Not necessary that reduced supply pushed prices up

Straits Times reported that the continued rise in resale flat prices despite record number of new flats launched is due to the reduced supply of resale flats as HDB dwellers are more determined to hang on to their flats and rent them out when they upgrade to a private home [1]. That greater determination to hang on to flats was in turn reported to be due to the 2010 cooling measure that prevents private property owners from taking on another HDB flat [1].

Record number of new flats launched doesn’t necessarily mean that demand has been satisfied. Otherwise why would HDB want to deliver at least another 20,000 new flats next year [2] which is more than the 15,000 Singaporean marriages each year [3]? Furthermore, resale flat buyers tend to be those who don’t qualify for new flats or who can’t wait [4] or who cannot accept the far flung locations of most new flats. For these groups of people, new HDB launches may not necessarily quench their thirst for resale flats. So there could still be strong demand for resale flats but that demand has yet to translate to strong resale numbers due to the current high COV prices as sellers stick to higher asking prices [5-1].

It was also reported that low interest rates and healthy HDB rental yields help upgraders pay for private property mortgages [1]. All else being the same, helping HDB dwellers upgrade to private property through low interest rates and healthy rental yields means potentially more flats released to the market which will increase, not decrease resale flat supply. Even if none of these additional HDB upgraders sell their flats, it simply means there is no increase, not that there is a decrease in resale flat supply. Furthermore, while rental yields have improved, private property prices and hence mortgages have also increased so much so it’s not a given that mortgage payment is necessarily easier now than before.

The graph [6] below shows that there was a sharp fall in resale numbers between 2009 Q3 and 2010 Q1 which occurred before the 30 Aug 2010 announcement preventing private property owners from purchasing and keeping an HDB flat. Since resale numbers had already begun sliding before the 2010 announcement, we can’t be sure that the slide after 2010 was not due to the continuation of the same force acting just before 2010 or due to the 2010 announcement itself.

The graph above also shows that between 2007 Q2 and 2012 Q3, HDB resale price kept going up with only the slightest of dips during the recession of 2009 even as resale numbers fluctuated up and down. HDB resale price may not be the price we should look at to understand the rise and fall of the HDB resale market. Many HDB resale buyers are concerned with the cash-over-valuation and to them, being able to afford a resale flat means affording the cash-over-valuation. When we plot cash-over-valuation together with resale numbers as shown in the graph below [7], the ups and downs of both price and quantity transacted start to appear:

The graph above shows that the rise in COV between 2009 Q2 and 2010 Q3 corresponded to a fall in resale numbers between 2009 Q3 and 2010 Q4. High COV in 2011 corresponded with low resale numbers in the same period. So what we see of late may not be out of the ordinary but part and parcel of the endless cycle of ups and downs of COV and resale numbers as one affects the other and is in turn being affected. As it is, COV has been falling since 2011 Q3. When it has fallen sufficiently, we could see resale numbers going up again.

The graph below [8] shows that resale numbers closely follow the number of PRs added each year:

It is therefore also possible that low resale numbers now is due to the slowdown in intake of PRs which reduces buyer numbers. This reduced PR intake could mean greater selectivity on the part of the government which could mean PRs with better earning powers who can better afford high COVs thus keeping COVs high despite the smaller numbers.

In summary, there could be other explanations to the current low resale numbers but high resale prices despite record launches of new flats. High COVs may have priced out buyers leading to reduced resale transactions. Smaller intake of PRs with better earning powers could have led to reduced resale transactions but higher COVs and hence higher prices. Other explanations include record BTO launches soaking up buyers with limited budgets leaving behind buyers who can afford higher COVs [5-2]; high private property prices force aspiring HDB upgraders to stay put [5-3] and restrictions to the second concessionary HDB loan making it more difficult to cash in on HDB sales [5-4].

[1] Straits Times, Reduced supply pushes prices up, 3 Nov 2012

DESPITE a record number of new flats launched by the Housing Board (HDB), prices of resale units continue to rise – 3.9 per cent so far this year – outpacing both the private market and economic growth.
This, said analysts, is largely due to a reduced supply of resale flats as more HDB dwellers choose to sublet their units when they upgrade to a private home.
Helped by low interest rates and healthy rentals from HDB units, these dual-property owners – of whom there are 33,000, or 4 per cent of all HDB flat owners – can use the rental to help cover mortgage payments on their private property.
Owners and analysts said a 2010 cooling measure – which barred private-property owners from owning both private and public homes – has also made HDB upgraders more determined to hang onto their flats.
Owners of private property who buy HDB flats must dispose of their private home within six months.
However, those who own flats can still buy private property.
And after they have stayed in the flats for the minimum five years, or less in some cases, they can rent out the whole unit while living in their condos.
“We know that once we sell it, we probably cannot buy again,” said housewife Sakura Siow, 38, of her family’s Jurong flat. They moved into a condominium in 2010.
“The rules keep changing for people with two properties so we are scared that we will not be able to come back into HDB if we sell.”
The number of resale transactions has dropped by a quarter since the 2010 measure. In 2010, 32,000 resale flats changed hands. Last year, this fell to 25,000 and the figure for this year is expected to be the same.
At the same time, the number of HDB units rented out has skyrocketed. In 2009, about 24,000 units were approved for subletting by HDB. This has surged to 43,000 as of the third quarter of this year, an 80 per cent increase. This means that about 4.5 per cent of the stock of HDB flats is being sublet out.
Agency bosses said their subletting business has grown by 10 to 20 per cent while resale transactions have shrunk by about the same proportion.
But as resale flat prices have been rising quickly, Propnex Realty chief executive Mohamed Ismail said commissions are still healthy.
While the money agents make from rental deals is less than from resale transactions, Rainbow Cottage key executive officer David Huan said subletting deals are agents’ “bread-and-butter” as commissions come in more quickly than for resale ones.
DWG senior manager of training, research and consultancy Lee Sze Teck expects the bottleneck in the supply of resale flats to ease in a few years, when those who are waiting for their new flats to be built get their keys and sell their old units.
With the Government curbing the number of foreign workers and a huge supply of new flats and private units, analysts expect rental yields to fall in a few years.
The HDB has rolled out a record 27,000 new flats this year, and there are over 100,000 new private residential units and executive condominiums in the pipeline.
For now, dual-property owners like Mr Ryan Sim, 38, are sitting pretty. The micro-processor firm boss moved his family into an East Coast condo and is renting out his Simei five-room flat for $2,900.
“It’s better to keep the HDB flat because there’s more oversupply of condos coming than flats,” he said.

[2] Straits Times, HDB to offer at least 20,000 new flats in 2013, 7 Aug 2012

The Housing Board will deliver at least 20,000 new flats next year. That is the promise National Development Minister Khaw Boon Wan has given to Singaporeans

[3] Straits Times, More HDB flats being built to cater to singles: Khaw, 15 Oct 2012

Mr Khaw replied that the HDB has been building 25,000 flats each year for the past two years, as compared to only 15,000 marriages involving Singapore citizens each year.


“If people can buy Build-to-Order (BTO) flats, they will buy,” said Lee Sze Teck, Senior Manager of Research and Consultancy at Dennis Wee Group. “Resale flats are for those who don’t qualify, or who cannot wait.”

[5] Straits Times, Cash premium for HDB resale flats rises again, 10 Nov 2012

[5-1] As for rising COVs, Dennis Wee Group spokesman Lee Sze Teck said this is due to sellers not budging on asking prices following record transactions recently.

[5-2] Mr Nicholas Mak, head of research at property consultancy SLP International, said the record supply of new flats may have contributed to rising COVs. The new BTO launches have soaked up buyers with limited budgets and those “left in the resale market are actually buyers who can afford to pay a higher COV”.

[5-3] Mr Tan Kok Keong, head of OrangeTee’s research and consultancy, said another possible reason is the rise in private property prices which has caused aspiring HDB upgraders to stay put.

[5-4] greater restrictions linked to a second concessionary HDB loan, implemented in 2010, which requires buyers to use 50 per cent of the cash proceeds of the sale of their existing flat to buy the next.

“These buyers are left with little to cash out from their first investment as they have to plough 50 per cent into the second flat, and use the remaining amount for cash premiums and agency fees,” he said.

[6] Resale numbers are normalised to fit into the same graph. It is not the numbers per say but the fluctuations of those numbers that is important.

[7] When normalised, the shape of the graph of median COV against time looks nearly identical for most housing estates (except for Bukit Timah and Central of which numbers are too small). The same shape is obtained regardless of whether it is 3-room, 4-room or 5-room flats. Averaging the normalised COVs gives us an accurate picture of how median COVs have fluctuated over time.

[8] PR numbers are only available annually and have to be duplicated into fours to fit into the quarterly graph. It is not a plot of PR numbers but increase in PR numbers from the previous year as the incremental PR number is deemed to add pressure to resale flat demand. The number is also normalised to fit into the graph.


One Response to “Not necessary that reduced supply pushed prices up”

  1. pendants Says:

    I usually wish to know a small amount about that person whose posts I’m reading

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