There has been a sharp uptick in the prices and sales volumes of resale flats, as of end-2020. In fact, resale flat prices were at a 10-year high as of last quarter. This is welcome news for many resale flat owners, who have been struggling with nearly seven years of consecutive price decline.

The current upturn has brought about new questions – mainly, this is about the existing supply of flats that have reached the Minimum Occupation Period (MOP), and whether they’re worth buying. I’ll explore both these topics below:

Where is the biggest supply of recently MOP flats likely to be?

Once a flat reaches the five-year MOP, the owners can resell it on the open market, or rent out the entire flat (if they are Singapore Citizens). This does not mean everyone will sell their flat after five years of course; but many do as a means of asset progression (see below).

As such, the supply of resale units is of interest to both pure home buyers, as well as first-time buyers who seek a stepping stone into the private market.

To see which areas have the largest potential supply, I have tabulated the estimated number of resale flats reaching MOP, in each HDB estate.

The following is an estimation only from Edge Prop, based on transaction date (i.e. flats sold in 2015). The numbers are as of 1st December 2020.

Again, just a quick reminder that these flats not necessarily five-years old, and could be much older. Some of them could, for instance, be 20 year-old flats that were last bought in 2015.

Regardless, we can see from the numbers that some of the most desirable areas – such as Bishan and the Central Area – still show thin numbers when it comes to availability. As such, those hoping for lower prices due to a large supply of resale flats may be disappointed, when it comes to those particular districts.

Is it worth jumping on the bandwagon, and buying a resale flat?

To answer this question, here are a few points we should consider:

• Keep the “upturn” in perspective
• The purpose of buying a resale flat
• Lease decay issues
• Affordability factors during Covid-19
• Construction time during Covid-19

1. Keep the “upturn” in perspective

When reading about how resale flats are “on the rise” again, it’s easy to lose perspective of the wider situation. To provide some clarity, here is the price movement compared to non-landed private housing:

It is indeed correct that resale flat prices (the blue line) are picking up again; from $395 psf in November 2015, to $428 psf in November 2020. This makes up for the period between 2013 to early 2020, during which resale flat prices were in a slow decline.

In the same time period, however, private non-landed prices had already risen from $1,135 psf, to $1,706 psf. There’s still a sizeable gap between the two, and it’s worth keeping in mind if property is your main asset for wealth accrual.

2. The purpose of buying a resale flat

If the purpose is capital appreciation, then one is better off upgrading to a private property when the resale flat makes this possible (see point 1).

In fact, a strong argument can be made that resale flats are even better as stepping stones to private property, compared to a BTO flat. The reason is that the five-year MOP is calculated from the time of key collection. So if you buy a BTO flat that takes four years to complete, you can only sell the property within nine years.

Bear in mind that the prices of private property have, historically, risen faster than those of flats. As such, every year increases the risk that your flat’s resale value may not “bridge the gap” to the property that you want.

As such, if your intent is to upgrade to a private property, it might make sense to make your first home a resale flat instead of a BTO flat.

However, certain financial calculations make render this point moot. For example, resale flats are generally more expensive than BTO flats; and there may be Cash Over Valuation (COV) involved. If you pay a lot more for your resale flat, then it may undo the advantage of being able to reach your MOP sooner.

This may well be the case if you pick a resale flat in high-demand areas, where the supply is scarce (see the table above). A resale flat in Bishan or the Central Area, costing over $700,000, may involve money better spent on a smaller non-landed private home. The considerations here are more complex, so do drop me a message on Facebook, and I can help you work out which would contribute more to your long term gains.

But in summary: A resale flat can serve a good purpose as a stepping stone toward private home ownership, provided you’re careful not to pay inflated prices.

3. Lease decay issues

As you can see from the price movement, not all flats have benefited from the recent uptrend. Flats built before the 1990’s have mostly continued on sharper declines, as Singaporeans get more conscious of the 99-year lease limitations.

In addition, the increasing number of five-year old flats reaching their MOP will raise downward pressure on these older flats. Think about it: how many people would pick a 25 year-old resale flat, if a five-year old flat is available just a few hundred metres away?

As such, even if you’re using a resale flat as a “stepping stone” for asset progression, it’s best to think twice before buying a very old flat. It may be a bit cheaper, but your future buyers are also going to value it less.

4. Affordability factors during Covid-19

If your job or industry is affected by Covid-19, now may not be the time to consider more expensive options like private housing. In these instances, you may want to consider a more affordable alternative like a resale flat.

As I mentioned above, you can put the flat on the market in just five years, as opposed to a BTO flat. This should give you sufficient time to ride out the storm. On top of that, the available grants for resale flat are in fact twice as high compared to new flats (up to $160,000, instead of $80,000).

For many, the final clincher may be the fact that resale flats have no income ceiling. So if you’re a high-wage earner right now, but worry that the situation may change due to a Covid-19 downturn, a resale flat could be a viable alternative to a condo right now.

In addition, remember that it’s expensive to offload a private property quickly; a Sellers Stamp Duty (SSD) of up to 12 per cent will apply, if you try to sell within the first year. As such, home buyers affected – or likely to be affected – by the downturn might want to consider a resale flat for the next five years.

5. Construction time during Covid-19

Subsequent “second wave” or “third wave” infections can impact construction times. For example, Malaysia’s Movement Control Orders (MCO) being implemented a second time could cause manpower and supply shortages in the construction industry. And needless to say, a second Circuit Breaker in Singapore (touch wood!) could cause construction delays again; this already happened the first time around.

Apart from the inconvenience, this could raise costs from temporary accommodation (e.g. renting while you wait), to stretching out the time before you can sell a new flat.

As such, some home buyers might want to play it safe for now, and elect to get a resale flat (or a resale condo if one catches their eye).

But the biggest and most important news of all was just announced in end-November 2020

We may soon see new regulations on prime region HDB flats, that impose controls on their resale prices. As I write this, the measures haven’t been announced yet; but it could make life tricky for those who have invested heavily in central area flats.

It is already a delicate balance as is: you need to be careful not to overpay for a resale flat; but the cheaper the area, the lower the appreciation might be (e.g. in non-built up areas like Canberra, Sembawang, etc.) As such, most home buyers who rely on flats for appreciation tend to prefer central area flats.

If new rules are passed to control their pricing, however, it might be painful to those who have already forked out high COV for these properties.

As such, I would think carefully before jumping on the resale flat bandwagon, short of the reasons I’ve discussed above. For a more detailed assessment on charting your asset progression, contact me on Facebook; I can help you to work out if a resale flat is a meaningful starting point.

You can also follow me on Ron Chong Property.sg, for the coming updates on the new HDB rules.