I feel there are only two times a family can sell their flat: (A) the right time, and (B) the wrong time. Which leads us to the easiest quiz ever: What time is it now for selling? First hint is that the answer’s not A. And if you disagree, here’s a few things you should know before selling:
1. COVs are at a 2.5 Year Low
Cash-Over-Valuation (COV) is the money paid over and above the actual value of the flat. COV is vital for two main reasons:
The first is that it tends to be a large cash infusion. That liquidity is exactly what you need when upgrading. But considering COV prices are their lowest in 2.5 years, trying to upgrade now is the definition of bad timing.
The second reason is that COV makes up a large part of your flat’s capital appreciation. If you’ve put in money to improve your flat (e.g. interior design), COV is often how you reap the benefit. But with COV prices so depressed, you’ll be lucky to break even.
Now I’m not about to politicize the issue, and get into a “Should housing even be an asset?” debate. If I do that, they’ll never unshackle me from this wall. For all practical purposes, let’s say your flat’s an asset. Now look at how it’s faring:
Back in September 2012, we were still discussing a million dollar resale flat. It had a COV of around $195,000, and while that was a freak incident, pay close attention to the language in the linked article. At the time, it saw fit to mention that COV is “normally below $100,000”.
What does that tell you about COV estimates, less than a full year ago? I’ll tell you one thing for sure: A COV of $50,000 wouldn’t have surprised anyone back then.
But as of January this year, COV prices were around $35,000. As of July, they fell further to around $20,000. In an environment where prices are going down faster than a bribed boxer, do you really want to sell?
2. It’s Hard to Get Financing Right Now
The recent cooling measures have introduced a MSR (Mortgage Servicing Ratio) of 35%, and a Total Debt Servicing Ratio (TDSR) of 60%. This other article will explain it in detail, or you can ask a mortgage specialist for free at MoneySmart.
But basically, it means people can borrow less from the bank. Ergo, many home buyers will not be able to borrow enough to meet your asking price. It might not matter how much you’ve improved the property, how great the location is, etc. The buyers just may not have the leverage right now, however much they like your flat.
But if you want to sell anyway, you’re like a Ferrari salesman insisting on closing a deal with a hobo. You can end up selling for as much as the buyer can give you, rather than the full value.
The other way this affects you is if you’re upgrading.
You can’t borrow as much for your new condo, bigger flat, etc. And with the COV on your existing property lower than usual, are you sure now’s the best time to upgrade?
Remember that property prices move in cycles. Each peak is usually higher than the last; so if you’ve missed this one, it might be worth waiting to catch the next before upgrading. Which leads me to the next point…
3. Consider Just Waiting a While More
Defence Minister Ng Eng Hen recently told Toa Payoh residents not to sell their flats, and he’s right. Toa Payoh’s a gold mine, and unless you have unique reasons, there’s no reason to let go of it. Especially not when resale prices are down.
But we can apply the same principle to most HDB flats. Just take a look at the resale price index: Like I said in point 1, every property peak tends to be higher than the last. So if you can afford to hold, why would you choose to sell during a down period?
Even with home loan interest rates creeping up (around 0.2%), a few hundred bucks a month hardly justifies a panicked sell-off. And if it’s profit you’re aiming for, you’ve probably missed the boat.
It might be best to live with it and wait for the next peak, rather than leap off the pier.
4. New Supply of Flats for Singles Will Lower Demand
HDB is launching BTO flats that cater to singles, with massive subsidies. This is the population demographic that, just a month ago, was still fighting for resale flats with Permanent Residents (PRs).
It’s likely that these new flats will cool demand in the resale market; again, a factor that drives COV downward. The continuation of this approach (HDB catering to singles) is a unique factor on this list. It’s the only one that suggests you should sell, before demand softens even further.
But there’s a limit to how many “flats for singles” HDB can set aside. And with the continued influx of foreigners and PRs, who can’t buy BTO flats, most signs point toward continued rises in resale flat prices. In the future, that is.
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