Earlier this week, National Development Minister Khaw Boon Wan announced HDB will slow the supply of Built-to-Order (BTO) flats by 25% next year.
This suggests that the government is trying to create a soft landing for HDB resale prices.
A bit of background before I justify this statement.
Since the introduction of the Total Debt Servicing Ratio (TDSR) cooling measure in June 2013, HDB resale prices have declined significantly.
According to SRX Property, HDB resale prices are off 8.9% since their peak in April 2013.
In May 2013, one month before the government introduced TDSR, Straits Times reported that Mr. Khaw, speaking in Mandarin, told participants at an Our Singapore Conversation dialogue on housing, “If housing prices keep rising, it won’t be good. If we can maintain them or even lower them by a few percent, for example 5%, that’s good. When I came into MND…that was my target.”
Based on an 8.9% decline, Mr Khaw’s target has already been met.
Furthermore, it doesn’t look like the decline in HDB resale prices has run out of steam.
The SRX Price Index has dropped for eight consecutive months, suggesting that the HDB resale market is on track for a double-digit decline of at least 10%.
10% is a significant watershed for any housing market. When prices start to fall into the double digit range, a malaise can befall homeowners.
For most people, their homes are their most important financial asset. It is a measurement of their current well-being as well as that of their future. For example, when prices are up, people are more confident that they will be able to trade up for a more expensive home or retire on the nest egg created by their home.
In other words, when prices are up, people tend to feel buoyant and more secure. When prices go down, anxiety can set in.
Therefore, it’s possible that the government is looking at current trends and reaching for a very important policy tool – BTO supply - to slow down the decline of HDB prices.
We would suggest that the increase in number of BTO flats has been more effective in containing property prices than the TDSR has.
We arrived at this conclusion by comparing the difference in price behavior between the HDB and private, non-landed resale market.
As the SRX Property graph indicates, SRX Price Index for HDB resale is almost a perfect downward slope whereas its private counterpart is a stubborn series of irregular peaks, valleys, and plateaus that has resulted in a decline of only 5.6% since its peak in January 2013.
By introducing a record number of BTO launches at below resale market price from 2011 to date, the government effectively reduced demand for resale HDB flats as the same set of buyers are now faced with more choices. At the same time, this policy increased the supply in the resale market as existing HDB owners must sell their flats after receiving the keys to their newly completed BTO flats. Consequently, both lower demand and higher supply exerted downward pressure in HDB resale prices this year.
The fact that Mr. Khaw expects to reduce BTO supply by 25% is a strong indication that the government preparing itself to slow the decline in HDB resale prices.
The question is whether cutting BTO supply by 25% is enough (or too much) to create a soft landing and ease homeowners’ concern about the value of their most important asset.
Source: SRX (24 Oct 2014)
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