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April 15, 2009 Wednesday

Timing's everything for upgraders

HDB residents buying a condo unit have to do their sums carefully

By Jessica Cheam


IN THE midst of Singapore's worst recession, people are still buying property.

Private condominium sales reached a recent high of 1,323 units in February - the highest since the 1,731 units sold in August 2007, which was the peak of the recent property bull run.

And though official figures are not yet available, the buying frenzy seems to have continued into March.

According to a recent report by DTZ Research, seven out of 10 buyers in the first quarter of this year are HDB upgraders.

This is a jump from the 48 per cent registered in the fourth quarter last year, and the highest number since the 86 per cent achieved in the second quarter of 2002.

HDB upgraders are home buyers with HDB addresses looking to move up the property ladder. They typically buy into mass-market condos, usually in the suburbs.

Experts say the recent brisk sales indicate a 'pent-up demand' in the market, especially from buyers who held back during the recent property boom, when prices skyrocketed in 2006 to 2007.

They also point to a unique phenomenon that occurs in a property boom-and -bust cycle where the gap between the price of HDB resale flats and mass market condos has narrowed to an all-time low.

Private property prices fell a quarterly record of 13.8 per cent in the first quarter of this year, compared with the marginal 0.6 per cent drop for HDB resale flats.

This means that HDB flat owners own an asset that has appreciated to more or less record value, at a time when the prices of mid-tier condos have dropped to affordable levels.

Now, the jump from public to private home ownership has always been a tantalising proposition.

But is this really the right time for an HDB upgrader to buy?

The answer, say property experts, depends on two things - when the condo unit the upgrader is buying will be completed, and what view he takes of the Singapore property market over the next couple of years.

Let me explain.

Unlike an investor who is buying for rental yield, the HDB upgrader typically moves out of his HDB flat and into his new condo unit. This means that he sells his flat only when the new condo unit is completed and ready for occupation.

Therefore, it makes the most sense for an upgrader today to buy a completed unit - because he can sell his flat now for a relatively high price and buy the new private condo unit on the cheap.

The problem is that there aren't many completed suburban developments on the market. Most new condos approaching completion today are in the prime districts, which were the focus of the property boom two years ago.

And the handful of suburban developments that are close to completion aren't that attractively priced, so the HDB upgrader isn't getting that good a deal on them.

The fact is: The cheapest suburban condo units today are those being sold 'off plan', meaning that they will be completed only two or three years later.

For HDB upgraders who buy these types of condo units, the fact that they can currently can get a good price for their HDB flats is moot, because they will sell their flats only two or three years down the road.

That brings me to the second point that HDB upgraders must consider before signing on the dotted line.

What will the global economy and the Singapore property market look like in two or three years' time, when these projects are due for completion?

Home buyers today can no longer rely on the now-defunct deferred payment scheme introduced in 1997. This allowed buyers to pay a 10 or 20 per cent downpayment, and defer taking a bank loan until the project was completed.

Developers have replaced this with the 'interest absorption scheme'. Here, the buyer also pays an initial 20 per cent downpayment and defers the rest until the property is completed.

But the big difference now is that the minute buyers commit to a property, they have to take a loan with a bank which the developer has selected. The developer then foots the bill for the buyer in interest payments to the bank during the construction period.

This arrangement carries new risks for the home buyer.

Firstly, if a developer goes under, it will no longer be able to pay the regular interest payments and the bank will go to the buyer for these payments.

This seems quite an unlikely scenario in Singapore as developers who offer this scheme generally have the financial muscle to ride out the tough times. Still, the risk of this happening is higher with smaller developers.

Secondly, the bank reserves the right to revalue a property at any point during the construction, or when the project is completed.

So if the property market heads further south, a bank may revalue properties downwards. This means that it will likely reduce the sum it had earlier agreed to lend to the buyer, who will then have to stump up a hefty sum of cash to make up the difference.

On the one hand, experts say banks are unlikely to revalue properties as long as buyers are able to make the monthly payments. Unlike high-end properties where prices could crash in as little as three months, prices of suburban units are less volatile, say analysts.

But on the other hand, if the market really crashes, HDB upgraders could be hit by a double whammy. They will have to fork out more cash to top up their loans at a time when the values of their resale flats would most likely have crashed along with the general market. And if they back out of buying the new flat, they will lose a 20 per cent deposit.

In the worst-case scenario, they could be saddled with two mortgages for properties, both in negative equity.

Such an optimistic gamble on the future is not for the faint-hearted nor the financially prudent, especially when unemployment is hitting a record high.

But if an HDB upgrader truly has the financial strength to hold on to his properties indefinitely for the long term, it could be a gamble that will pay off when the market finally recovers.

These are sums that one must do carefully, no matter how beautiful and attractive floor plans and showflats now look.

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