There will have less demand for resale flats due to a tighter HDB credit ceiling, although demand should remain strong for desirable homes

Prudent borrowing is encouraged by the tighter loan limit, which is reasonable given the unstable nature of the employment market.

August 20, 2024

One urban legend surrounding Singapore's real estate market is that the government steps in swiftly to curb price increases.

The Housing and Development Board (HDB) market was the focus of the most recent wave of property cooling measures since resale flat prices there have been increasing at a much higher rate than private house prices.

The HDB resale price index increased 2.3% from the prior quarter in the second quarter of 2024. The index rose 4.2% from the previous quarter and 6.6% from the same period last year.

Property price index for residential properties in Q2 increased 0.9% quarter-on-quarter, 2.3% compared to Q4 2023, and 6.0% year-on-year, according to the Urban Redevelopment Authority.

The loan-to-value (LTV) ceiling for HDB loans was reduced from 80% to 75% as of 12 am on Aug 20. The 75% cap is comparable to the loan-to-value (LTV) restriction that banks and other lending institutions impose on house loans. An S$37,500 reduction, to S$562,500, results from a lower LTV of 75% (rather than 80%) for a house valued at S$750,000.

The reduced LTV limit for HDB loans will have less of an impact on first-time homeowners with lower to medium incomes, since they will be eligible for a larger means-tested Enhanced CPF Housing Grant when purchasing both new and resale apartments. Grant amounts are increased in a staggered manner. The biggest boost of S$40,000 goes to qualified families and joint individuals whose monthly household income is up to S$1,500.

It is important to see the most recent action taken to curb the HDB resale flat market as a proactive measure. Indeed, 25% or less of the monthly family income was utilised to pay the HDB housing loan by 80% of the first-timer families that received the keys to their resale apartments in 2023.

Adverse effect

With a reduced LTV ceiling for HDB loans, the resale flat market for HDBs is expected to lose some of its pace.

A reduction in the purchasing power of certain consumers is one consequence. Certainly, not all purchasers will be able to borrow the whole amount or for the full term of the loan. However, there are homebuyers who want to maximise their profits by taking out the largest possible loan for the longest possible period of time in order to get their ideal unit or by purchasing the most expensive property feasible.

Two, the market for HDB resale flats will see a decline in buyer sentiment. In light of the reduced LTV on HDB loans, some purchasers may choose to sit tight till they see how the resale market reacts. This serves as a reminder that the government may and will step in to assist stabilise property prices, which may cause many HDB resale unit purchasers to continue with more caution.

Many prospective purchasers in this sector may be intending to finance their condo purchases in new suburban complexes with a large portion of the proceeds from the sale of their HDB residences, thus a downturn in homebuying mood for HDB resale flats might have an indirect impact on these sales.

Basis for support

Nonetheless, there are a number of demographics that should keep buying HDB apartments for resale. Even though they have the option to purchase subsidised HDB Build-To-Order (BTO) houses, some purchasers may choose to purchase HDB resale homes instead. This might be due to their desire for a unit in a certain area or the shorter waiting period.

Because they are either not qualified to purchase BTO units or can only purchase smaller BTO apartments, many purchasers also prioritise HDB resale flats.

Couples with two citizens of Singapore, households with one citizen and one permanent resident (PR) who earn more than the income limit for BTO homes, households with PR applicants and core occupiers who have had PR status for at least three years, and individuals aged 35 and up are among those who purchase HDB four-room and five-room units on the secondary market instead of the BTO market.

Reports make news when HDB resale properties in desirable areas sell for over one million dollars or, in many instances, more than 1.5 million dollars. Homebuyers may worry about housing affordability due to these transactions, even though they only make up a tiny proportion of all resale flat agreements.

In the highly desirable HDB resale property subsegment, strong momentum is expected to persist. Not only are these houses often more affordable than the surrounding new or resale leasehold condos, but they may also be fantastic places to live.

A large number of local private homeowners may be willing to sell their owner-occupied house for a HDB resale home, allowing them to save more money for retirement and reduce their monthly property-related expenditures, especially considering the ageing population in the area. Between the ages of 55 and 69, 787,167 Singaporeans made up almost 22% of the total population in 2023.

Cautionary borrowing

Particularly for young couples without substantial assets or parental financial assistance, access to big house loans is crucial as they begin the process of becoming homeowners.

Nonetheless, given the potential growing instability of the employment market, the current trend of lowering the LTV ceiling for HDB loans makes perfect sense. Prior to this most recent modification, the LTV ceiling was cut from 90% in December 2021 to 85% in September 2022, and subsequently to 80% in October 2022.

A homeowner who loses their work or enrols in a full-time degree to retrain for new professional options may find that being compelled to borrow less is a gift. Additionally, taking care of small children or ageing parents may require a homeowner to take a significant leave from full-time job.

To satisfy the housing needs of many young residents and maintain reasonable pricing for HDB resale flats, HDB must maintain its relentless pursuit of building additional BTO units, especially in desirable areas.