A few days ago, HDB launched a record number of flats. Now they’re jamming the brakes and cutting supply again. What’s going on? Is it government mind games? A spectacular typo in an e-mail to the builders? Application of the strategic method known as scissors-paper-stone? None of them, because there’s actually a purpose behind the madness:
Why We Need to Tone It Down
Back in June, the supply of BTO flats was already high.
So high, in fact, that the government planned to tone it down 2015. Then a few days ago, we had a record-breaking launch of almost 9,000 new flats. We also saw the application rate for BTO flats, which was 5.3 in 2010, plummet to 2.9 this year (i.e. fewer people want them).
All the signs suggest that, at HDB’s current pace, we were headed for a supply glut.
That’s when there’s too many flats to sell, and HDB’s left with a whole bunch of vacant units. Units that – with or without tenants – still require constant cleaning, checking, repainting, etc. The unoccupied units basically become a giant shredder for taxpayer dollars.
The question on everyone’s mind is….
Why Allow the Supply Surge in the First Place?
Make the supply go up gradually, and then stop when it’s at the right point. Is that what you’re thinking?
We’re pretty sure HDB could do it too. But their start-stop approach to supply comes with another benefit: it acts as a short term way to cool prices. It works something like this:
- HDB carpet bombs the country with BTO flats.
- The ramped up supply (three years worth, coupled with a record breaking launch) makes balloting easier.
- The availability of BTO flats decreases overall demand for resale flats, also lowering the median Cash Over Valuation (COV).
- Timing it to the point where resale prices plummet, and there is a threat of a supply glut, HDB slams the brakes.
So sure, HDB could have launched the new flats in a slow and gradual way. There just wouldn’t have been as much impact on lowering home prices (for more on things that will raise your home loans value, follow us on Facebook).
A View on the Impact: Investor Versus Home Buyer
For home buyers, all of this constitutes a positive impact. They can get resale flats at lower prices (probably), and the huge number of BTO flats give them more choices. Balloting has also become a lot easier since 2010.
For property investors, well…they mainly have to cross their fingers and hope the tapering raises demand again. With the current demand for resale flats at an ebb, the median COV is likely to keep falling. We spoke to property agent Albert (not his real name), who thinks:
“At least the over-supply has stopped. It has driven prices down like crazy (for resale flats -Ed.) and it is getting to the point where everyone would rather keep their house than sell. I have seen one or two units sold under valuation, and I think the trend will continue. Even if they taper the supply next year, I don’t know if that will slow the pace of falling prices.”
Albert agrees the early tightening of supply is good for investors. However, he adds that resale flat prices are still likely to tumble further:
“When will the demand rise again?” Albert asks, “It will take a long time, given the number of units HDB launched. Maybe demand will return in five years, maybe 10. This is why investing in the property market takes holding power, to wait out situations like these…even for many years.”
How do you think this start-stop strategy is going to affect public housing? Share your thoughts with us here!
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