Thursday, September 24, 2009

HDB resale market still buzzing

In contrast with 2006 and 2007, the current run is not supported by a buoyant economy and buyers will resist paying too much cash

WITH 80 per cent of Singapore's population staying in HDB flats, one would expect the HDB market to be affected by the current recession and unemployment situation. But both the primary and secondary HDB markets appear unscathed by the current crisis. Can we expect this to continue?

From a modest 2 per cent increase in 2006, HDB resale prices rose 17.5 per cent in 2007, and 14.5 per cent in 2008. According to HDB's numbers, even though HDB resale prices saw a slight dip of 0.8 per cent in the first quarter of 2009, they quickly rebounded by 1.4 per cent in Q2 to a new peak of 140.2 points. Over the past three-and-a-half years, resale prices have increased by some 38 per cent.

Current resale prices are some 2.4 per cent higher than the Q4 1996 peak. This means HDB homeowners who had bought their flats during those times can now get more than they paid if they resell their flats. Quarter-on-quarter, Q2 data show that the price increase has tapered off to just 1.4 per cent compared to the average quarterly increase of 4 per cent for 2007 and 2008.

However, the surge in resale HDB transactions that started in Q2 carried through into Q3. Transactions done by ERA's agents, who collectively have a 45 per cent share of the HDB resale market, show that resale prices have gained some 3 per cent in Q3 over Q2.

With the momentum likely to continue to year-end, we are likely to see a similar price increase of 2-3 per cent in the final quarter. For the whole year, HDB resale prices would probably have increased by 7-8 per cent.

Cash-Over-Valuation (COV) is the amount that a buyer pays over and above the valuation of a flat and this amount cannot come from a home loan or from the Central Provident Fund (CPF). The higher the COV demanded by sellers, the more cash the buyer has to fork out.

From the market peak in Q4 2007, the median COV for all flat types has slid along with the waning economic conditions. HDB statistics show that the median COV for 3-room, 4-room, 5-room and executive flats slid from the Q4 2007 high of $18,900, $22,000, $26,000 and $33,500 respectively to $5,000 for 3- and 4-room flats; and $0 COV for 5-room and executive flats in Q2 2009.

However, a surge in resale transactions in Q2 and Q3 brought median COV for all flat types to five-digits again in July and August. ERA's resale transactions show that median COV in August reached $19,000 for 3-room flats and $20,000 for the bigger flat-types.

Eighty-six per cent of the company's HDB resale transactions were concluded with COV; while 9 per cent were done at valuation; and only 5 per cent below valuation.

With strong resale demand, COV is likely to continue trending up for the rest of the year and perhaps into 2010. But as Singapore's economy is just starting to recover, current COV increases are largely driven by pent- up demand and are likely to taper off once they reach the resistance level. In contrast with 2006 and 2007, the current run is not supported by a buoyant economy and buyers will resist paying too much cash for HDB resale flats. HDB has been monitoring the situation closely and it tries to balance the market with affordable housing options like more new flats that target predominantly the first-timers.

Resale volume and popular locations

Over the past three years (2006- 2008), the HDB resale volume has stabilised around an average of 29,000 units a year. However, in Q2 this year, transactions surged by some 3,700 units or 58 per cent; and this brought the H1 total to 16,630 units.

This is some 2,500 units or 18 per cent more than H1 2008. As the current pace is likely to continue till year- end, we may see total resale transactions in the region of 33,000 units for 2009. This would mean that HDB resale flat volumes may increase by some 16 per cent over last year's all- time low of 28,419 units.

Currently, 3-room flats make up 29 per cent of resale transactions; 4-room 38 per cent; 5-room 26 per cent and executive 7 per cent. This is in contrast with 2002 when the HDB resale market was at its trough. Then, 3-room flats accounted for 36 per cent of resale transactions; 4-room 42 per cent; 5-room 17 per cent; and executive only 5 per cent.

Based on resale transactions thus far, the popular locations and the respective resale prices for the various flat-types can be seen in Chart 2.

Who are the buyers?

The surge in demand for HDB resale flats has been fuelled by a mix of upgraders, downgraders and the increasing population of permanent residents (PRs).

Those who are financially stable upgrade to larger flats while those facing financial constraints have been downgrading. The government's target population of 6.5 million is steadily increasing the pool of PRs; and they have to buy their HDB homes from the resale market as they do not qualify to buy new flats directly from HDB.

ERA's resale transactions show that PR buyers make up some 40 per cent compared to 20 per cent three years ago. They typically buy 3- or 4-room flats and may upgrade to 5-room flats once they obtain their citizenships.

New HDB flats

So far this year, HDB has launched some 3,900 new flats under its Build- To-Order (BTO) programme. Of the 3,900 units launched this year, some 2,400 units or 62 per cent are in Punggol. Work on the Punggol Promenade has just commenced to transform it into an attractive waterfront precinct with an array of leisure activities.

Targeting first-time home buyers, 90 per cent of the flats in each BTO launch are reserved for their application and selection. Only 10 per cent of the flats are allocated to second-timers.

BTO flats are usually priced a shade lower than similar resale flats in the same locality. First-time buyers are attracted to these flats as they can be fully funded by CPF funds and loans from HDB or banks.

Responding to demand, HDB has been stepping up its BTO launches with some 4,000 units in 2007 and 7,800 units in 2008. With the aim of keeping housing affordable especially for first-timers, HDB has indicated that it may launch up to 8,000 units this year.

The take-up for BTO launches has been good as first-timers prefer to buy direct from HDB rather than in the resale market where a majority of the deals are done with COV.

Under the Design, Build and Sell Scheme (DBSS), private developers have launched and sold six projects since 2006. Their sales status is in Chart 3.

Priced at about $450,000 to $750,000, DBSS flats are more likely to attract buyers who intend to buy another new flat after they have become eligible to sell the first one that they had bought from HDB. This is because they need not pay any resale levy on their first flat when they buy DBSS flats.

Except for the first project, Premiere @ Tampines, that has been fully sold, the other five projects have sold out their 4-room flats, while some of their 5-room types have yet to find buyers. These are likely to take slightly longer to sell due to higher prices or the Ethnic Integration Policy (EIP).

Due to their different price ranges, both BTO and DBSS flats target predominantly first-timers and second- timers respectively; and are unlikely to cannibalise each other.

Going forward, HDB monitors new flat demand closely and will accordingly launch more BTO flats or put more DBSS sites on sale when necessary. As demand is strong for both types, we are likely to see more releases this year.


As Singapore's economic and employment numbers improve, we are likely to see the current buzz in the HDB market continue well into next year. Resale prices are expected to increase further.

Unlike the private residential property market, the movement of HDB flat prices is more gradual. We are likely to see overall price increases of 7-8 per cent this year and next year, supported by increasing valuations.

COV transactions will probably stabilise, with the bulk of resale transactions closing at $15,000-$30,000 above valuation as buyers resist paying too much in cash.

With more new flats coming onstream, some demand is likely to be taken away from the resale market. Resale volume is likely to stabilise around 30,000-33,000 units for 2009 and 2010.

The writer is associate director, ERA Asia-Pacific

Source: Business Times, 24 Sep 2009

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