Measures to cool the property market appear to have made some impact already, says EUGENE LIM
Published September 23, 2010
EUGENE LIM
In 1989, the government made major policy changes by removing the income ceiling for buying resale HDB flats; allowing HDB owners to invest in private residential properties; as well as allowing private property owners and Singapore permanent residents (PRs) to buy resale HDB flats for owner occupation.
Since then, resale HDB prices have seen their ups and downs. But in the second quarter of this year, HDB numbers showed that resale HDB prices hit their highest point since 1990. Resale HDB prices were 18 per cent higher than the first peak in Q4 1996; and five times more than flat prices in 1990, when the resale market started.
Despite higher valuations, 96 per cent of resale transactions in Q2 were done at higher and higher cash-over-valuation (COV). Prices continued to climb in July and August. Resale HDB transactions handled by ERA agents showed that the median COV increased to $35,000, up 17 per cent from Q2's $30,000.
But it was 11 times more than the market low of $3,000 just 14 months ago. On the ground, many deals were closed by negotiating on the COV rather than the resale price of the flat.
For five straight quarters starting in Q2 2009, resale transactions shot past 8,000 units; with three-room transactions accounting for 30 per cent; four-room 36 per cent; five-room 25 per cent; and executive 9 per cent.
This exuberance in the resale market was happening despite the HDB's launch of some 66,500 new flats since 2006 - including the estimated 16,700 units this year.
Many first-time buyers, priced out of the resale HDB market, put the blame on, among other things, the artificial demand coming from those buying HDB flats for investment or short-term speculation.
These were people who did not need a roof over their heads but were riding the buoyant resale HDB market for personal profit, and in the process driving up prices.
While there were no official statistics as proof, these claims have some validity. A three-room resale flat bought at $300,000 that rents for $2,000 a month gives a yield of 8 per cent per annum; well above the average private property yield of 3-4 per cent.
A resale flat bought in 2008 and sold in 2010 could net the seller a gain of at least 30 per cent. A PR can buy a resale flat, rent it out for an income stream, and after a few years sell it for a good profit. The profit could be channelled to buy a better house back home and other luxuries.
An astute investor with spare cash could be tempted to take a punt in the resale HDB market, despite flouting public housing rules.
Impact of new measures
On Aug 30, the government announced measures designed to help first-time buyers, as well as to keep the resale HDB market in check. These measures were:
Minimum occupation period for resale HDB flats extended to five years.
Private property owners who buy resale flats have to sell their private home within six months of buying the flat. Private homes include overseas properties.
Those with existing mortgages can only take a maximum loan of 70 per cent; and need to fork out a mandatory cash deposit of 10 per cent.
First-timer households with monthly income of between $8,000 and $10,000 can buy new flats under the Design, Build, and Sell Scheme (DBSS).
HDB speeds up completion of flats from three years to two-and-a-half years.
While these measures may help to rein in runaway prices, they have also made buying and selling property more complicated.
Those who buy a resale flat from Aug 30 onwards can no longer buy private property within the first five years of the resale flat purchase.
Should they buy private property after five years, they will have to put up a higher cash downpayment of 10 per cent of the purchase price if their current loan is not fully paid up. In addition, they can only take a maximum loan quantum of 70 per cent.
After buying the private property, it may not make sense for them to sell their resale flat to buy another one, unless they are prepared to sell the private property within six months. This means they can no longer bequeath their private property to their children or rent it out for income.
Meanwhile, should PRs buy a resale HDB flat, they will have to part with any property they own in their homeland within six months of the flat purchase. With non-genuine demand taken out of the equation, PRs are placed in a dilemma.
First-time buyers will have a large supply and variety of flats to choose from: Build-To- Order (BTO) flats (16,700 units in 2010 and up to 22,000 units in 2011), DBSS flats (up to 7,000 units in 2010 and 2011), and executive condominiums (up to 8,000 units in 2010 and 2011). As such, we estimate that demand for resale HDB flats may drop by some 30 per cent.
If that happens, total resale volume this year could dip below 30,000 units and median COVs fall to $20,000 or lower by year's end. With lower transacted prices, valuations will also be lower and this may again impact future resale prices. A price correction in the resale HDB market is in the offing.
Measures to cool the property market appear to have made some impact already. The recent launch of the Yishun Riverwalk BTO project attracted only 3,225 applications for 1,408 flats - well below the ratio seen in past BTO launches when up to six times the number of bids were seen for each unit.
This may indicate that first-timers may be intending to return to the HDB resale market in anticipation of falling prices. These buyers had been priced out of the resale market during the property boom and flocked to join the queue for new HDB flats. They may now be waiting to see if resale prices will drop.
Those who have an immediate need for homes will probably go to the resale market instead of queuing for a new flat which may take three years to build.
The five-year minimum occupation period (MOP) only affects resale applications received by HDB from Aug 30. For those who bought their flats before that, the previous MOP of three years, 2.5 years or one year still applies, depending on when they acquired their flats and the type of loans they took.
These HDB owners can sublet their HDB flats after occupying it for three years. They can also invest in a private property during their MOP; unlike buyers after Aug 30.
Days of high COV transactions may be over
With the new measures taking effect, the froth in the resale HDB market has been removed. Coupled with new housing options for first-time buyers and the sandwiched class, the key driver for the resale HDB market going forward will be those with immediate housing needs - whether they are Singapore citizens or PR households.
The resale HDB market should now reflect the real demand for housing. As such, the days of high COV transactions may be over.
The writer is associate director, ERA Asia-Pacific
Source: http://www.businesstimes.com.sg
