Prices of HDB Resale Flats to be Uneven in 2009 – though generally firm

According to HDB's Resale Price Index released on 23 January 2009, prices of HDB resale flats rose 1.4 per cent in the fourth quarter (Q4) of 2008 over the preceding quarter.

However, the quantum of the growth in Q4 was smaller than in Q3 2008 which registered a much stronger 4.2 per cent price rise. It was also the first time price growth has dipped below three per cent in six months. This may be a sign of things to come.

In fact, after hitting the all-time high in November 2008, prices of HDB resale flats appear to be easing in January 2009.

Moreover, the market mood turned cautious at the beginning of the new year after a slew of bad news hit the airwave. With the highest number of white-collar layoffs in almost a decade, prospective buyers are more circumspect.

The overall prices of HDB resale flats may start to ease from the first quarter of 2009 onwards. Some experts even predict that the overall HDB resale prices will drop five to 10 per cent in the full year. The factors that are likely to thwart price growth this year include:

• The softening of market valuation prices, (which often act as a guide price for buyers), due to the lower Cash-over-Valuation portion.
• The falling rents for approval units under ‘whole-flat subletting’ due to higher supply and declining demand, in the wake of high corporate layoffs and mass departure of permanent residents.
• Demand for resale flats started to weaken in Q4 2008, where only 6,186 resale transactions were registered. In Q3 2008 there were 8,110 resale transactions. The number of resale deals for the whole year was 28,419, which represents a three per cent dip from the transactions in 2007.

However, as the public housing segment is a broad ship, comprising different flat types for the various different population segments, the factors affecting resale prices can be varied.
 
Factors supporting demand for smaller flats

On the other hand, the strong base of potential buyers, particularly for three- to four-room flats will provide the underlying support in the HDB resale market. With the enhancements made to the Additional Housing Grant (AHG), more middle income households will qualify for state subsidises when buying their first public flats.

To encourage more lower- and middle-income citizen households to own their first flat, the government has approved an additional S$10,000 for the AHG, bringing the maximum grant to S$40,000. In addition, the income ceiling for qualification for the AHG has been raised to S$5,000 monthly.

Ironically, the worsening economic climate will create more demands for subsidised flats as more potential homeowners will opt for financial prudence in a time of great difficulties.

Factors supporting demand for larger flats
 
However, the argument may not apply to the larger flat segment which may suffer from the ‘crowding out’ effect when more mass market condominiums join the fray with more affordable price tag – if the recession persists beyond middle of 2009.

In fact, barely two months ago, five-room flats were still asking for very high prices; but in January 2009, sellers of bigger flats were content with prices that are par with the HDB market valuation price or even lower than that.

HDB resale market entering a new ‘Low Cash-Over-Valuation’ cycle

According to the latest HDB data, the median cash-over-valuation (COV) portion for all HDB estates had fallen by 21 per cent to S$15,000 in the fourth quarter (Q4) of 2008, compared with a 4.5 per cent to five per cent decline in the previous three quarters.

COV portion of an HDB resale flat deal is the cash amount over and above the market valuation price determined by an independent appraiser. It acts as a barometer of the overall resale price trend. When the COV falls, so will the overall resale prices.

In fact, larger flats suffer the largest fall by quantum in Q4 when compared Q3. For example, COV for five-room and executive flats fell by S$6,000 each.

Table [1] – COV for all flat types in 2008

In fact, COV for larger flats continues its downtrend in January 2009.

Some five-room flats and executive flats are even asking for ‘at or below’ valuation price. This means that the purchaser need not fork out any cash, except the deposit of up to S$5,000 which must be paid in cash, if the purchaser is qualified to enjoy the HDB’s subsidised loan. For purchasers who are using private bank loans, they need to pay the first five per cent down-payment, which includes the deposit of S$5,000, in cash.

New valuation prices will be lower

It appears that the downward trend has been set as the supply of larger resale flats appear to be higher than the number of willing buyers. The market valuation prices may fall as a consequent as all valuers, when appraising the value of a resale flat, adopt the comparative valuation method.

This means that most of the existing resale flat listings on the open market which were appraised earlier would have higher market valuation. Conversely, most of the new listings will come with lower market valuation prices, which make them more attractive to buyers.

Resale prices overheated during boom years

In some popular heartland estates, such as Tiong Bahru and Queenstown, the resale prices have gone beyond acceptable threshold for potential homeowners of modest means. Their values had appreciated by leaps and bounds during the ‘en bloc sale’ craze between mid-2007 and early 2008.

As such, flats sellers in these areas are now asking for lower COV. For example, the median COV for five-room flats in Bukit Merah, which reached S$61,000 in Q3 2007, has fallen to S$10,000 in Q4 2008.

Overall, the COV for five-room flats registered a 35 per cent fall to S$11,000 in Q4 2008, from S$17,000 in Q3 2008. However, the fall in the COV of four-room flats was smaller at 25 per cent, due to stronger demand for smaller flats.

Prepared by Sam Gian - Independent Real Estate Sales Trainer