There was a time when resale flats were budget buys. When we couldn’t afford a new place, the resale market was the last resort. It was cheap, it was available, and the only “cash over valuation” was paying off the previous owner’s loan shark. But not any more: These days, resale flat prices are sky high. And despite cooling measures, they’re clinging on tighter than your girlfriend at a horror movie. In this article, I explore four possible reasons why the prices aren’t dropping:
1. Higher Rentals and Permanent Residents
Great, now I have to discuss Singaporean PRs and local property. This’ll turn out like an inter-faith dialogue at an Al Qaeda conference.
Here we go: Since the new cooling measures, rental rates have been at an all time high. From the start of 2012, rental hikes of 5 – 10% have become a reality. Rental costs, even for HDB flats, can hit the $2,500 – $3000 mark.
Great news for landlords. But a significant portion of PRs depend on rented or sub-let HDB units; and right now, they’re feeling like over-milked cash cows. We’ve mentioned elsewhere that rental money is wasted money; the advantage of rental is supposed to be lower cost. But since rentals are now at the $2500 – $3000 mark, they’ve become comparable to a home loan anyway. There is, in effect, no advantage to renting over buying. On top of that, high rentals mean PRs need to purchase fast; the longer they wait, the more money they’ll blow on rental.
The result on the resale market is rapidly rising cash over valuation (COV), which is reaching medians of $50,000 in some districts. And considering over 80,000 PRs joined us in 2011, this trend won’t stop any time soon.
2. Supply Crunch
Between 2003 – 2007, construction of new HDB flats fell by 75%. Someone must have taken a seriously long coffee break, and what we’re seeing now is the fallout from that.
Nothing much to say here: It’s demand and supply. There are now more people who want resale flats than there are resale flats. So long as that’s true, sellers can charge whatever they want. Their advertising may as well consist of dropping their pants, mooning you, and asking “What are you going to do about it?”
There has been some government response to the supply crunch: A large number of BTO flats were launched in 2010, but many of these aren’t even complete yet. And knowing the speed of the average contractor, you might be interested in a different type of home by the time they’re done. Namely, a retirement home.
Property expert Colin Tan, from Today Online, predicts that the supply crunch won’t ease till 2017.
3. Upgraders Holding On to Their Flats
If you currently own private property but buy a HDB flat, you are required to sell the private property within six months. This caters to HDB’s core purpose: it’s about essential housing, not investment opportunities for speculators.
Before this law, upgraders (people moving from HDB into private housing) were quick to sell their old flats. Now, it makes more sense for them to hold on to the old flat, renting it out to service the new home loan. After all, if they do sell their HDB flat, they won’t be able to buy another one again; not without losing their private property. In effect, the new law makes it harder to eventually own two properties, and discourages reselling.
This contributes to the supply crunch in point 2.
In addition to this, higher rental yields make it more viable to rent rather than re-sell. Previously, upgraders might have needed to sell their flat fast, in order to service their new home loan. But the increased rental income now covers a significant portion of their loan repayment, which also discourages selling.
4. Demand Can’t Be Siphoned to New Flats
The demand for resale flats isn’t easily diminished. Even with a lot of new flats (which take time to build), there is a core demand that remains unaffected. There are three groups that comprise this:
- Permanent Residents
- Location Dependent Buyers
PRs can’t directly buy new HDB flats. As such, the availability of new flats only affects them indirectly, and they maintain the consistent demand for resale flats. It’s not their fault: Their alternatives are private property (often too expensive), or renting (see point 1).
Resale flats are a favourite purchase amongst downgraders. For example: The children of a retired couple move into their own house. The retirees, who are now living on their CPF, have no need of their five room flat. Their most obvious choice is to downgrade to a resale two or three room flat, using the money from the sale to cover their retirement.
Location Dependent Buyers
These are buyers who have specific location requirements (e.g. near a particular school or hospital). In some cases, the only property that caters to their requirements are resale flats. This is especially true in older districts, where there’s barely room for a new Mama Shop, let alone a new development.
Still Want a Resale Flat?
With current COV prices soaring, you’d be advised to think carefully about buying a resale flat. Remember that COV is not covered by a home loan, so you need to have cash on hand.
To make sure your financing will suffice, make sure you get the latest home loan rates first with MoneySmart. This free website will pick the best home loan package for you, which might make that high COV more bearable.
Just key in the details of your property, a loan amount you can manage, and the site will find the best options. You can also talk to the site’s mortgage specialists, who will advise you on your financing needs.
Are you bothered by the price of resale flats? Comment and tell us how it affects you!
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