six rounds of property cooling measures starting from 2009 to October last year - until this year's curbs.

Earlier cooling measures helped reduce volumes of transactions, but HDB resale prices continued to hit new highs.

Volumes dropped from 37,205 resale deals for the whole of 2009 to just 9,570 in the first two quarters of this year, the lowest since 1997.

According to SRX data, however, median HDB resale prices rose from $315,000 in January 2009 to $460,000 in January this year.

The HDB resale price index kept rising. From 138.3 points in the first quarter of 2009, it hit a record high of 206.6 points in the second quarter of this year.

But the pace of growth at least has slowed, in response to measures introduced by the Monetary Authority of Singapore (MAS).

The 0.5 per cent increase in the resale price index in the second quarter of this year was the lowest since the first quarter of 2009.

In January, MAS tightened the loan eligibility of buyers by capping the mortgage servicing ratio at 30 per cent and 35 per cent for bank loans and loans from the HDB respectively.

These percentages refer to the proportion of a buyer's gross monthly income that can be used for loan repayments.

Then, just last month, the mortgage service ratio for HDB loans was tightened to bring it into line with loans from private banks.

In addition, maximum loan tenures for HDB loans were reduced from 30 years to 25 years, and from 35 years to 30 years for private bank loans.

Permanent residents were also required to wait for three years after getting their residency to be eligible to buy an HDB resale flat. Previously, there was no wait.

These moves were in addition to the introduction in June of a total debt servicing ratio for property loans.

This capped the total debt obligations of a borrower at 60 per cent of his gross monthly income if he wanted a mortgage.

Unlike the mortgage servicing ratio, this ratio included all debts being serviced.

As a result of these latest measures, the property market is expected to cool even further in the coming months.

National Development Minister Khaw Boon Wan said last month that the new measures to curb loans were meant to help stabilise and "restore the balance in the HDB market".

To draw demand away from the HDB resale market, the Government has also expanded its Special Housing Grants to households earning less than $6,500 a month.

This is on top of earlier moves to ramp up its building programme and delink new flat prices from resale ones.

About 83 per cent of resident households live in HDB flats.

In an earlier interview, Mr Khaw said: "You can do a vertical hard landing - a crash. But we want a soft landing and a long runway which, in this case, means time. So you need more time, and therefore you need multiple measures over time."

A soft landing is necessary because some buyers have been taking advantage of low interest rates, and putting themselves at considerable financial risk, in an effort to purchase a pricey flat.

The bull run in housing prices has led to flats being less affordable across most income groups in recent years, said National University of Singapore economist Tilak Abeysinghe.

He has written a paper with fellow researcher Gu Jiaying that charts housing affordability based on the ratio of median lifetime income to average HDB resale prices.

In 2006, a median priced HDB four-room resale unit ($246,000) was affordable to the bottom 20 per cent of income earners. However, the same unit last year (at about $460,000) is no longer affordable to this group.

The research paper says this can be attributed to the differential increase between housing prices and incomes.

Median housing prices have gone up about 11 per cent a year since 2006, outpacing annual average growth in median lifetime income of 4 per cent.

However, the Government's moves on the housing market this year have had an impact, with affordability indicators flattening out, said Associate Professor Tilak, noting that the median price for four-room flats is now about $450,000.

Experts say larger flats such as five-room units are likely to see less demand. This is because borrowing restrictions will eliminate buyers who normally go for larger flats with the intention of renting out spare rooms for added income.

PropNex chief executive Mohamed Ismail expects a price drop of up to 10 per cent for bigger flats.

All in all, these moves show the continued determination of the Government to discourage excessive consumption, particularly when it comes to basic housing needs, say Citigroup analysts Adrian Chua and Ivan K. Lim.

A weaker HDB resale market, they add, will also affect the private resale sector as HDB upgraders typically go for mass market condo units.

SLP International's head of research Nicholas Mak points out that it is not in the Government's best interest to let the resale market fall too drastically.

"A flat is typically a household's largest asset. If market conditions are good and property prices still go down severely, home owners will be stuck."

Resale flats' median COV at 4-year low

By Charissa Yong, The Straits Times, 7 Sep 2013

THE HDB resale market cooled further last month as cash premiums payable by buyers fell to a four-year low.

Prices have seen the longest downward slide in seven years, amid low transaction volumes that showed no signs of revival.

Overall median cash premiums for resale flats dropped $2,000 to $18,000 last month. This was the lowest since July 2009, when the median cash-over-valuation (COV) was $10,000, according to Singapore Real Estate Exchange estimates released yesterday.

Median premiums have halved since they peaked at $35,000 in January. Resale prices also slipped 0.7 per cent last month, a fourth consecutive monthly drop. This is the first time since January 2006 that prices have fallen for four straight months.

These are all fallouts of the January curbs on the proportion of income buyers can use to repay their mortgage, said analysts.

"That started the ball rolling," said Mr Chris Koh, director of property firm Chris International.

Singles became eligible to buy new HDB flats too, drawing some away from resale ones.

Bigger homes in less central towns fetched lower COVs. Sellers are worried that the COV will continue to dip "if they do not lock in their buyers now", said ERA key executive officer Eugene Lim. Punggol's executive flats, of which three were sold last month, went for a median $13,000 below valuation, the lowest by region.

But executive flats in popular estates like Bishan and Queenstown still commanded high premiums. The highest COV was for Bishan flats, which fetched a median premium of $120,000.

However, resale transactions stayed low. A total of 1,280 flats were sold last month, similar to July's 1,286, but a 29 per cent drop from last year.

Prices of private non-landed resale homes inched up 1.5 per cent last month after a 0.5 per cent drop the month before.

National Development Minister Khaw Boon Wan said yesterday on his blog that HDB completed 9,000 new flats this year, and is on track to deliver this year's promised 13,600 units. The 2014 target is 28,000.

VoicesTODAY asks: Will you be able to afford the home you want? - 5 Sep 2013

ECs within easier reach than resale five-room flats?

By Ku Swee Yong, Published TODAY, 5 Sep 2013

Details of new Housing and Development Board (HDB) schemes to help lower- and lower-middle-income Singaporean families own their homes were unveiled on Aug 27, following the broad measures announced at the National Day Rally.

The schemes include additional grants for first-time buyers for up to four-room flats and a step-up grant for those upgrading from two-room to three-room flats. It is heartening to see the caring thought behind these schemes.

Measures were also announced to stabilise HDB resale prices further. Build-to-Order (BTO) prices have been kept steady since the 2011 General Election, but resale prices have continued to rise by about 20 per cent in the last two years and the National Development Minister had indicated that he would like to instil more prudence in home buyers with regard to their household debt.

With the latest measures, new loans taken from the HDB for BTOs or resale flats will see the repayment period reduced from 30 to 25 years, and the Mortgage Servicing Ratio (MSR) limit reduced from 35 per cent to 30 per cent. HDB buyers also need to satisfy the 60 per cent Total Debt Service Ratio (TDSR) limit.

For a young high-flying couple whose household income is S$8,000 and are buying their first BTO flat, a 25-year loan from the HDB at 30 per cent MSR (S$2,400 a month) would allow the couple to borrow S$529,000. This means that almost all five-room BTOs, including many in matured estates, are within their reach so long as they have sufficient savings for the 10 per cent downpayment.

However, for this same couple, a resale five-room flat that costs, say, S$800,000 would require at least S$270,000 to be paid upfront with a S$529,000 loan. This upfront payment would be quite a stretch as they have yet to accumulate much in their CPF.

EC: TWICE THE LOAN QUANTUM

But let us look at another scenario. A couple with S$10,000 income (the maximum that qualifies them for HDB BTOs) can afford to take a loan of S$661,000 over 25 years at 30 per cent MSR. With this loan, they can also afford many types of resale HDB flats, especially if they are second-timers who have already built up equity in their current HDB flat.

This same couple — who would be considered part of the nation’s “sandwiched class” — might also consider a new Executive Condominium (EC) where only the rules of TDSR apply.

TDSR takes into account other financial liabilities such as car loans, student loans, insurance payments, credit overdraft and so on. A maximum of 60 per cent of household income can be used to repay a mortgage for a new home purchase, over a maximum period of 30 years.

If they buy a brand-new, taxpayer-subsidised EC, they can borrow S$1.33 million over 30 years (before the borrowers reach their weighted average age of 65) if they have no other liabilities such as car loans. This loan quantum is twice the S$661,000 they can borrow from the HDB for a flat.

This couple could, therefore, buy an EC of over S$1.6 million if they are able to pool together cash and CPF of around S$370,000 (20 per cent downpayment and about 3 per cent normal stamp duty).

A curious fact: EC buyers are allowed to exclude their existing home loan commitment from the TDSR calculations if their current property is sold within six months of the ECs getting Temporary Occupation Permit. However, under the same scenario where the couple has no other liabilities except for their existing home loan, they will not be able to afford a private residential unit at S$1.6 million — their current home loan would have to be taken into account in the TDSR calculations.

In short, for families in the higher income range of S$8,000 to S$12,000 a month, purchasing a new EC is a really attractive proposition because of the HDB loan restrictions on the one hand, and the TDSR restrictions on purchasing private properties on the other.

In fact, it may be easier to stretch one’s upfront payment to buy a new EC with a larger loan quantum than, say, a S$800,000 resale five-room flat in prime estates such as Dawson, Bukit Merah or Marine Parade.

WHERE DEMAND WILL BE

Looking ahead, as home buyers do their sums and compare the alternatives available, we can expect the following. One, demand for three-room and four-room flats will increase at the expense of larger flats, as buyers are restricted on their loan quantums due to tighter MSR. As there is a shortage of supply of resale three-room flats, we might expect Cash-over-Valuation (CoV) to increase in this category. Demand will also favour BTOs as they are cheaper, with more grants available and higher borrowing limit, than resale flats.

Two, demand for five-room HDB resale flats will decline, particularly in the prime estates, where current resale prices are in excess of S$800,000. Only buyers with a lot of upfront equity will have the means to purchase these flats. Expect CoVs, and in particular V (Valuation), to drop.

Three, demand for ECs will increase especially for HDB upgraders who are considering whether to: (a) upgrade to a prime resale flat under tighter loan restrictions, or (b) upgrade to a brand-new EC which allows higher loan quantums.

The combination of the curbs on HDB loans and TDSR on private properties has aligned the winds favourably for ECs to be the most compelling residential category for HDB upgraders and middle-income new home buyers.

ECs are at the outset subsidised via lower land cost. And after 10 years of living in them, ECs probably have better profit potential following privatisation and price-normalisation with private condominiums nearby. So, given all this in total — the unique loan scenario, the first-timer grant, the resale potential — are ECs more than ever a privileged taxpayer-subsidised housing class?

Ku Swee Yong is a property agent and CEO of real estate agency International Property Advisor. He is the author of two best-sellers: Building Your Real Estate Riches and Real Estate Riches.