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Saturday, 28 August 2010

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!?


Looking at the past prices (available data from 04 to present):

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!


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.


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.



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.


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.



Anonymous Anonymous said...

Currently some private developers are rushing to launch their projects.

Is the end of property bull run near?

28 August 2010 at 19:34  
Blogger Market Uncle said...

Depending on how 'near' you meant. Looking at the units in the pipeline, the supply of private residential areas growing fast to meet the demand:

29 August 2010 at 15:44  
Anonymous Anonymous said...

as long as the only way to get money out of CPF is to invest in real-estate the market will not be based on occupancy rates but on perception of supply and demand.

Only gahmen knows what supply and demand will be: they release the land, they admit foreigners.

HDB construction schedule has been limited because less people were satisfying the S$8000 criteria.

By fragmenting the market, the govt actually makes the prices higher as the govt does not put a ceiling on the prices it just creates more scarcity in each market.

30 August 2010 at 18:37  
Blogger AK71 said...

Hi Market Uncle,

I believe that the continuing influx of foreigners have caused prices of HDB flats to levitate:

Demand for homes in Singapore's public housing blocks, where 80 percent of the population reside, is also straining supply. Foreigners who enjoy permanent residency and are eligible to purchase public housing totalled 533,000 in 2009, a 37.8 percent increase from 2005.

Bad if you are looking to buy a flat but good for existing owners, I guess.

30 August 2010 at 18:38  
Blogger Market Uncle said...

More measures are introducted to cool the prices:

I assume there'll be more if the prices continue to defy gravity and logic.

30 August 2010 at 20:10  
Anonymous Anonymous said...

$100,000 above valuation - clever or crazy?,4136,253704-1283119140,00.html?

How many such buyers are there in the market?

Can the government ban people from paying such COV?

Will removing COV helps?

The author seems to be very proud of his decision. Using what ever reasons to justify the COV.

30 August 2010 at 22:42  
Blogger qq said...

With the new measures implemented after the National Day Rally, mass market property investors (and speculators) will have to think twice (and maybe thrice) before buying HDB (and private).

Hope this will cool down the ever rising property prices for past many quarters.

31 August 2010 at 09:22  
Blogger Market Uncle said...

Removing or controlling the COV will just drive the 'extra' cash payment underground and I doubt banks (or even HDB) will lent to the full 'valuation' that includes the hefty premium the sellers ask for.

Anyway, the new easures practically shut off 'rich' people who already owned private properties from want to profit from the higher rental yield of buying resale HDB and selling them.

If the current measures still doesn't bring the runaway resale prices down to more sanity, another more stricter measure could be forcing all HDB owners who subsequently bought private properties to sell of their HDB within a stipulated period (e.g. 6 mths). This way, only true occupiers of HDB flats can own them.

2 September 2010 at 21:44  

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