Can the Resale Flat Market Sustain Its Momentum During Covid-19?

2020 will be an unforgettable year for the Singapore property market.

First, we had an unprecedented Circuit Breaker period, which put a stop to all viewings and showflats from April to June. Then, against all expectations, we saw private home sales surge to a two-year high, while landed properties recorded a 50 per cent increase in sales volume.

The third surprise to complete the set, is the rebound of resale flats. The HDB resale market has rebounded with a vengeance, after consecutive decline since 2013. The market has sent a clear signal: Most Singaporeans believe in the safety of our real estate, not only during – but perhaps especially – during uncertain times.

The question now is: Can resale flats keep up the momentum, or was this a slight quirk?

How much have HDB resale flats rebounded?

This graph from Square Foot Research illustrates just how sharp the rebound has been:

HDB resale flat prices

Back in October 2015, resale flat prices were around $421 psf. This more or less trended downward, until the end of the Circuit Breaker period. Then between July till the present, flat prices rose to an average of $443 psf.

Besides rising prices, resale flat volumes also hit a 10-year high of 7,787, bucking a recent trend of buyers preferring new flats.

Why is this happening?

  • The slew of almost-new flats entering the market
  • Upgraders often prefer resale flats
  • Potential delays in new flat construction
  • Affordability issues during the downturn
  • For downgraders, it’s much slower to get a BTO flat

1. The slew of almost-new flats entering the market

One of the chief drawbacks of buying a resale flat is lease decay. However, the market has seen a bumper crop of flats that have only just reached the Minimum Occupation Period (MOP).

In 2020 alone, for instance, about 26,000 flats reached MOP; and about 50,000 flats are expected to reach their MOP by end of next year. Before this, the average number of flats that usually reach MOP each year (10-year average) is only 9,000 units.

These almost-new flats combine two significant advantages:

First, they are already completed and ready to move in. Unlike BTO flats, buyers don’t need to wait three to five years before the flat is finished.

Second, these resale flats are practically new – at around five years of age, there’s no need to worry about lease decay eating into eventual gains.

This provides an excellent opportunity for those who want to use these flats as a starting point, in terms of asset / wealth progression. This is because…

2. Upgraders often prefer resale flats

HDB flat rebound

Let’s say you intend to use your flat as a stepping stone, eventually selling it to purchase a condo. Would you prefer a BTO flat, or a resale flat? Consider this scenario:

Let’s say you purchase a BTO flat instead. You wait around four years for it to be completed. After that, you move in and your MOP countdown begins (that’s right, your MOP begins from the point of key collection, and not from the time you actually buy your flat).

By the MOP is over, you would have waited nine years before you could upgrade to a private property.

Also, we shouldn’t forget the effect of age and time on financing and cost. To get full financing for a private property, your age plus your loan tenure cannot exceed the retirement age of 65.

So if you are 30 years old when you buy your BTO flat, you will be 39 years old by the time you can sell it. This leaves you with a maximum loan tenure of 26 years, instead of the usual 30 years (to secure maximum financing).

You’re also likely to end up needing more to purchase a private property, as costs tend to rise over time. If you want a new condo, for instance, remember that every new launch is always priced higher than previous condos around it.

Now, let’s say you were to purchase a resale flat instead. As there’s no construction time, your five-year MOP can begin the moment you move in. You can sell the flat by the time you’re 35, still be young enough for a 30-year loan tenure, and own a private property asset earlier.

3. Potential delays in new flat construction

Construction HDB

Covid-19 has caused some delays in construction. According to the Straits Times, for example, some BTO flats were estimated to have construction delays of up to nine months.

For the more investment-oriented, this just aggravates the issue I mentioned in point 2 – the MOP only begins from the point of key collection. For home buyers, nine months is a long time to continue staying with parents, or pay rent.

The longer it takes for BTO flats to be completed, the more attractive resale flats (that are not too old) will be to the market.

4. Affordability issues during the downturn

In Q2 2020, Singapore was in its worst recession in 55 years. This can potentially result in businesses closing or failing to expand; that in turn can mean loss of income, or smaller bonuses.

Due to the downturn, some buyers who would have bought a private property may instead have opted for a resale flat. Also, some upgraders may choose a larger resale flat (e.g. moving from a three-room to a five-room), rather that commit to a private property at this time.

Apart from affordability, there’s also the issue of a smaller cash outlay. If you can get an HDB loan for a resale flat, the minimum down payment is just 10 per cent, which can be fully paid using your CPF.

If you were to purchase a condo, the minimum down payment is 25 per cent (five per cent in cash, 20 per cent can come from CPF). For a $1.5 million condo, for example, this would come to a minimum of $75,000 down in cash.

The smaller cash outlay is attractive, for home buyers facing the current Covid-19 downturn.

(Home buyers with high incomes, however, should note that they may be asked to use a bank loan instead of an HDB loan).

5. For downgraders, it’s much slower to get a BTO flat

Delay

Most Singaporean homeowners are far from over-leveraged, thanks to loan curbs like the Total Debt Servicing Ratio (TDSR) – this caps loan repayments at 60 per cent of the borrower’s monthly income, inclusive of all other debts.

However, there are bound to be some downgraders or right-sizers, especially in the Covid-19 environment. For this group, a resale flat is usually preferable. This is because you need to wait 30 months after disposing of a private property, before you can apply for a new flat.

How sustainable is the surge in resale flat demand?

At present, analysts from various agencies predict a three to 3.5 per cent rise in HDB resale prices for the year.

The momentum is likely to be sustained throughout 2021, as the apparent causes have not yet abated. We are still expecting record numbers of flats to reach MOP next year, for instance; and the Covid-19 situation is far from over. As such, more buyers may be inclined to “play it safe” while the virus is still raging.

Over a longer period, it seems likely that resale flats will continue to hold favour with property upgraders, due to the shorter time before which they can sell.

This doesn’t mean you should rush out and get any five-year old resale flat for asset progression

While it undeniably helps that the flat is newer, other fundamentals still apply. Not every resale flat is right as a stepping stone. Location, entry price, and the right time to sell are all key factors in ensuring it can fund your future condo or EC.

Or if you’re already looking to sell and upgrade, now may be the right time: demand is raging and prices are on the upswing. Drop me a message on Facebook, and I can help you plan the next steps in asset progression.

You can also follow me on RonChongProperty.sg for further market insights and updates, on the Singapore property market.

 

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