Stubborn HDB Property Bubble?

Some of my friends painfully resisted buying a flat for the past few years, hoping that the property bubble will pop when the global recession erupted. But to their disbelief, the prices and cash over value (COV) continue to defy gravity and broke new highs. This prompted me to take a closer look at this bubble, why is it so stubborn!?

Demand

Looking at the past prices (available data from 04 to present):
src: http://www.hdb.gov.sg/fi10/fi10321p.nsf/w/BuyResaleFlatResaleIndex?OpenDocument

it can be seen HDB resale prices hit the bottom and remained there after '97 Asia Financial Crisis to late 2006. Though this period included the dot com bust (2000 to 2002) and SARS crisis (2003), there is still generally good economic and population growth (local + foreign). Thus it is quite unthinkable that demand for flats will remain stagnant for nearly 10 years!


Supply

From HDB FAQ, it can be seen that they massively overbuilt in 1997 and and apparently took them nearly 10 years to clear their stock:

...

With the BTO System, flats are built based on real demand. Before any BTO project proceeds, we need to have a clear indication of demand - where to build, what type of flats to build, how much to build.

In this way, there is better management of supply and demand. Before the BTO System, when we tried to build ahead of demand, we ended up with a huge oversupply situation when the financial crisis hit in 1997. Prices were depressed which did not benefit anyone.
...

src: http://askhdb.hdb.gov.sg/Home/hybrid/Themes/HDB/Answers_internal_check.asp?MesId=4604291&isCFP=&FolderID=0&ProjectId=7875909&reAskpage=answer.asp&SelectedCategory=&RecordQuestion=

So if HDB is not going to build ahead of demand anymore and thus assuming there will not be an over supply of flats in the future, then prices will have already found a floor and the ceiling will be determined by demand. HDB will continue to launch BTO until all the demands (genuine ones) are answered, judging from the number of projects launched in first half 2010 (already more than last year), more coming up in second half 2010 and even more in 2011 if necessary.

(src: http://www.hdb.gov.sg/fi10/fi10296p.nsf/PressReleases/B6B5E10434F42EB64825776900154FF8?OpenDocument)

(src: http://www.channelnewsasia.com/stories/singaporelocalnews/view/1073777/1/.html)

With the recent drive to sustain economic growth based on productivity growth and not via cheaper foreign labour, the demand for flats should be moderated further. Thus I see that price increase will slow down and subsequently stay flat, but not come all the way down since there will not be a repeat of large number of excess HDB flats.

Conclusion

The era of cheap HDB flats (when HDB overbuilt or even cheaper during my parents time when flats sell at cost) is over. Whether or not the current prices or cash over valuation is justified is not really easy to answer. But should young couples continue to wait for a major price correction? They will need to weigh the opportunity cost of waiting for the price to come down versus the risk of paying much more should their combine income exceed $8,000. It will not be an easy decision.