Saturday, June 25, 2011

Will HDB resale flat prices fall?

Last month we have looked at the supply and demand situation and wrote an article named HDB resale flat prices are set to fall. Last 10 years, the market conditions were pushing the prices up: very low supply of new HDB flats, large number of PR approvals and very low interest rates on mortgages. Now the conditions are slowly turning against the prices: number of PRs approved is declining, there will be increase on new HDB completions and interest rates will go up.

But things will not change overnight and there is room for supply crunch since absorbing the huge number of newly PRs and first time home buyers who cannot get a new HDB flat due to long queue will take several years.

But recently, average Cash Over Valuation (COV) paid by by HDB resale flat buyers has increased again after declining to 20,000 SGD range:

"CASH premiums paid by home buyers in the second quarter have shot up to about a median of $31,000 after taking a breather in the first quarter where median COV was $21,000.

Analysts say tight demand has sustained the pressure on prices, but noted that volume of sales have come down in June. Some have attributed it to the 'Khaw' effect - where uncertainty has beset the market since National Development Minister Khaw Boon Wan took over the ministry."

COV is cash a buyer pays over the valuation of HDB and since it needs to be paid by cash, it greatly effects  affordability of the flat and shows the demand versus supply. A lot of potential private property buyers are now waiting in the sidelines to understand what will be the private market look like, especially after Khaw Boon Wan openly shared his worries about private property prices. If these people wait, it means their HDB flats will not be available for the resale market.

Other than uncertainty, people are also forced to stay in their HDB flats with the record record high public private house price gap:
"THE price gap between mass market private homes and HDB flats has widened to a new record - making it harder than ever for aspiring HDB upgraders to buy a private home.
This is according to a new report by Goldman Sachs, which said that the price difference between 99-year leasehold homes in the suburban areas and five-room HDB flats grew to about $490 per sq ft (psf) in the first quarter of the year."
Significant supply of resale HDB comes from Singaporeans who upgrade to a private housing when their minimum occupation period of 5 years expire. These people are called HDB upgraders. If these people cannot upgrade, then they will continue in their HDB flats and it will not be available for the resale market.

According to The Ministry of Development blog second timers form the largest portion of the demand for HDB resale units, 34%. First timers (23%) and PRs (20%) follow them. First timers go to HDB resale market because many cannot secure a new flat due to over-subscription and some are not eligible because they earn more than 8000 SGD per month. Increased number of BTO completions and an increase in eligibility ceiling to 10,000 SGD per month will probably draw a good portion of this demand out of HDB resale market.

For now, supply may shrank much more than the demand causing a COV hike. According to The Straits Timesa article above, resale flats brokered by DWG and PropNex fell from 664 and 434 in May to 516 and 142 this month to date.

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