Sustainable BTO Flat Supply? Really, HDB?

I wonder if anyone is celebrating or cursing after reading that HDB will scale back its Built-to-Order (BTO) flats in 2014.

I hate to spoil the party for those celebrating but the headline by HDB is misleading.

HDB is scaling back by only a mere 3% or 800 less BTO flats from 2013 (read point 4). But they are reducing the number of 3- to 5-room BTO flats by 18% or 4,000 units and increasing the number of studio and 2-room BTO flats. The supply of 2-room BTO flats will almost double from 2,600 in 2013 to 5,000 in 2014.

Source: HDB

What is the likely impact?

1) HDB resale flat prices have fallen especially the bigger flats. Cash-over-valuation (COV) has been declining with more resale HDB flats sold at or below valuation. This applies especially to buyers of Executive Condominium (EC) units as they are required to dispose off their HDB flat. If HDB does nothing to arrest the fall, it can be a potential political time bomb for the next General Election in 2016. By pushing some of these demand back to the HDB resale market, it might arrest the slide.

2) There is still a sizeable number of singles in their 40s and 50s who want a place of their own. Since they do not own any flat at the moment, price movements in the HDB resale market will not affect them. Giving them this chance to own a HDB BTO flat might work in the favour of the Government.

3) HDB could be looking at opening up the 2-room BTO flats to divorcees with child(ren) in the later part of 2014. Hence there is a need to increase the supply.

4) Construction costs are going to stay elevated. With the Government cutting down on foreign workers, the huge number of homes to be constructed and MRT lines in the pipeline, resources are getting stretched. Even if a recession comes, construction prices will not come down immediately.

So I would say it is not a sustainable BTO flat supply. It is just the HDB trying to balance the HDB resale market.


Note:
HDB BTO flats is a form of wealth distribution by the State. The HDB market is divided into two segments: current owners and would-be owners. Current owners want prices to stay elevated. Would-be owners want prices to come down. It is difficult to satisfy both at the same time. Now that the HDB has satisfied the would-be owners, it is time to take care of current owners.

I did not comment on the impact on the private property market because the buyers (coming from the HDB market) would have already secured a loan. I would speculate half will rent out their HDB flats to pay for the private condominium monthly loan installments and the other half will stay in their HDB flats and rent out the studio or 2-bedder condominium/apartment unit to cover the monthly loan installments.

Further Tightening of the HDB Market - MSR and Loan Tenure

Apparently someone up there thinks that the screws are not tight enough and they have to tighten it more to screw HDB owners up.

After achieving some initial success with the Mortgage Service Ratio (MSR) and shorter loan tenure which resulted in HDB resale transactions and cash-over-valuation (COV) falling, the Ministry for National Development (MND) decided to cut the MSR (35% to 30%) and loan tenure (30 years to 25 years).

What will happen next? Your guess is as good as mine.

Resale transactions and COV will continue to ease thereby making it more affordable for first time home buyers. The latest median transacted COV is $20,000.

With a shorter loan tenure and MSR, buyers have to fork out more cash if they buy a more expensive or big HDB flat. There will be lower demand for 5-room and bigger flats.

Sellers will curse their luck. As it is, I have seen advertisements for the same HDB flats for more than a month without success. The seller was only asking $20,000 COV. Two weeks ago, the advertisement changed to View To Offer (VTO) with no mention of COV. It is going to get more chilly for HDB resale flat sellers. There are going to be more transactions where COV is zero or even negative depending on how desperate the seller is.

Those borderline HDB upgraders who committed to a private condominium or executive condominium in 2010 will be the first to get hit HARD, real hard! When I say borderline, I mean those who need to sell off the HDB flat as they do not want to rent out their HDB flat and have no ability to service two loans. Their condominium or EC is going to obtain its TOP in 2014.

But as it is, our Government always try to balance out the market. To maintain a steady rental market for those wanting to hold on to their HDB flats, the Government has directed that the new Permanent Residents (PR) ie. those who get PR status for less than three years rent them. If I am a PR, I will be mad.

Already with the Additional Buyer's Stamp Duty (ABSD), a PR have to pay additional 5% for their first property purchase. Many are putting off the purchase of a property. Now they have to wait even longer. Who knows if the ABSD rate might go up?

Despite the Government trying to keep the HDB rental market steady, we doubt it will help much. First, approvals for PR status have been falling year after year since the Government tightened the criteria. We don't see it easing soon. Second the number of HDB upgraders who are holding on to their flats and renting them out is increasing. The 2Q 2013 subletting cases rose 6% from 1Q 2013. While HDB flat rentals have been holding steady, it is near the tipping point.

The mass market condominium will experience a knee jerk reaction but the fall in transactions will not be glaring. MND chose a nice month to announce new measures. It is the Lunar Seventh Month afterall and transaction volumes are expected to be low anyway.

Hopefully investors will be more sane after absorbing the new cooling measures and not pay ridiculous prices for a mass market condominium unit.

HDB Resale Prices up 0.6% in Q1, COVs Drop