Feb 11, 2010

HDB resale prices: Don't just find a scapegoat

It is not an issue of us-versus-them, but one of a rise in demand

By Chua Mui Hoong, Senior Writer

THE Housing Board is reviewing rules on flat ownership, to see if any encourages speculation in HDB resale flats. The review will be completed in a few months' time, according to National Development Minister Mah Bow Tan.

The background: Resale flat prices rose by 3.9 per cent in the last quarter of last year, or by 8.2 per cent in the year. From 2007 to 2009, prices have gone up nearly 40 per cent.

Young couples complain that prices are rising beyond their reach. All manner of folk are being blamed for the rise in prices: foreigners, permanent residents, rich private-property owners who buy HDB flats for rental income, or people who 'flip' HDB resale flats within a year. The HDB will have its work cut out coming to grips with this issue.

But actually, what exactly is the issue? Are rising HDB resale prices an issue?

Surely not to the majority of 880,000 or so households who already own an HDB flat, to whom rising flat prices means rising asset values.

Rising prices are an issue to new households and those with no roofs over their heads. Who are they? The 25,000 couples who marry each year. Also, over 7,000 couples in a year file for divorce, which means some 7,000 ex-spouses may be searching for a new home. In 2008, nearly 80,000 people were granted PRs and another 20,000 were conferred citizenship. Presumably, many among them will want to buy a home.

All in, that's about 132,000 people a year who may be looking for a home. Of these, about 10,000 may get a subsidised new HDB flat. About 20 per cent may go for private property. That still leaves about 95,600 people who may be eyeing an HDB resale flat.

But only a fraction of them will actually buy a resale flat, since some would already own homes, or may decide to rent or live with others. The total number of resale transactions last year was 37,205, an increase of 31 per cent over 2008.

The overall picture suggests rising demand for HDB resale flats spurred in part by immigration. PRs own less than 5 per cent of HDB flats, but last year 20 per cent of resale transactions involved them.

But if one looked at the issue rationally, high resale prices is not a Singaporeans versus non-citizens issue. In fact, old citizens should cheer PRs for boosting demand, and other PRs and new citizens should rue them for the same reason.

Is it speculation that is driving HDB resale flat prices up? HDB rules now allow a buyer of a resale flat to sell it after one year, if he did not take advantage of any government grant in buying it. The flat can be rented out after three years.

The public discussion on the 'speculative' element in resale flats throws up two possibilities: one, some people are buying and selling HDB flats for profit, or 'flipping' as it is called; or that some people are buying HDB flats with the sole purpose of renting them out.

Is there evidence of 'flipping'? Property agents have said there is hardly any. In its review, HDB should track and make public the number of people who churn resale flats for a profit from say, above 12 months to 18 months. If there is evidence of such a trend, and there are grounds to think such transactions are causing a bubble in resale flat prices, then HDB should indeed tighten the rules to weed out such short-term profit-driven demand.

(Declaration: I own an HDB resale flat I hope to sell one day at a price higher than what I paid for it - like the other 879,999 HDB flat owners.)

What of the charge that some people are buying HDB flats for rental income?

Actually, this is patently the case - and rightly so. HDB's 2008/09 annual report states there were 22,754 flats that were sublet. No one knows how many more flats are being sublet illegally. A number of HDB flat owners will also be renting out some bedrooms for income.

HDB flats may be built for owner-occupation - hence, the eligibility criteria on citizenship, formation of family, income limits, and the five-year time bar before they can be sold.

But HDB flats after five years are bought and sold like any other commodity, with buyers concerned about investment value, resale potential, potential rental income and financing costs.

The HDB resale market has been gradually freed up over the years. Right now, an HDB flat makes for a decent investment. A four-room flat in Clementi has a median price now of $415,000 and can fetch $2,000 a month in rent - a gross yield of 5.78 per cent, much higher than bank deposits.

Rather than frown on such returns, we should acknowledge that good rental yields speak well of the health of the resale market. An HDB resale flat buyer who does not get a government grant or take up a subsidised HDB loan, gets no subsidy for his purchase. If he is prepared to abide by HDB rules and lives in the flat for three years before letting it out, there is little justification to deny him the income.

The way I see it, rising resale flat prices reflect genuine pent-up demand spurred by high levels of immigration. They do not seem to be driven by speculative frenzy. Those priced out of the market may find it emotionally satisfying to finger PRs or speculators as scapegoats than to acknowledge that the market is moving faster than one's income and savings can keep up with.

It is important for HDB to respond appropriately to what appears to be a short-term spike in demand, which should resolve itself, since the flow of foreigners will slow. It should not over-react by tightening the rules.

Spooking the HDB resale market will dampen the private property market and cause a fall in asset values of HDB households, affecting their sense of wealth and their sense of retirement security.

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