Why your HDB is not going to make you any money

[Arcachon]

Just like any young couple would as they begin their next chapter of life, you ballot for a BTO and, after 4 years of wait, move happily into your first matrimonial home. Over the years, you start a new family and draw greater income as you progress up the career ladder at work. As the fifth year of your HDB’s minimum occupation period draws closer, you toy with the idea of an upgrade to provide you and your family with a better standard of living.

The next question that will probably come into your mind would be whether to sell off your flat or to keep it and rent out. For sentimental value, many couples may choose the latter. After all, this is your first matrimonial home and a subsidized flat from the government.

But before making any decision, one question that you ought to be asking yourself should be if your flat has any investment value or simply put ‘Is my HDB going to help me make money?’

To answer this question, one should first understand the demand and supply of the current resale HDB market. Over the years, the government implemented several cooling measures that have resulted in the demand of resale HDB flats to decline. Let us take a look at some of them:

1. Mortgage Servicing Ratio
In August 2013, the government introduced the Mortgage Servicing Ratio (MSR), limiting borrowers to 30% of their gross monthly salary for mortgage purposes.

According to MOM, the median gross monthly income of full time employees residing in Singapore is at $4,056 (as of 2016).

This would mean that based on the median income, your regular couple working full time is only able to afford a property priced at $485,000. If you are planning to sell your property above this price, chances are you are going to face challenges selling the property at your ideal price.

2. Permanent Residents (PR) who want to buy resale flats will have to wait three years after receiving their PR status
Another cooling measure that was also announced in 2013 was that Permanent Residents (PR) who want to buy resale flats will have to wait three years after receiving their PR status.

This was a measure implemented to ensure that PRs are not crowding the HDB resale market, and enhance affordability for Singaporeans. With such implementations, PRs who are looking at saving on rent may consider purchasing private property instead of waiting 3 years before purchasing a resale flat.

3. Removal of Cash over Valuation
Before 2014, sellers focused on Cash over Valuation (COV) to determine asking price. Often, COVs set by sellers would get higher and higher based on what their neighbors have sold at. This resulted in escalating quantum, whereby buyers wound up paying more than the fair valuation of price.

In 2011, the median COV was at $36k (according to 99.co). As of 2014 COV prices fell, and since its removal, there were some cases where COV was at $0.

4. Private property owners are not allowed to buy HDB
Private property owners would have been your target when selling your HDB, since they probably have a higher disposable income.

Unfortunately, private property owners are not allowed to purchase a HDB flat unless the private property is disposed within six months of the effective date of purchase.

Other than demand, another factor that may directly impact your ability to sell your property and at the right price is none other than the supply of resale HDBs in the market.

Additional Buyer’s Stamp Duty
In 2013, the government announced that individuals who would like to purchase a second property would have to pay additional buyer’s stamp duty (ABSD). This means that on top of the 3% buyer’s stamp duty, a Singaporean will have to pay an additional 7% of the property price on your second purchase. Below is the ABSD one will incur when purchasing a property for the buyer segments:

Buyer from 12 Jan 2013 ABSD for 1st Property ABSD for 2nd Property ABSD for 3rd & more property
Singapore Citizen (SC) – 7% 10%
Permanent Resident (PR) 5% 10% 10%
Foreigners and Non-Individuals (Companies) 15% 15% 15%

To avoid the payment of ABSD, there is a rising trend where couples would sell their HDB and decouple to avoid paying ABSD. In a 2013 market report, it was mentioned that law firms in Singapore saw an increase number of cases where couples ‘decoupled’ their properties. This would mean an increase in supply of resale properties in the market.

Increase in supply of Build to Order (BTO) flats
Between 2011 and 2013, some 25,000 BTO units were released every year. This supply was cut in 2014 to 22,400 units and 15,000 units in 2015. In December last year, it was once again announced that 17,000 BTO flats will be launched in 2017.

Can you imagine the supply of resale units in the market when these BTO flats reach their 5 years minimum occupation period?

Not all flats are eligible for Selective En- Bloc Redevelopment Scheme (SERS)
And here comes my last point, citing from an article in the papers earlier this year. It also addressed concerns with regard to home buyers forking out high prices to purchase older flats, hoping to benefit from SERS. However, it being a selective scheme, it is clear that not all HDB owners would benefit from SERS.

It was reiterated that when HDB leases (of 99 years for public housing) runs out, they have to be returned back to the state. Hence, prices of flats near the end of their lease period may come down. This may further impact the resale market for HDB, bringing prices down.

As property is the preferred retirement asset in Singapore, it is natural for homeowners to want to leverage on it and enjoy a comfortable retirement. However, based on the above factors discussed, would your HDB really be a worthy asset to keep till retirement?

https://www.iproperty.com.sg/news/wh...uid=lBaMZFsky7

[Arcachon]

As the property is the preferred retirement asset in Singapore, it is natural for homeowners to want to leverage on it and enjoy a comfortable retirement. However, based on the above factors discussed, would your HDB really be a worthy asset to keep till retirement?

The answer is still YES.

[Arcachon]

1. Mortgage Servicing Ratio
In August 2013, the government introduced the Mortgage Servicing Ratio (MSR), limiting borrowers to 30% of their gross monthly salary for mortgage purposes.

According to MOM, the median gross monthly income of full time employees residing in Singapore is at $4,056 (as of 2016).

This would mean that based on the median income, your regular couple working full time is only able to afford a property priced at $485,000. If you are planning to sell your property above this price, chances are you are going to face challenges selling the property at your ideal price.

Just look at the number of property selling above $485,000 and you will know the answer.

[Arcachon]

2. Permanent Residents (PR) who want to buy resale flats will have to wait three years after receiving their PR status
Another cooling measure that was also announced in 2013 was that Permanent Residents (PR) who want to buy resale flats will have to wait three years after receiving their PR status.

This was a measure implemented to ensure that PRs are not crowding the HDB resale market, and enhance affordability for Singaporeans. With such implementations, PRs who are looking at saving on rent may consider purchasing private property instead of waiting 3 years before purchasing a resale flat.

Since 27 August, 2013 - 1. Singapore Permanent Resident Households need to wait three years from the date of obtaining SPR status, before they can buy a resale HDB flat.

From 28 August 2016 onwards more SPR will be able to buying resale HDB.

https://www.srx.com.sg/cooling-measures

[Arcachon]

3. Removal of Cash over Valuation
Before 2014, sellers focused on Cash over Valuation (COV) to determine asking price. Often, COVs set by sellers would get higher and higher based on what their neighbors have sold at. This resulted in escalating quantum, whereby buyers wound up paying more than the fair valuation of price.

In 2011, the median COV was at $36k (according to 99.co). As of 2014 COV prices fell, and since its removal, there were some cases where COV was at $0.

http://www20.hdb.gov.sg/fi10/fi10320...%20English.pdf

http://www.stproperty.sg/articles-pr...ation/a/113752

COV (Cash-Over-Valuation) is a form of housing valuation that is unique to Singapore. Its origins and development are not based on the principle of professional valuation. Indeed it came about because valuation cannot accurately reflect the value of the house. Interestingly, it can only be found in the open market (secondary market) for HDB (Housing Development Board) flats.

The fact that COV, as an ancillary value (it is added to the professional valuation to form the selling price), has become an accepted arrangement between buyers and sellers suggests that it is really a result of the inadequacy of professional valuation.

It is common to hear such talks by buyers and sellers. Seller says, “My 5-room flat was valued at $580,000. I asked for a COV of $40,000, so it was sold for $620,000. I am pleased with the selling price.” While the buyer will happily tell others: “Initially the seller asked for a $45,000 COV, but I lower it to $40,000. In the end, I paid $620,000 for the flat.”

Evidently COV has become an essential feature in the price negotiation during the sale of a resale HDB flat. Rarely will you hear people saying that they will remove COV in the transaction because it is not part of the professional valuation.

Of course, shall the supply of resale HDB flats exceeds the demand there will be no need for COV; in fact the buyers' offered price can even fall below the professional valuation. But as Singapore's population grows this is unlikely to happen.

Thus COV and professional valuation have both become necessary parts in the transacted price. Still in any transaction the professional valuation forms the basis for negotiation. Nobody ever doubts its reliability because it is professional. If you call it into question, the deal will fall through. A COV negotiation suggests the inadequacy of the professional valuation, but using the former to make up for the weakness of the latter is an amusing thing.

As its name suggests, the COV is the cash paid in excess of the valued amount of the flat. Together the COV and valuation forms the transacted price. Seen this way, the valuation obviously does not reflects the true value of the flat hence there is room for further negotiation.

The transacted price is a legally accepted agreement between buyers and sellers. But by a quirk of fate, the COV has become a “price” system by itself. Even the HDB keeps track of it and store it in its database. COV has become an indicator for price trend. Its most special trait is that it is paid for in cash (previously it was an under-the-table transaction) and can be used as the cash component for the down-payment of the next house or as the renovation fee.

While COV is not directly related to the professional valuation, nevertheless it complements it. As it is sensitive to market movements and determined by the demand and supply of resale HDB flats, it has become an effective market indicator. To find out the HDB property value of an area or for a particular HDB housing type, all you have to do to look at the relevant COV. From the value of the COV you can also find out how the property market is doing.

Why does COV only appear in the HDB resale market?

For all other property types regardless of intended uses COV is unheard of. It is peculiar to the HDB resale market as HDB flats are subsided public housing provided by the State with a minimum occupation period (MOP) of 5 years. If for any special reason the owner wishes to sell it during the MOP, he can only sell it back to HDB at the price he paid for it.

After the MOP, sale of the flat can be made in the resale market in competition with other flats. A qualified valuer will then be needed to assess its value for financing purposes for the banks, HDB and CPF (Central Provident Fund).

As HDB flats are subsided housing, it comes with a host of rules such as being out-of-bounds to foreigners. Furthermore owners cannot own more than 1 HDB flat at any one time, nor own a HDB flat and private residential property concurrently during the 5-year MOP. Living in a private home that you own while renting out the HDB flat is also barred.

In addition, after the sale of the HDB flat is completed CPF savings used in the purchase of the flat, along with interest that would have been earned had the monies remained in the CPF account, will be refunded into the CPF account. The sale proceeds may also be used to make up for any shortfall in the Minimum Sum of your CPF account. After all the deductions, sellers may find themselves with little cash from the sale. Consequently, the valuation of a HDB flat and a private home with similar characteristics can differ widely.

Previously COV is illegal but to curb this widespread practice, HDB has legalised it.

All in all, COV came about because professional valuation cannot truly reflect the value of the flat. However it may not be a bad thing since sellers get some extra cash for other expenses.

[Arcachon]

When the HDB resale Market start to go up, the true force of the market will be shown on the resale price of HDB.

HDB resale price was controlled until 10 Mar 2014 by controlling the valuation price of resale HDB by HDB for those who know the history of COV.

Moving forward HDB have decided to let market decide the true value of resale HDB while the market is low and oversupply of new BTO. The effect can only be felt after the enbloc sale of HUDC and SPR start buying resale HDB and the reduce BTO from 2017 onwards.

[Arcachon]

4. Private property owners are not allowed to buy HDB
Private property owners would have been your target when selling your HDB, since they probably have a higher disposable income.

Unfortunately, private property owners are not allowed to purchase a HDB flat unless the private property is disposed within six months of the effective date of purchase.

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I am a private property owner and have recently inherited an HDB flat. Can I keep both these properties?
A:
It depends on when the inherited property was purchased by its previous owner. If you had inherited a non-subsidised HDB flat bought before 30 August 2010 by its previous owner, you can retain ownership of both the private property and the HDB flat.

If you decide to keep the HDB flat, you will have to meet prevailing eligibility conditions (i.e. family nucleus and citizenship), and you and your family will also have to live in the HDB flat.

But if you decide not to, or are not eligible to take over the HDB flat, this is what you may do:
if the MOP has been met, the administrator/executor may sell the flat in the open market.
if the MOP has yet to be met, you can approach HDB for help and we will assess and see how best we can help.
If you had inherited a non-subsidised HDB flat that was bought on or after 30 August 2010 by its previous owner, and the flat has yet to run the full MOP, you can keep only one of the properties.

Should you decide to keep the HDB flat, you have to make sure that you fulfill prevailing eligibility conditions (i.e. family nucleus and citizenship) first before disposing of the private property. Do note that other policy treatments on inheritance for subsidised and non-subsidised flats remain the same.

http://askhdb.hdb.gov.sg/ifaq.aspx?c...0640&topfaqs=1

[Arcachon]

Do you know about Right-sizing with Silver Housing Bonus

Private property of Annual Value of $13,000 or less

http://www.hdb.gov.sg/cs/infoweb/res...-housing-bonus