Analysis: Cut in supply of BTO flats will ward off glut

Prospective buyers of new Housing Board flats may be alarmed by the news that there will be a 25 per cent cut in the number of flats launched next year.

But there is, arguably, little cause for worry.

This is not a case of regular supply being choked off but, instead, a return to sustainable levels after three years of unusually high supply.

The move helps to avoid the damaging prospect of a supply glut - a problem that may seem alien to first-time buyers today but was a pressing issue just over a decade ago.

When announcing the move on Monday night, National Development Minister Khaw Boon Wan was careful to put it in context. From 2011 to last year, more than 25,000 Build-To-Order (BTO) flats were launched each year to meet "pent-up demand", he said.

This backlog has largely been dealt with, which is why the HDB is returning to a slower pace, cutting supply by 10 per cent this year, and another 25 per cent next year.

There are signs that demand for BTO flats is falling. For one thing, application rates have been dropping, so it makes sense to cut BTO numbers now. "The chances of first-timers securing their flats are quite high," said ERA Realty key executive officer Eugene Lim.

This year, there have generally been two or fewer first-timers chasing each three-room or larger flat available to them.

Application rates for flats in certain projects have been as low as 0.4 first-timers per flat.

"With a reduced supply, we may expect the application rates to increase but not significantly," added Mr Lim.

After all, the three years of higher flat supply were the aberration. This cut is part of a gradual return to the norm.

The 16,000 or so new flats next year will also exceed the estimated 15,000 new Singaporean families formed annually.

And if some first-timers turn to the resale market as a result, that is not necessarily a bad thing.

First-timers formed almost a quarter of resale buyers in 2011 but this fell as most people opted for BTO units instead. For many sellers reportedly having trouble finding buyers, the return of first-timer demand will be a boon.

In the longer term, there is a more important need for the supply cut, and that is, avoiding an oversupply down the road.

This was alluded to when Mr Khaw framed the 16,000 figure as "sufficient to meet demand, without causing a glut in the public housing market".

Policymakers are likely still haunted by the spectre of empty HDB blocks in estates such as Sengkang, as was the case in the late 1990s and early 2000s after the Asian financial crisis.

"A supply glut will have a severe impact on the one million HDB flat owners in Singapore," said PropNex Realty chief executive Mohamed Ismail Gafoor.

In other words, it is better to face a bit more competition for a new flat now, than to find your flat's value eroded a few years down the road.

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