Weak demand, looming glut weigh on housing market
Housing data released in recent weeks have revealed further weakness in real demand, while the oversupply situation is set to worsen. The figures are also raising more questions about Singapore’s public housing policies and whether grants supported by taxpayer funds may be subsidising declining home values.
Housing data released in recent weeks have revealed further weakness in real demand, while the oversupply situation is set to worsen. The figures are also raising more questions about Singapore’s public housing policies and whether grants supported by taxpayer funds may be subsidising declining home values.
First, it was disclosed in Parliament on Feb 12 that about 10,000 new Housing and Development Board (HDB) flats were still available under the Sale of Balance Flats scheme. This comes after all the roughly 100,000 Build-to-Order (BTO) flats launched in the past four years were oversubscribed and sold, with the exception of a small number of units that may not have been sold because of ethnic ratio quotas.
It could be that “returned goods” make up about 10 per cent of total supply, accounting for these 10,000 balance flats. Successful BTO applicants who had selected their flat but subsequently backed out of their purchase contribute to the stock of these balance flats. Such buyers, who have to forfeit 5 per cent of the purchase price, back out for various reasons: Some couples decide not to get married, while the financial situation of others could have deteriorated.
There could be other reasons. We do not know from the brief announcement in Parliament whether the pace of buyers backing out of BTO units has increased over the past year. The HDB resale index has dropped by a cumulative 8.6 per cent over six consecutive quarters, since the third quarter of 2013. Are there applicants who backed out of their BTO purchase to buy a flat from the resale market, taking advantage of falling prices in the secondary market amid deepening “cash-under-valuations”? Are there BTO “investors” — those who are more profit-motivated than home-usage driven — who backed out in the hope that the downward trend of resale prices may lead to much lower prices for new flats?
Secondly, the long-awaited HDB Annual Report 2013/14 — which was released in December, about two months later than usual — showed a large jump in its financial deficit to S$1.973 billion, more than double the S$797 million deficit in the previous year. The spike resulted from additional grants for home buyers as well as the massive construction pipeline of 86,298 BTO flats, up from 72,737 in the year before.
While all the HDB’s deficits will be covered by government grants, what is worrying is the magnitude of the gap and the potential burden on the Government and taxpayers. If Singapore’s economy worsens, the S$1.97 billion deficit could rise further as more BTO buyers back out of their purchases. Or, if HDB resale prices continue to fall, more BTO applicants may back out.
Finally, the latest set of Urban Redevelopment Authority data for the fourth quarter of last year revealed persistently high vacancies for Executive Condominium (EC) units. Since the third quarter of 2013, 4,610 new EC units have been completed, raising the total number of these hybrid private-public housing units to 15,040, from 10,430 units. The 4,610 new units have been fully sold after they were launched about four to five years ago.
Despite the requirement of a five-year minimum occupation period (MOP), the total number of vacant EC units rose from only 36 in the second quarter of 2013 to 1,734 in the fourth quarter of last year, or a vacancy rate of 11.5 per cent. The number of vacant EC units has been unusually high over the past six quarters. In the 10 years from 2005 to last year, the number of vacant EC units exceeded 500 in only one quarter — at 588 units in the second quarter of 2005, representing a 6.2 per cent vacancy rate then.
What could be the reason for the current 1,734 vacant EC units, given that they are supposed to be fully sold and that buyers are subject to the MOP? The MOP requirement means the units cannot be leased out and should therefore be expected to have high occupancy rates. So why would such a product, heavily subsidised by taxpayers with grants for the sandwiched class, have such high vacancy rates instead?
Could these vacant units be owned by investors, as opposed to owner-occupiers, who somehow qualified for grants supported by taxpayers? If, theoretically, the land for these ECs were sold for private residential development, would government revenue from such land sales be much higher?
The ramping up of new home construction over the past four years has led to a rebalancing of supply and demand, causing property prices to decline moderately, Minister for National Development Khaw Boon Wan wrote on Feb 20 on his ministry’s blog.
Policy measures, such as loan curbs and the three-year waiting period for permanent residents to buy HDB resale flats, have also worked to put downward pressure on prices, helping buyers, though the longer-term effects are still unknown. Many existing HDB and EC owners may be saddled with negative asset values as the massive pipeline of 182,506 residential units — public, private and hybrid — is progressively completed.
ABOUT THE AUTHOR:
Ku Swee Yong is a licensed real estate agent and chief executive of property agency Century 21 Singapore. He recently published his third book, Real Estate Realities: Accommodating The Investment Needs Of Today’s Society.