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Property

EC vacancies signal continued HDB resale price weakness

By Ku Swee Yong

[email protected]

Published: 4:03 AM, November 7, 2014


Executive Condominiums (ECs), the hybrid private-public housing type targeted at the sandwiched class, are registering a high rate of vacancy across the island, pointing to continued selling pressure in the Housing and Development Board (HDB) resale market.

While I have been harping on the massive oversupply of housing in Singapore, as in my commentary “Tidal wave of property supply hits Singapore” (Sept 19), the truth is that most investors do not acknowledge the pain until they are swept away by the tsunami. The signs are everywhere and have been around for some time.

A year ago, in a commentary titled “The price war has begun” (Today, Nov 8, 2013), I forecast that private home prices will slide in subsequent quarters even though the Urban Redevelopment Authority’s (URA) Property Price Index (PPI) index had inched up by 0.4 per cent in the latest reporting quarter. That forecast was premised on the fast dropping Cash-Over-Valuation premiums and HDB resale prices, coupled with the tighter loan rules and the intense competition among developers and individual home sellers.

The full set of property market numbers for 3Q2014 was released two weeks ago, revealing that the URA PPI has recorded its fourth consecutive quarter of decline since that forecast. In last year’s commentary, I concluded that “a gradual drop in the overall price indices is the result desired by the authorities.”

Just last month, two ministers confirmed publicly that despite the four quarters of price declines, the cooling measures will not be lifted for the time being.

As of the third quarter this year, there were 21,569 vacant private homes, excluding ECs. This represents 7.1 per cent of the total stock of 302,510 apartments, condominiums and landed properties and the seventh consecutive quarter of increase from the 5.2 per cent vacancy rate in the first quarter of last year.

In the EC segment, there were 2,375 vacant units out of a total completed stock of 14,624 units, or 16.2 per cent. The first three quarters of this year saw the completion of six EC projects with a total of 2,941 units. These projects were sold out well before their completion and although there may be first-time buyers who did not tie the knot and have to give up their units, these numbers are negligible.

Even while ECs are designed for sandwiched-class families with up to S$12,000 in monthly income, a large proportion of EC buyers and investors are HDB upgraders and second-timers. Families receiving their keys for a newly-completed EC will move in to enjoy the upgraded environment and condo facilities, but they are subject to a Minimum Occupation Period (MOP) of five years from key collection before they can put the unit on the market.

The concern now is that while 2,941 EC units were added this year, the number of vacant units rose to 2,375 as at the end of the third quarter.

One reason for the slow take-up of completed units despite the MOP is that upgraders and second-timers are finding it challenging to sell their current HDB flats. While no official figures are available from the HDB or from EC developers, my guess is that at least half of ECs are purchased by upgraders who own HDB flats.

Four years ago, when these ECs were launched, a typical plan for the upgraders was to buy the EC — many on deferred payment schemes — in the expectation that HDB resale prices will rise during the time that the new home was being built. By the time they receive the keys to their ECs, these upgraders could sell their HDB flats in the resale market for a sizeable profit, which could be used to reduce the loan on their new homes.

However, the tide has turned against them. HDB resale prices have dropped for the past five quarters and recent changes to valuation rules and to purchases by Permanent Residents have made it even tougher to sell the current units at market prices. Most serious sellers, such as the upgraders, are pressed to accept prices below market value. However, some are still holding out for better prices while postponing their key collections.

So, in the EC segment, potentially about 2,300 families are concurrently owning two taxpayer-subsidised housing units: the HDB flat that they currently own and possibly occupy, and one completed EC that they have yet to move into.

By law, each family is allowed to own only one subsidised housing unit at any one time, and I am guessing that these families are under pressure to sell their HDB flats as soon as possible. The pressure to sell may worsen, with EC completions expected to total 2,854 next year, 6,371 in 2016 and 2,505 in 2017.

Two other segments will add to the supply of resale HDB units. Second-timers who have purchased HDB BTO (Built-to-Order) flats and DBSS (Design, Build and Sell Scheme) units will, by law, need to sell off their current HDB flats when the new BTO/DBSS flats are completed.

About 5 per cent, or 1,400 units, of the 28,000 new BTO flats that are expected to be completed this year belong to second-timers who need to sell their existing HDB flats before they move into their new BTO units. Over the next three years, the proportion will grow as the allocation of BTO units for second-timers was increased to 15 per cent in 2012 and the BTO/DBSS flat completions are expected to be 26,000, 28,000 and 26,000 in 2015, 2016 and 2017, respectively.

Due to a lack of good data about upgraders and second-timers, the extent of the selling pressure is not very clear. However, from the steep climb in the vacancy rate of ECs that were recently completed and which are already sold, we can conclude that there are many families who are stuck in transition between their HDB flats and their EC units.

Part of the blame goes to falling HDB resale prices and we can sympathise with these upgraders for being unable to sell their current flats soon after their new EC units are ready.

However, wasn’t the large supply of BTOs and ECs meant to correct HDB resale prices? And considering this situation from the taxpayers’ standpoint, to what extent and for how long should the system allow for several thousand families to own two subsidised housing units concurrently?

Every second-timer knows at the outset that it is his or her duty to sell the current HDB flat once the new subsidised unit is completed. Perhaps the HDB might consider being a market maker, buying back the second-timers’ current units when the new ones are completed.

ABOUT THE AUTHOR:

Ku Swee Yong is a licensed real estate agent and the chief executive of property agency Century 21 Singapore. He has just launched his third book Real Estate Realities — Accommodating the Investment Needs of Today’s Society.