New measures to calm the market may impact about 10% of purchasers with a HDB loan

Compared to other apartment purchasers, this demographic is "not insignificant," since they shell out an extra S$20,000 to S$60,000 on average.

Aug 20, 2024

Approximately 25% of purchasers who take out loans from the Housing and Development Board (HDB) end up borrowing 75% or more of the property's value. This demographic is more likely to be impacted by the government's recent efforts to rein in the resale market.

In a decision announced on Monday night (Aug 19), the loan-to-value (LTV) ratio for HDB loans was reduced from 80% to 75%, in line with loans issued by other financial institutions.

Officials have seen that borrowers with greater LTV ratios tend to purchase bigger apartments at higher costs, according to Minister for National Development Desmond Lee, who spoke at a media conference on Tuesday (Aug 20).

These purchasers are "not insignificant" since they push up the resale market as a whole (the typical resale buyer spends an extra S$20,000 to S$60,000 compared to other buyers with LTV ratios of 75% or lower, depending on the kind of flat).

The most recent statistics from the government show that resale prices increased 4.2% in the first half of 2024, which is somewhat less than the 4.9% gain for the whole year of 2023. According to statistics provided by ERA Realty, resale prices have increased by 42.5% during the second quarter of 2020.

There has been some suspicious activity regarding the sale of public housing apartments for more than S$1 million in the last several months. According to Eugene Lim, chief executive officer of ERA Singapore, there were 539 million-dollar sales in the first seven months of 2024, with thirteen acquisitions for more over S$1.5 million. Throughout all of 2020, just 82 such trades occurred.

During Tuesday's briefing, Lee said that the lower LTV limit would stabilise the remainder of the resale market by discouraging riskier borrowing and reducing demand in the upper end of the market. He emphasised that, in reality, the number of multi-million dollar flat sales represents just around 2% of all resale transactions during the last fifteen months.

Centrally placed, high-floor maisonettes, executive apartments, jumbo flats, or five-room flats are the most common types of these more expensive residences, he added. Singaporeans are now worried about the overall affordability of resale flats, thanks to these apartments making headlines. Such market dynamics have the potential to lead to a bubble in the secondary market if one is not cautious.

Beyond just a cooling mechanism

"Not just a cooling measure" is the minister's description of the new government action.

"It is prudential," Lee said sharply. "A great deal of doubt persists. Neither the future of the economy nor the timing of interest rate hikes are clear to us.

"Those who buy at higher prices with larger loans are also hardest hit when the market cools," he added, citing history as evidence that the housing market swings in cycles.

According to Lee, this is why the government is taking measures to reduce demand and promote careful borrowing, all the while gradually increasing supply to satisfy demand.

The decrease of the LTV ceiling would not impact the great majority of homeowners with HDB loans, he said. With a HDB loan, the LTV restriction is 75% or below for 90% of purchasers.

Additionally, Lee brought out the fact that when buying a resale apartment, most purchasers do not pay the cost over value (COV). Cash is required to settle the COV, which is the disparity between a resale flat's selling price and its true HDB value.

Buyers pay a median of S$30,000 to S$40,000 for the minority that incur a COV. According to Lee, this has been "pretty stable" over the last two years.

For first-time purchasers from lower- to middle-income families, HDB has enhanced the Enhanced CPF Housing Grant (EHG) up to S$120,000. This will assist them buffer the effect of the reduced LTV.

He estimated that 13,000 families, or around 85% of first-time purchasers, would gain from this change annually, with those with lower incomes standing to gain the most.

Minimal influence

But there are those in the real estate industry who question whether or not these new policies will really work.

The majority of purchasers of apartments with four bedrooms or more are not expected to see a rise in housing subsidies, as pointed out by Lee Sze Teck, senior director of data analytics at Huttons Asia. He also said that they may use bank loans to finance their purchases, in which case they won't be affected.

According to Huttons' Lee, prices are expected to keep rising as a reduced supply of four- and five-room apartments reaches their minimum occupancy term this year.

The stricter financing limitations may not have much of an impact on the million-dollar area of the resale market, according to Christine Sun, chief researcher and strategist at OrangeTee Group.

One issue she pointed out was that these purchasers may not be eligible for a HDB loan at all. Households with an average gross monthly income below S$14,000 are not eligible for HDB loans.

In addition, the Ministry of National Development said that 53% of resale flat purchasers used HDB loans in 2023, a little increase from 38% in 2022. In the first half of 2024, the percentage stayed at 53%.

"Plus, even if they are impacted by the reduced LTV, they might still be able to afford the additional 5% in cash," Sun said.

A couple with a combined CPF savings of S$150,000 are seeking to purchase a five-room apartment at a median price of S$680,000, according to Lim of ERA. According to Lim, most purchasers today would find S$20,000 to be a "reasonably manageable" amount, and with the reduced LTV in place, they would need only that amount.

Along with the first wave of former private homeowners who had fulfilled the statutory 15-month wait-out period before acquiring a HDB resale property, Lim also remarked that there was an increase in million-dollar sales this year. This was implemented in September 2022 as a move to calm down the market.

According to Lee of Huttons, there are some homebuyers who aren't taking out loans at all.

According to Ismail Gafoor, CEO of PropNex, this class of purchasers is very likely to have driven up resale prices. “(They) may continue to have the financial means to purchase the flat of their dreams at a premium price.”

Wong Xian Yang, head of research at Cushman & Wakefield, pointed out that certain families would benefit from additional liquidity due to the increased EHG. The outcome, he warned, may be price inflation for smaller, less expensive apartments in immature complexes.

Wong countered that, because of the greater quantum, purchasers of bigger or more expensive apartments often optimise their LTV. "The decrease in LTV limits may thus limit the increase in the prices of these apartments," he said.

According to Wong Siew Ying, head of research and content at PropNex, there could be an unforeseen impact on the HDB resale market, even if the higher EHG would "certainly" help first-time purchasers.

With the Proximity Housing Grant adding up to S$30,000, the total grant sum might be "quite generous," which could increase demand for resale flats. "Furthermore, it's possible that some sellers of resale flats may maintain a high asking price for their flats, assuming that buyers will be able to take advantage of a higher grant," she said.