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More active resale HDB market in the making

Transaction volumes are set to increase but prices are unlikely to spike with MSR in place.

By Eugene Lim SEAH YAO HUI

Oct 22, 2015


WITH an estimated 82 per cent of Singapore's resident population living in more than a million Housing Development Board (HDB) flats, the performance of the HDB resale market naturally becomes a concern to the majority of the population.

Since peaking more than two years ago, prices of HDB resale flats have been decreasing steadily.

Based on the board's third quarter flash estimate, the HDB resale price index has eased by a total of 9.9 per cent over nine straight quarters - from a high of 149.4 in Q2 2013 to 134.6.

In Q3 2015 itself, the index dipped 0.3 per cent from the previous quarter, marking the smallest decrease in the nine quarters of price corrections.

A rosier picture has emerged on the transactions front, with a 27.8 per cent increase in the number of resale flat applications to 5,286 in Q2 2015 from 4,135 in the preceding quarter. Even when compared to the same period last year, there was a marked 20.4 per cent increase in the number of transactions from 4,389 in Q2 2014. However, this is a far cry from the numbers recorded in 2009, when transaction volumes used to hit more than 10,000 units a quarter.

A cool resale market

A combination of the following demand and supply side factors has led to the current state of the resale market.

The mortgage servicing ratio (MSR) introduced in 2013 has limited a buyer's monthly mortgage payments to 30 per cent of his income. This effectively restricts the maximum loan quantum a purchaser is able to obtain and thereby curtails his purchasing power. Prices therefore decrease as buyers can no longer afford to make as high offers as before.

HDB has also correspondingly ramped up the supply of Build To Order (BTO) flats since 2011, releasing more than 20,000 units a year. The upcoming launch in November will see about 7,000 BTO flats being offered concurrently with 5,000 balance flats. The intensive injection of new flats into the market in large quantities and in a variety of locations each time is aimed at keeping public housing prices affordable for those who are looking to purchase their first home from the HDB. With a higher success rate of attaining their homes via the HDB BTO programme, more home buyers, both first and second timers, have turned away from the HDB resale market; hence this has had an impact on resale prices and transactions.

New rules have been introduced for Singapore Permanent Residents looking to buy their first flat as well. All Singapore Permanent Residents have to pay a 5 per cent Additional Buyer's Stamp Duty on their first residential property, even if it is a HDB flat. In addition, new Singapore Permanent Residents have to wait for three years before they are allowed to buy a resale HDB flat, further dampening demand for resale flats.

New initiatives announced

At this year's National Day Rally, Prime Minister Lee Hsien Loong announced four major policy changes pertaining to public housing, among which two are particularly relevant to the HDB resale market.

First, the monthly household income ceiling for buyers of BTO flats was raised to S$12,000 from S$10,000 previously - with effect from Aug 24, 2015. The income ceiling for singles to purchase a 2-room BTO flat was correspondingly increased to S$6,000 from S$5,000. According to 2014 data from the Singapore Department of Statistics, with this increase, an additional 8.3 per cent or 99,600 households will now be eligible for a BTO flat.

The second major change is the introduction of the Proximity Housing Grant (PHG). Also effective from Aug 24, the Proximity Housing Grant is a one-time disbursement of S$20,000 to families who buy a resale flat within a 2-km radius of their parents or married child. A major difference from previous policies is that every Singaporean would be eligible for this grant, regardless of whether they have previously received housing subsidies, income, or ownership of private property.

Moving forward

The increase in income ceiling will have a positive impact for those who are buying HDB resale flats with the housing grant and/or a loan from HDB. A higher income ceiling means more buyers will be eligible for the grant. In addition, more buyers can qualify for a larger loan quantum whilst still keeping within the 30 per cent MSR cap. Hence, this will help boost resale transaction volumes.

The Proximity Housing Grant is also likely to increase HDB resale volumes. First-timer families with a combined monthly household income of S$5,001 - S$12,000 are eligible for both the Proximity Housing Grant of S$20,000 and the Central Provident Fund Housing Grant of S$30,000, thus enjoying a total of S$50,000 in grants. On top of that, families earning S$5,000 or less also qualify for the Additional Housing Grant, further increasing the grant quantum received.

We envisage that many families will make use of Proximity Housing Grant to buy a resale flat that is near their parents' home. Resale HDB flats, especially those in mature estates, would probably be in greater demand as a result of this, as most parents are rooted in mature estates and reluctant to move out from there. With the enhanced grants, it would help ease the financial load of young families seeking homes in mature estates.

This would be a great boost for the resale HDB market and we may well expect volumes to increase in the coming months.

Prices are unlikely to spike as, from empirical observations, negotiations tend to focus more on prices that were transacted recently rather than future prices. This is because the buyer's objective is to be able to puchase at a price that is supported by valuation. Also, buyers will continue to be restricted by the MSR, which will probably not be lifted anytime soon. Thus, there is unlikely to be large price movements in the short term.

Buy or sell?

Sellers would want to sell their flats for as high a price as possible. In this period of suppressed prices, sellers might sometimes set a high asking price.

However, not only would this not benefit them, it might even backfire. Buyers would not be keen to make an offer for a flat that has a high asking price, which would increase the length of time the unit stays on the market. Thus, sellers should set realistic asking prices as, based on today's prices, despite the drop in price levels over the past nine quarters, most will not make a loss.

Potential home buyers, on the other hand, would probably wonder if prices are now low enough to purchase a public housing flat from the resale market.

However, there never is a "best time" to buy a property. The general trend for HDB resale flats has been an increase in prices over the years. With Singapore's limited land area and an ever increasing population, home prices inevitably rise over time. Short-term fluctuations might occur, such as during the Asian Financial Crisis, but prices will eventually increase. Sometimes, external economic shocks might not even affect resale prices negatively, as seen in the 2008 to 2010 period during the Global Financial Crisis; HDB resale flat prices climbed instead. Thus, there never really is a "best time" to buy a property; any time is a good time.

A more active resale HDB market in the making?

A more active resale HDB market is quite certainly in the making. With resale HDB prices more stable now, coupled with the ability to use the Proximity Housing Grant to defray the purchase price, we can expect increasingly more resale transactions going forward. We may see an overall resale transaction volume of around 20,000 units for the whole of 2015 - around 15 per cent more than last year's 17,318 units.

HDB subletting market continues to average more than 10,000 units a quarter

According to the Singapore Real Estate Exchange (SRX) flash report for August, the rental index for HDB flats dipped 0.6 per cent month-on-month in August. Since the peak in August 2013, rents have fallen by 6.6 per cent. This could be attributed to an increase in the number of flats being put up for subletting. Since Q2 2013, the number of flats approved for subletting has been steadily increasing and this has applied downward pressure on rentals.

Morever, a rental decline in the private residential market could also have contributed to depressing HDB subletting rentals. With more private apartments and condo units being completed, the supply glut is forcing landlords to cut rents to keep their tenants or secure new ones. With some of the older three-bedroom private apartments/condos in suburban locations being rented out at below S$3,000 per month, HDB rents are consequently pushed downwards.

Data from HDB showed that the number of rental transactions inched up 1.2 per cent to 10,510 in Q2 2015 from 10,385 in the previous quarter. Compared to the same period a year before, the increase was 24.3 per cent. As sublet HDB flats have been traditionally popular with their low rental quantum and highly accessible locations, it is expected that they are in demand. This is especially so for flats going for below S$2,500 a month, as there are no close substitutes for them. As companies tighten their pay package for foreigners, expatriates might find that HDB flats offer a much cheaper alternative to private apartments/condos with comparable levels of accessibility.

Also, as an increasing number of private residential developments are completed, the HDB upgraders would find themselves in a position of having to decide whether to sell their existing HDB flat. Due to its higher rental yield, owners would usually choose to rent out their HDB flats while occupying the private property, thus translating to a higher number of rental flats.

Leasing demand for HDB flats has remained steady for the past few quarters. However, a bumper crop of private homes slated for completion (a chunk of them in the suburbs) poses competition to the HDB rental market. This, in turn, will keep downward pressure on rentals as landlords strive to find suitable tenants. Consequently, rental volumes for HDB flats are expected to remain robust in the coming months.

As more HDB flats reach their five-year minimum occupation period and more private residential projects are completed, landlords will find themselves hard pressed to find a tenant. Some tips they could consider include:

Giving the flat a makeover;
Buying new household appliances if necessary; and
Keeping rentals reasonable.

On the other hand, under current market conditions, tenants are in a more favourable position. Before entering into a tenancy agreement, they should:

View a few different flats prior to deciding which one to rent; and
Know what sort of rental levels are being fetched for similar flats.

Eugene Lim is key executive officer and Seah Yao Hui, research analyst at ERA Realty Network