Toasting To A Healthy HDB market

Source : The Business Times, March 26, 2009

The Housing Board market holds the key to the longer-term prospects of mass market private condominiums

NEW private home sales in Singapore surged in February to an 18-month high of more that 1,000 units, after hitting an all-time low of 104 units in January.

In demand: The top-selling HDB estates include Woodlands, Jurong West, Hougang and Punggol (above) where most resale flats sold are priced in the $250,000-$450,000 range

Some 80 per cent of the buyers who snapped up units in projects like Caspian and The Quartz have HDB home addresses, as ERA has observed. Of these buyers, 94 per cent are Singapore citizens and permanent residents. Typically, they are dual-income households earning $8,000 to $12,000 a month. Most of them are in the 35-45 year age group and have one or two children. These HDB upgraders are buying for their own occupation rather than for investment or speculation.

Indeed, this recent surge confirms the trend shown by data from the Urban Redevelopment Authority's Realis that HDB upgraders' contribution to total private home purchases rose from 22 per cent in 2007 to 36 per cent in 2008. That's the highest level in four years.

With some 80 per cent of Singapore's population living in HDB flats, the aspiration to upgrade to private residential property remains strong. The main reason for buying a private property is to upgrade their lifestyles.

Let's look at some contributing factors that are enabling the HDB homeowner to upgrade to private residential property.

Resale prices

From a modest 2 per cent increase in 2006, the HDB Resale Price Index went up by 17.5 per cent in 2007 and 14.5 per cent in 2008. That means prices have risen by some 34 per cent over the past three years.

After an average quarterly rise of 4.1 per cent in the first three quarters of 2008, HDB resale prices slowed to a 1.4 per cent increase for Q4 2008, primarily due to a temporary mismatch of price expectations between buyers and sellers. Nonetheless, with this moderate increase, the HDB Resale Price Index has hit a new peak at 139.4 points, and is now higher than the previous peak in Q4 1996 by 1.8 per cent. This means HDB homeowners who bought their flats during the last peak can now resell the flats at prices equal to, if not higher than, what they had paid for them.

Over the past three years, the rise in HDB resale prices was fuelled primarily by demand from 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 to smaller flats. The government's push to raise the population to 6.5 million is steadily increasing the pool of PRs, and they typically buy their HDB homes from the resale market as they do not qualify to buy new flats directly from the HDB.

Most HDB upgraders to private condominiums tend to own four- or five-room flats. Currently, four-room flats account for 37 per cent of total resale transactions while five-room flats account for 26 per cent. Three-room and executive flats account for 29 per cent and 8 per cent respectively. We expect the proportion of four- and five-room flats sold in the resale market to remain constant for the rest of the year. However, the ratio for three-room resale flats may rise to 32 per cent while the market share for executive flats may fall to just 5 per cent should the current economic gloom be prolonged.

The median resale price of an HDB five-room flat is currently $380,000. Assuming the original purchase price from the HDB some five years earlier was $250,000, the homeowner can make a profit of $130,000 upon resale. Similarly, a four-room flat sold at a median resale price of $310,000 today and which had been bought for $190,000 would result in a $120,000 profit on resale. This profit would help the homeowner make the downpayment on a private property.

Going forward, HDB resale prices are expected to stabilise as sentiment may be affected by the gloomy economic environment. Also, buyers have been resisting high cash-over-valuation (COV) transactions and this trend is expected to continue as homebuyers rein in unnecessary cash expenditure. Median COVs for various flat types are now $15,000 (three- and four-room); $11,000 (five-room) and $12,000 (executive); quite a shade lower than the Q4 2007 market high of $18,900 (three-room); $22,000 (four-room); $26,000 (five-room) and $33,500 (executive).

Quarter-on-quarter, we may continue to see sub-one per cent price increases as the market finds its footing. If the current crisis worsens, buyer resistance may intensify and HDB resale prices could start to fall. During the 1997 Asian financial crisis, HDB resale prices fell by some 29 per cent over two years from the market peak in Q4 1996 before starting to recover.

For now, HDB resale prices are stable and we do not foresee any significant downward pressure on prices for the next two quarters, at least.

Resale volume

Over the past three years (2006-2008), the HDB resale volume has stabilised around an average of 29,000 units a year. That's an 11.3 per cent drop from the average of 32,700 units transacted a year between 2003 and 2005. This drop in volume is expected as buyers now have more new flats to choose from under the HDB's build-to-order (BTO) system and the Design, Build and Sell Scheme (DBSS) by private-sector developers.

During this period, the HDB intensified its BTO programme. In 2008 alone, the HDB launched a total of 7,793 units under the BTO system in towns like Punggol, Choa Chu Kang, Yishun, Woodlands and Bukit Panjang. This was the highest in recent years. Just this February, HDB launched another 815 units in Woodlands and will continue to offer more flats of different pricing, sizes, design types and locations to cater to the different needs and budgets of flat-buyers. BTO flats are entry-level public housing targeted primarily at first-time homeowners. They are generally priced between $120,000 and $350,000, depending on flat type and location.

So far, the HDB has awarded a total of six DBSS sites to private-sector developers, of which five have been launched. DBSS flats are priced higher at between $450,000 and $750,000. Another target segment would be those upgrading from flats originally bought from the HDB as buying DBSS flats exempts them from having to pay the resale levy. DBSS flats are thus in direct competition with mass market private condominiums as they are after the same target market. However, DBSS flats priced in the $650,000 to $750,000 range may prove to be more difficult to sell as their pricing would overlap with entry-level mass market condos that have more appeal due to their private property status.

Resale volume for HDB flats seems to have stabilised within the range of 28,000 to 30,000 units a year. As these flats are primarily bought by households that cannot wait for new flats to be completed or do not qualify to buy them, we do not foresee the volume dipping below 28,000 this year. The top-selling HDB estates are Woodlands, Jurong West, Tampines, Hougang, Sengkang, Punggol and Yishun where the majority of resale flats sold are priced in the $250,000 to $450,000 range. A stable HDB resale market provides a firm base for upgraders to private property.

An emerging trend

HDB rentals have been on the rise over the past three years. Current HDB policies have also made it easy for owners to sub-let the entire flat. Those who bought flats directly from the HDB can obtain approval to rent out the whole flat after they have occupied it for five years. Those who bought from the resale market can rent out their flats after living in it for three years.

As such, we are seeing a new trend of HDB dwellers upgrading to live in private condominiums while renting out their HDB flats. Currently, the median rent of $1,800 a month for a four-room flat and $2,000 a month for a five-room flat can give their owners a return of 6-7 per cent, based on median resale prices of $310,000 and $380,000 respectively.

The usual tenants are foreigners working or studying here who do not have a big enough budget to rent private property. Demand currently outstrips supply and those renting out their HDB flats would have an income stream that helps pay the mortgage on their condominium.

Many believe that the HDB market is 'recession-proof'. With 80 per cent of the population as its base, it has shown its resilience in these troubled times. With the resale transaction volume somewhat stabilised at about 29,000 units a year, resale prices are also expected to hold steady for the rest of the year.

Buyer resistance is likely to contain further price increases to marginal levels. Resale flats selling at below $500,000 are likely to form the bulk of transactions as those on a budget try to avoid having to stretch themselves financially. Those who can afford it will be looking to upgrade to competitively priced private condominiums, as we have seen recently. So HDB flats priced above $500,000 may take much longer to find buyers.

A stable HDB market is essential to support the private condominium market, but a healthy HDB market holds the key to the longer-term prospects of mass market private condominiums.

The writer is associate director, ERA Asia Pacific