Why HDB Income Ceiling Should Not Be Revised Again

Just recently someone made a comment and asked for the HDB income ceiling to be revised again.

There may be merits to the case but I feel that the HDB income ceiling should not be revised for the following reasons:

• Developers of Executive Condominiums (ECs) benefit

By increasing the income ceiling, developers benefit as the pool of prospective buyers is enlarged. Prices in the property market now are constrained by many factors notably the Mortgage Service Ratio (MSR) and Total Debt Servicing Ratio (TDSR). Even with the MSR, prices of ECs can theoretically be priced at $1,000 psf if there are buyers (see my earlier post in October 2014 - How High can EC Prices Go?). If the income ceiling is raised, it means that more of the household income can go towards housing and gives the developers more room to raise EC prices when the market is buoyant. For the buyers, it is back to square one again as they will be squeezed by the higher housing loan.

• Housing is a personal lifestyle choice

Let's face it. Housing is a personal lifestyle choice. Similarly for cars. There are many people who aspire to own a private condominium or EC. I have seen many people with a household income of $6,000 to $8,000/month applying for an EC. And they apply for the largest or best (ie. top level or best view) unit they like. These units cost between $1 and $1.3 million. Some of these people own a car and maybe have a domestic helper to help. This group of people are likely to stretch their spending to the max and complain that the cost of living is very high. I shudder at the thought of what will happen to their family when there is a loss of income.

• The beneficiaries are a small pool of people

By raising the income ceiling, you are benefiting a small group of people. Worse still, you allow the higher income people to compete for public housing. The increased demand for public housing will put a strain on public resources which can be better channelled towards social spending.

• Contrary to some Government policies

The Government is encouraging people to get married earlier and has been controlling the housing prices to lower the stress on families. Couples who apply for a HDB flat before age 30 need only put a downpayment of 5% for their flat. By increasing the income ceiling, couples may put off their wedding to a later date since there is more room for their income to rise. Getting married later will affect the chances of conceiving although having a baby or babies are personal choices. So it is not in line with other Government policies.

• Repercussions on Government subsidies

Many if not most of Government subsidies are based on income for example housing grant, childcare etc. With the revision in income ceiling, should all the income ranges for these subsidies be revised as well? If yes, where will the money for these expenditures come from? More taxes - direct and indirect?

• Upsetting the balance in the property market

While the group of beneficiaries from a revised income ceiling is small, it can upset the balance in the property market. More people will try to apply for a BTO flat instead of buying from the HDB resale market, EC or private market. Some sellers of HDB resale flats might have to reduce their asking prices to sell. If HDB resale prices weaken further, existing owners will not be happy and this affects their ability to upgrade. The other spectrum of the property market like EC or private property gets affected as well. It will further affect the weak property market.


The revision in income ceiling can be a vicious circle. It may increase property prices, put a strain on public resources and possibly upset the balance in the property market. It should not be done and I hope the Minister for National Development does not consider it.

Unintended Targets of the Tightening of the Home Loan Market - Retirees

Even though the Total Debt Service Ratio (TDSR) and lowered Loan to Value (LTV) ratio have been implemented for more than a year, I believe the full impact of the measures have yet to surface.

Why?

From the run up in the property market from 2009 to 2013, in the absence of the two measures mentioned above, investors can over-leverage and buy multiple properties. Furthermore banks were dangling attractive interest rates to borrowers with typical lock-in periods of two and three years.

Those who were lucky to refinance before the measures can breathe easy for a while. For those who committed to a purchase from 2011, they will have to grapple with refinancing, easing rentals and the Seller's Stamp Duty (SSD) when the lock-in period ends and the development achieves its temporary occupation permit (TOP).

Borrowers with multiple loans will encounter difficulty refinancing with another bank as they have to meet the TDSR and LTV ratio. Even if they want to sell, they will need to pay SSD. If they hold, they might not be able to rent out the property at their desired rent (if they can find a tenant) to pay the mortgage. Effectively these people are at the mercy of the banks who can increase the interest rates.

Which brings me back to the title of the post - retirees. I know of retirees who depend on their property investments and other investments for passive income. The passive income may not be viewed favourably by banks and can be subjected to hairline cuts when re-assessing the repayment ability in the wake of the two measures. Some retirees might be forced to sell because they either cannot refinance or they face higher mortgage payments exceeding the rental collected on their property(ies).

One retiree is trying to offload his property at 20% below the last transacted price. The measures can deprive them of passive income in their golden years. Can they ever get back into the property market? Unlikely unless they do not take a loan as I do not see the two measures removed because they encourage financial prudence.

There will be more fire-sales coming up whether by retirees or speculators. Already I see owners trying to sell their completed properties of less than ten years for less than $1,000 psf. And these are in the city fringe areas.

Many investors are raring to go but held back because of the additional buyer's stamp duty (ABSD). When this tax is removed, transaction activity in the market is going to spike.

How High Can EC Prices Go?

Last week I discussed about the high return rate among Executive Condominium (EC) buyers. Today I shall look at how high can an EC unit on a per sq ft (psf) basis be priced.

The latest EC project to open for e-applications or e-Apps is Lake Life at Taman Jurong. On 6 Oct 2014, it was reported that 1,200 applications was submitted for the 546-unit project. The strong turnout was no doubt aided by the Government plans for the Jurong Lake district.

But what was eye-popping was the psf quoted for the EC project. At $880-$890 psf, this will be the most expensive EC project to-date.

Type	Size (sf)	Quoted Price Range (psf)	Estimated Price (Top Range)
5 bedroom	1,604-1,711	$880-$890	$1.42-$1.52 million
4 bedroom	1,195-1,701	$880-$890	$1.06-$1.51 million
3 bedroom	1,023-1,711	$880-$890	$0.91-$1.52 million
2 bedroom	743-969	$880-$890	$0.66-$0.86 million

Source: Lake Life e-brochure, news reports, Real Property Advisory Singapore


Can a family with an income ceiling of $12,000/mth afford the EC?

For a couple age 30 years, their affordability would look like this:

Household Income	$12,000/mth	$10,000/mth	$8,000/mth
Mortgage Service Ratio (30%)	$3,600	$3,000	$2,400
Total Debt Servicing Ratio (60%)	Pass	Pass	Pass
Loan Tenure	30 years	30 years	30 years
Interest	1.50%	1.50%	1.50%
Loan Amount	$1.04 million	$869,000	$695,000
Purchase Price (80% loan)	$1.30 million	$1.09 million	$869,000
Size of 3 bedroom	1,023 sf	1,023 sf	1,023 sf
Maximum psf	$1,271	$1,065	$849

Source: Real Property Advisory Singapore


For a HDB upgrader, with more equity on hand, their affordability would look like this:

Household Income	$12,000/mth	$10,000/mth	$8,000/mth
Mortgage Service Ratio (30%)	$3,600	$3,000	$2,400
Total Debt Servicing Ratio (60%)	Pass	Pass	Pass
Loan Tenure	20 years	20 years	20 years
Interest	1.50%	1.50%	1.50%
Loan Amount	$745,000	$620,000	$497,000
Purchase Price (70% loan)	$1.06 million	$886,000	$710,000
Purchase Price (60% loan)	$1.24 million	$1.03 million	$828,000
Size of 3 bedroom	1,023 sf	1,023 sf	1,023 sf
Maximum psf (60% loan)	$1,212	$1,007	$809

Source: Real Property Advisory Singapore


Looking at the numbers above, theoretically the developer can price their project at above $1,000 psf if there is no mortgage service ratio (MSR) and maximum loan tenure limit.

To afford the most expensive unit, the family has to have plenty of liquidity so as to fulfill the MSR.

Whatever it is, the applicants will be busy calculating how much cash they can afford to put for the downpayment so that they can catch the potential upside from the rejuvenation of Jurong Lake district.

High Return Rate Among Executive Condominium Buyers - No Cause for Concern

Early last month, The Straits Times ran an article on high return rate among Executive Condominium (EC) buyers. Reasons given range from inability to secure loan, lower mortgage servicing ratio (MSR), cancelled marriage plans and so on.

Based on my experience, returning units due to financing issues and not meeting Minimum Occupation Period (MOP) is highly unlikely.

When I registered my application or e-Apps for Lush Acres on 14 July 2013, I have to submit my income statement. If you exceed the maximum income ceiling of $12,000 a month, you cannot register your application.

If I am an existing home owner, the agent will ask me to login to MyHDBPage and check whether I have fulfilled the five years MOP.

As for loans, there are bank staff around to assist. Furthermore there is usually a one month period after e-Apps before you are invited to select an unit (I was invited to select an unit on 17 August 2013 but I opt not to). This period is long enough for you to determine your maximum loan for the unit.

The more likely reasons could be cancelled marriage plans (but I have heard of people not cancelling the agreement and find another spouse over the next three years), loss of income and perhaps jitters over the current property market conditions.

So buyers could have chose to give up the purchase because they think prices will ease further down the road.

My advice is don't give up the purchase. EC prices are unlikely to ease. Simply because of the 15 months rule imposed by the Government. This has unwittingly created a period where there are no launches of EC projects resulting in pent up demand. But down the road, the property market is expected to stabilise.

That being said, I feel that the application rate for new EC projects are likely to hover around 2 as there is a steady supply of Build-to-Order flats and softness in the HDB resale market.


Next I will explore how much higher can a developer price their EC projects.

Is the Private Residential Property Market near the Bottom?

Should I buy now or should I wait?

I guess this question is on almost every Singaporean's mind. I get asked by quite a number of people: aspiring home owners, upgraders and investors. Afterall, everyone wants to buy at the lowest price.

However estimating the bottom of the market requires a very big crystal ball. Unfortunately I do not have a big crystal ball now. Unless someone wants to sponsor me a Swarovski crystal ball.

I do have a small soccer ball. A mini 2010 World Cup soccer ball - a gift from my previous company.

I shall put my head on the chopping board and attempt to guess the bottom of the market.

Let's take a look at the chart below. It shows the price index of the Singapore Private Residential Property Market. The green years are the peak in the property market and the red years are the bottom of the property market.

It appears there is a certain trend in the market. The property cycle seems to be five to six years. A property cycle is defined as either peak to peak or bottom to bottom.

Some will argue that it is only four years from 1996 to 2000 and eight years from 2000 to 2008. We must remember that the sentiments in the property market was badly shaken by the dotcom bust in 2000/2001, 911 terrorist attacks in 2002 and SARS in 2003. That led to the rise in property prices coming to a halt and staying dormant till 2004.

But nevertheless from 1996 to 2013, in a short span of 18 years, we witnessed three property cycles each averaging around six years.

If we look at the bottom of the market, it shows a time gap of between five and six years between cycles. Again, counting the time span between 2009 and 1998 which is 12 years, it is again around six years for each property cycle.

So if the past trends were to hold true, we are not at the bottom of the market yet. If anything, the earliest the market will bottom out is probably end of 2014. But a more likely scenario will be 2015.

Source: URA / Real Property Advisory Singapore

There you have it. 2015 will be the bottom. Do your homework and assess your purchasing power before you commit to a property buy.

But please don't come after me if it did not materialise. Afterall I used a soccer ball instead of a crystal ball to peek into the future.

Will the Buyers Return in Force for Lakeville?

Tough days are coming and developers know it. No longer are the days where you can achieve sales of more than 50% during the launch. The Santorini for one, sold only 40% or 80 units of the 200 units launched for sale.

Analysts blamed the Total Debt Servicing Ratio (TDSR) for the quieter market. But I would say most of the demand has been soaked up. The TDSR helped to arrest price increases and return some sanity to the market.

More effort and even greater product differentiation is needed to move units. An article by Business Times on Tuesday (see below) highlighted that developers are spending or doing more marketing to sell their projects. Some examples are listed below.

• Seminars
• Multiple estate agencies

I have seen more TV ads placed by one of the largest developers in Singapore. Another foreign developer even invited the public to name their executive condominium project - not one but two.

All eyes are on Lakeville now which is expected to be launched soon. The developer said the average selling price is between $1,250 to $1,350 psf on balloting day. If sales disappoint, the negativity will hit the market and perhaps trigger even lower prices for other projects yet to be launched.

New Resale Rules Do Not Change the Resale Market at All!

The Ministry of National Development (MND) announced a new set of procedures for the HDB resale market on 10 March 2014. See below.

But does it change the resale market at all?

My stand is no.

HDB is merely shifting the valuation report to a later stage and perhaps avoid the situation of sellers requesting for a new valuation report (some sellers are unable to sell their flats for more than three months despite offering to go below valuation). However buyers and sellers can still call any HDB appointed valuer and request for an indicative valuation (with no liability on the valuer). But at the end of the day, the valuer might not be the one who carries out the valuation. Seasoned real estate salespersons can also advise buyers and sellers on the value. It really depends on whether buyers and sellers want to use the published HDB prices, the indicative valuation or real estate salesperson's advice since either value is not confirmed/endorsed by HDB.

This practice of requesting for a valuation report after an option has been granted in the private property market has in most instances seen valuers matching the agreed price. If the same situation is to happen in the resale market where valuers match the agreed price, it serves to stop the slide in HDB resale prices. 

Another reason why HDB is changing the whole procedures is probably because it is taking longer than three months for some HDB flats to be sold. Valuation reports are only valid for three months and sellers have to request for another valuation report.

Source: MND