Not All New Flats Are Created Equal

Source : The Sunday Times, Dec 7, 2008

With the HDB resale market heading south, some new flat buyers may see a paper loss

It used to be that one could never lose out buying a new HDB flat from the Government.

It was a sure-win bet to a better life for many as they sold their flats for windfall gains after five years, as allowed under HDB rules, and upgraded to newer or bigger and nicer homes.

This, however, may no longer be the case these days.

New HDB flats are subsidised and priced below those of resale flats in the same area. But there has been a shift in the market cycle, and the HDB resale market is seen heading south because of the current recession.

'This is more or less the peak for HDB flat prices,' said C&H Realty managing director Albert Lu.

The Housing Board has said new flat prices fall when the market goes down and vice versa, since these are priced at a discount to the market. This will be the subsidy that buyers enjoy.

While new flats have always been a safe bet, some who bought or are buying them now may find themselves with a paper loss soon.

The situation is similar to that in the previous 1996 peak. Back then, those who bought new flats in the new town of Sengkang found themselves 'under water' a few years later, said Mr Eugene Lim, an associate director of ERA Asia Pacific. The prices they paid were higher than those of resale flats in the area.

Experts say that as the HDB resale market slowly inches down, this scenario may present itself again. 'Those who buy new flats when resale prices are high may have a higher probability of losing out,' said MrLeong Sze Hian, president of the Society of Financial Service Professionals.

'In contrast, those who buy when resale prices are low may have a higher probability of a price appreciation. So, maybe a balanced cost-approach pricing may be better instead of market subsidy.'

The balanced cost-approach is based on pricing the cost of building the flats. It will give rise to more stable prices that reflect inflation and wage increases, he explained.

Buyers of new build-to-order flats will have to wait about three years, by which time the market may have changed completely.

They may end up in a position where their new flat's price is similar or higher than resale prices, MrLu said.

Experts, though, are quick to add that it will be only a paper loss, if any. 'If you don't sell your flat, you will not see any loss,' explained ERA's Mr Lim. 'There is a downside risk to buying a new flat, but it is very small.'

In any case, buyers of new flats have to occupy their units for at least five years before they can sell them. Many often continue to live in them for years after that, experts say.

In the next five to 10 years, if the world economy strengthens, the next peak for HDB flat prices may be higher than where they are right now, said Mr Lu.

There is, therefore, the possibility of a capital appreciation, but any gains will likely be smaller than before, since today's buyers are paying a lot more for their HDB flats.

'It's no longer the $100,000 to $200,000 types of gains that were easily attainable in the past,' said Mr Lim.

Mr Lu said that for those seeking a new flat to live in, it would not really matter when they buy. If they were to buy high and sell low, they would also be able to buy a replacement home at a low price, he pointed out.

Ultimately, new HDB flats remain the cheapest form of housing in Singapore.

Still, buyers have to work out their sums first.

Regardless of the economic situation or any potential capital appreciation gains, the key is to buy a flat that one can afford, experts advise.