Measures to check HDB resale market running ‘out of line with economic fundamentals’

By Nicholas Lam

/ EdgeProp Singapore |

August 21, 2024 2:16 PM SGT

In the past three years, changes to the LTV limit and cooling measures have slowed resale price growth from 10.4% in 2022 to 4.9% in 2023 (Photo: Samuel Isaac Chua / EdgeProp Singapore)

The loan-to-value (LTV) limit for HDB housing loans was lowered from 80% to 75%, effective Aug 20. This brings the limit in line with loans granted by financial institutions, which remain at 75%.

It is the fourth round of property cooling measures targeted at the HDB market since December 2021 and the third adjustment to the HDB LTV ratio. In December 2021, the HDB LTV ratio was adjusted from 90% to 85%, from 85% to 80% in September 2022, and from 80% to 75% on Aug 20.

"We have introduced these measures against the backdrop of sustained broad-based demand from all buyer groups – from young couples looking to set up their first home, second-timers looking to upgrade, as well as more singles wanting to own their flat earlier," says Desmond Lee, Minister for National Development on Aug 20.

Over the past three years, the reductions in the LTV limit and cooling measures have moderated resale price growth from 10.4% in 2022 to 4.9% in 2023. “This reflects the effectiveness of such measures in stabilising the market,” says Mohan Sandrasegeran, head of research and data analytics at SRI.

Spike in number of million-dollar flats

Eugene Lim, key executive officer of ERA Singapore, notes that the most crucial metric is the number of million-dollar flats that changed hands in the resale market.

EdgeProp Singapore research shows that the number of million-dollar HDB resale transactions hit an all-time high of 124 in July.

ERA says that in 2020, only 82 flats were sold at prices in the million-dollar range. However, in just the first seven months of 2024, there were 539 such transactions. Of these, 13 were done at prices above $1.5 million, with the highest at $1.73 million.

The cooling measures in September 2022 required private property owners to wait 15 months after selling their property before purchasing an HDB resale flat. However, that did little to dampen demand, notes ERA’s Lim. Between 3Q2022 and 4Q2023, an average of 112 million-dollar flats were sold quarterly.

ERA's Lim adds that by 1Q2024, which coincided with the first batch of private property owners completing their 15-month wait-out period, the number of million-dollar flat transactions surged to 183, followed by 236 in 2Q2024.

(Source: Data.gov.sg, ERA Research)

‘About 2% of all resale transactions’

"HDB flats with very high resale prices make up a very small proportion of all transactions, but they capture public attention," says Minister Lee. "In the last 1.5 years, flats that cross the million-dollar mark make up about 2% of all resale transactions."

These high-priced transactions are causing Singaporeans to be unduly concerned about the affordability of HDB resale flats in general. "If we are not careful, such market dynamics can cause the resale market to run out of line with economic fundamentals and cause a bubble," he cautions.

"History tells us that the property market moves in cycles, and those who buy at higher prices with larger loans are also hardest hit when the market cools," Lee continues. "This is why we are moving now to dampen demand and encourage prudent borrowing, even as we continue to inject supply at a steady pace to meet demand."

However, Lee assures that “the vast majority of HDB home loans will not be affected” by the latest measures, as almost nine in 10 buyers with HDB loans already borrow at LTV ratios of 75% or less.

Cooling the top-end of the HDB resale market

The reduced LTV ratio will mean that HDB homebuyers in the new and resale market will have to fork out a higher downpayment. "Broadly, we think the cut in LTV to 75% could potentially help to cool the top-end of the HDB resale market as buyers who take HDB loans will not be able to borrow as much as before," says PropNex CEO Ismail Gafoor.

The latest LTV restrictions are not expected to impact buyers taking bank financing, as the LTV limit is already 75%. Gafoor reckons these buyers are likely to be the ones whose monthly household incomes have exceeded the $14,000 income ceiling and are not eligible for an HDB loan.

"This group of higher-income buyers are likely to have contributed to the high flat prices in the resale market," says Gafoor. "Therefore, we suspect that the new cooling measures may not capture these buyers, who may continue to pay a higher price for the flat they desire."

For example, the difference in downpayment is $15,000 for a $300,000 flat when the LTV has been reduced to 75%. It widens to $50,000 for flats priced at $1 million and $75,000 for flats priced at $1.5 million (see Table).

Enhanced CPF housing grants

For many low- to middle-income households, the difference in downpayment would likely be offset by the Enhanced CPF Housing Grant (EHG), which was raised as part of the measures announced on Aug 19.

According to the Ministry of National Development (MND), the EHG is a means-tested grant that supports lower-to-middle-income households buying new or resale flats as their first home. The grant can be used to pay for their property's downpayment.

First-time home buyers, especially lower-income households, will be less affected by the lower LTV limit as they receive significant housing grants.

The EHG has been increased to $120,000 for eligible first-timer families and up to $60,000 for eligible first-timer singles. Previously, the EHG offered up to $80,000 for eligible first-timer families and up to $40,000 for eligible first-timer singles.

Helping lower- to middle-income homebuyers

Under HDB's new loan structure, aspiring homeowners seeking to buy a two-room HDB resale flat at $336,000 (its average transacted price so far this year) would need a minimum household income of $3,900, says Lee Sze Teck, senior director of data analytics at Huttons Asia.

This is after considering a mortgage servicing ratio (MSR) of 30%, HDB's interest rate of 2.6% over a 25-year loan period, and no other external sources of financing.

The new LTV ratio will increase the down payment by an additional $16,800. However, under the new EHG matrix, they would receive $25,000 more in grants — an increase from $55,000 to $80,000 — offsetting the upfront financial burden.

However, it is the opposite for the pricier HDB resale units. For instance, the average cost of a four-room HDB resale unit in 2024 is $616,000, and it requires a minimum monthly household income of $7,000 to service the loan. The new LTV ratio will increase the down payment by $30,800. At this income bracket, the EHG amount only increases by $5,000, resulting in a shortfall of $25,8000 in additional funds needed upfront.

The shortfall increases when considering five-room and executive HDB resale units, which average $718,000 and $865,000, respectively. New homebuyers can expect to pay $35,900 more in down payments for five-room resale units and $43,250 more for an executive HDB unit.

(Source: URA, Huttons Data Analytics)

Fewer flats reaching MOP in 2025

Hutton's Lee says the lack of new supply is expected to continue. An estimated 7,000 flats are expected to reach the end of their minimum occupation period (MOP) in 2025, which is lower than the 12,000 flats this year. This would in turn exert upward pressure on HDB resale prices next year, he adds.

Christine Sun, chief researcher and strategist at OrangeTee Group says the latest cooling measure aims to temporarily slow down price increases and curb the million-dollar price tags on resale flats.

"Instead of implementing a blanket measure that impacts all buyers, the measures seemed to be carefully calibrated such that those who need financial assistance, the lower income groups and eligible first-time buyers, will still be able to afford an HDB flat despite the reduced LTV since they will be receiving more help in the form of EHG," says Sun.

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