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Published March 26, 2012

HDB upgraders between a rock and a hard place

Falling cash-over-valuation makes it harder for them to upgrade to private housing

By MINDY TAN


(SINGAPORE) With cash-over-valuation (COV) figures - the cash premium paid by buyers over an HDB flat's valuation - continuing to fall amid a slowing resale market, HDB upgraders are facing an increasingly uphill task of moving into the private market.

While HDB has stopped providing overall COV figures for resale flats, data from PropNex Realty, based on the firm's February resale deals, shows that median COVs have continued to fall in the range of $3,000 to $7,000, except for three-room units.

Based on the firm's January resale deals, median COV across all the flat types dipped by between $3,000 and $6,000. The median COV across all flat types is now about $25,000, compared to $35,000 in the fourth quarter of last year, industry players estimate.

The lower COVs have made it harder for people upgrading to private property since they will have less cash on hand, noted Chua Chor Hoon, head of Asia Pacific Research at DTZ. HBD upgraders constitute an important source of demand for mass market private projects.

The fall in COVs across the island - except for five-room and executive units in a handful of towns - is a harbinger of a weaker HDB resale market in 2012, said Ms Chua.

Property watchers said a combination of demand and supply side factors is reining in the HBD resale market by keeping both buyers and sellers on the sidelines.

Png Poh Soon, Knight Frank's head of consultancy and research, added: 'Prices of resale flats have appreciated significantly. For existing owners, there is no reason for them to sell at a lower price as private properties are not cheap either. To upgrade and avoid taking excessive financial burden, many need to sell off their existing HDB.'

'(On the other hand) buyers with financial constraints will turn to BTOs (build-to-order flats) because it is cheaper (while) those who can afford ECs (executive condominiums) believe they are getting a better deal as the price quantum between some resale flats and ECs are very close.'

'Existing HDB owners looking to sell their units are therefore caught in a bind... Owners of resale units asking for higher prices may have to market their units longer so that they are able to attract the 'right' type of buyers. So long as private market prices continue to hold, HDB resale prices should remain stable. If the former increases further, HDB resale prices will also escalate.'

That more alternatives - in the form of the ramp-up in supply of BTO flats and ECs - are now available to buyers has also played a part in lowering demand.

ECs, a public-private hybrid, which are sold with condominium-like facilities, may be particularly attractive to buyers, given that the price quantum between some resale flats and ECs is only between 10 and 15 per cent, pointed out Knight Frank's Mr Png.

Various policy changes have further sweetened the allure of ECs. For instance, the monthly household income ceiling was increased from $10,000 to $12,000, making it easier for first-timer households to take the EC route, noted ERA Realty key executive officer Eugene Lim, in a report issued in February.

Further, Minister for National Development Khaw Boon Wan's promise to modify existing balloting rules for second-time buyers looking for BTO flats has further encouraged many to hold back their move into the resale market, he added.

'Should the new rules substantially increase the number of BTO flats made available to second-time buyers, the HDB resale market may be greatly impacted since these buyers form the bulk of the resale market,' said ERA's Mr Lim.

'When that happens, demand for resale flats will come only from families that have immediate housing needs, those downgrading from private properties, and singles and permanent residents who do not qualify to buy new HDB flats.'

In addition, as part of the cooling measures implemented in August 2010, owners of private property - including overseas residential properties - have to sell their private homes within six months of taking possession of the HDB flat should they purchase HDB resale flats. This is another factor dampening demand.

And the price gap between new private properties - with the accompanying attractive discounts and sweeteners offered by developers - and HDB units may not be as big as it may seem, noted Mr Png.

'While psf prices have increased for private homes, the quantum difference between HDB resale and private units may not be excessively wide. This is because the size of new private homes are shrinking. Potential resale home buyers may prefer new private properties than older HDB resale flats,' he said.

According to Ong Kah Seng, director at R'ST Research, about one in seven homes sold by developers last year were shoebox apartments (up to 500 sq ft). Buyers snapped up a record 2,037 such units last year. Even as demand is being siphoned from the HDB resale market, recent policy changes, including the minimum occupation period of five years and the lowering of the loan-to-value limit to 60 per cent, alongside low average completion rates of new HDB flats between 2002 and 2010, have resulted in a general supply shortage of resale flats.

Supported by a buoyant rental market, more HDB owners also prefer to rent out their HDB units rather than sell it, since they would have to first sell any private property, if they should wish to buy a HDB flat again, after upgrading.

'Those who are not able to afford to purchase an additional private property will prefer status quo, and sit on a 'paper gain',' suggested Mr Ong. 'Moreover, the longer term price outlook for HDB resale flats are on the uptrend, particularly those in mature estates which have good property fundamentals.'

In addition, the increase in BTO flats, which mainly helps first-timers, cannot assuage the main bulk of demand for HDB resale flats from second-timers, singles, private property owners, and permanent residents, which remains high, said PropNex Realty's chief executive, Mohamed Ismail.

According to percentage breakdown given by MND, first-timers constitute 23 per cent of total demand. 'Moreover, BTO flats take three years to be completed, some newly married couples would still prefer to buy a HDB resale flat,' Mr Mohamed added.

In 2011, resale HDB transactions yielded only 24,633 units, a 24 per cent drop from 2010 figures. On the other hand, HDB resale flat prices hit a record high, after posting a 10.7 per cent increase in 2011. Prices increases are expected now to slow.