Softly, gently does it to cool HDB market

This story was first published in The Straits Times on Jan 2, 2014

At the start of 2013, the question was whether the Government would succeed in its policies to cool down an exuberant housing market.

A year on, Housing Board resale prices have slipped, cash premiums have gone down and fewer flats are changing hands.

Against today's backdrop, one might instead wonder if the landing may not be as soft as planned. But is the HDB resale market in any real danger of a hard landing? Experts say no.

''There is almost no possibility that public housing is heading for a hard landing in 2014,'' says property market research firm R'ST research director Ong Kah Seng, echoing the sentiments of other analysts.

Instead, the market seems to be cruising towards National Development Minister Khaw Boon Wan's planned ''soft landing''.

Softly, softly

THOUGH there is no official definition, a hard landing would mean a fall of something like 15 to 20 per cent, say analysts.

Since the late 2000s, flat prices have soared - as have the tempers of those who felt priced out of the housing market. From end-2006 till end-2010, for instance, the resale price index - tracking prices of HDB resale flats - rose 66 per cent. Such soaring house prices were seen as a source of voter unhappiness in the 2011 General Election.

The Government has tried to bring the market gently back down to earth. Last year, there were finally signs of success.

HDB resale flat prices have fallen. In November, the resale price index slipped to 146.9 points - the lowest level since September 2012, according to Singapore Real Estate Exchange (SRX) figures.

The cash premiums which buyers pay, known as cash over valuation (COV), have also fallen. Median COV fell from a high of $35,000 last January to $8,000 in November.

This is on the back of more ''negative COV'' deals, in which flats go for less than their valuation. SRX reported 97 such deals in November, compared to just three or so a month in the first six months of 2013.

And predictions from analysts are that resale prices will fall further: by 5 to 10 per cent in the whole of this year.

But they add that such a fall still counts as a soft landing, in contrast to the 15 or 20 per cent plunge that would constitute a hard landing.

For instance, four-room flats in Bedok, a mature estate, were going for $447,000 in the third quarter of last year. A 10 per cent fall this year might bring this down to just over $400,000. But a hard landing could see the price plunge to $357,000 instead.

This sort of dive is unlikely, barring another global financial crisis - and economists are optimistic about this year, notes SLP International Property Consultants head of research Nicholas Mak. He observes that the last time the housing market fell as steeply as 20 per cent was in the Asian Financial Crisis.

Resale prices ''didn't even drop'' during the more recent sub-prime crisis of 2007 to 2009, he notes.

The cushion of demand

ONE reason for the soft landing is that deliberate government cooling measures - rather than external blows - lie behind the current market slide.

These include tighter rules for HDB loans. The maximum tenure was cut from 30 years to 25 years. The mortgage servicing ratio limit was lowered so that buyers can use only up to 30 per cent of gross monthly income to repay HDB loans, down from 35 per cent. And new permanent residents now have to wait three years before they can buy a HDB resale flat.

Beneath these top-down restrictions, however, buyer demand remains.

The high home ownership rate of 90 per cent does not stand in the way of demand, since existing home-owners may still wish to upgrade or downgrade.

Such buyers might form about 70 per cent of the resale market, says ERA Realty key executive officer Eugene Lim.

What about the Government's ramped-up supply of new Build-To-Order flats in the last three years? More than 77,000 BTO flats were launched from 2011 to 2013, more than twice the number in the three years before.

But there is limited overlap between BTO and resale flat buyers, say analysts. Some resale flat buyers cannot or do not want to wait for BTO flats. Others seek better locations. And still others simply do not qualify for a BTO flat, whose buyers are subject to an income ceiling. So higher BTO supply will not dampen resale demand.

What of the private property market, where prices are falling? Could this siphon off demand from resale? Some buyers might switch, says Mr Ong - but not many. ''The shift in demand from resale flat to private residential will be very marginal, as the price gap between the two types of properties is still very wide,'' he says.

Far from a hard landing, analysts instead expect prices to stabilise in 2014.

''It is more likely that resale prices will go on a slight descent before plateauing,'' says OrangeTee head of research Christine Li.

These falling prices may then have their own in-built braking mechanism: attracting buyers who were biding their time.

''Once buyers notice that prices have come down, COVs are down, they'll be tempted to come back in the market again,'' says Chris International director Chris Koh.

In any case, the BTO programme is tapering off this year. This could drive some buyers back into the resale market.

Fear of a glut?

THE current fall in prices and transactions is therefore no cause for alarm, with all analysts interviewed saying the market is headed for a soft, not hard landing. But another issue is cropping up: the prospect of an oversupply.

It wasn't too long ago that HDB blocks lay empty in towns such as Sengkang, in the late 1990s and early 2000s, during the aftermath of the Asian Financial Crisis.

The resale market was also hit by falling demand and prices, as buyers had plenty of ready-built new flats to buy.

From 2014 to 2016, more than 97,000 new HDB flats will be completed. The large supply of flats has prompted some to ask if there could be another HDB flat supply glut.

But analysts say those fears are misplaced. In the 2000s, the glut of unsold flats only arose because there was no Build-To-Order system then. ''With the BTO system today, chances of (a glut) happening are low,'' says Mr Mak.

Previously, the HDB built in anticipation of demand based on couples who put their names down to ''queue'' for a flat, assuming all those in the queue were serious buyers. But when the Asian Financial Crisis hit, many dropped out of the queue for a new flat. The HDB was left with 31,000 unsold flats on its hands.

In 2002, the HDB switched to the BTO system, under which blocks of flats are built only if enough units are booked. With this, the risk of oversupply is contained. The announced tapering of BTO supply this year should also help keep supply in check.

Many levers

IN ANY case, there are many levers the Government can pull to manage a cooling HDB market.

''The Government can easily remove or ease cooling measures if prices drop too fast for their taste,'' says Ms Li.

It could loosen loan rules and restrictions on purchase of resale flats.

As for the risk of an oversupply, the Government has another tool to deal with that: the Selective En bloc Redevelopment Scheme or Sers.

Under this scheme, which aims to renew older public housing estates, old flats are demolished. Residents have the choice of moving to new flats elsewhere, with their neighbours.

By speeding up Sers and demolishing more blocks, the Government can create a need for new flats and soak up excess supply. If there are too many new flats with no takers, the Government can knock down a few precincts to rejuvenate more estates.

The cooling of the overheating HDB market which the authorities have worked at through 2013 for has finally dawned. This year, it seems likely that they will pull the manoeuvre off: softly, gently, and without a crash.

This story was first published in The Straits Times on Jan 2, 2014

To subscribe to The Straits Times, please go to