3 reasons why resale HDB pricing is set to stabilise
During the course of my work, I meet many people with different inspiration and expectation on their housing matters. Recently, I came across this young couple who believes that their HDB flat is their security nest and by holding on to it, the value of the HDB will continue to appreciate.
Many HDB homeowners have the similar thoughts as the young couple and I understand why. However, let me share with you the direction for the HDB market in time to come. Perhaps then, you may have a different perspective and planning for your housing matters.
Point 1: The introduction of Mortgage Service Ratio (MSR).
Mortgage Service Ratio (MSR) is the proportion of your monthly gross income that is spent on mortgage repayment. According to the MAS policy, MSR must not exceed 30% and is applicable to the purchase of HDB flat and EC.
Quoting a standard and simple scenario, if your household income is $8,000, the approximate loan after applying MSR is $479,402 at a 3.5% interest rate with a 30-year loan period.
This means that if the medium price of a resale HDB 4-room flat rises up to $800,000, the household would possibly need to come out with a combined cash and CPF of $302,598.
In another words, a capped on the amount of loan to take based on a buyer income means that the buyer would have to fork out a larger amount of cash and CPF to pay for a house should the resale HDB flats continue to appreciate higher.
Point 2: The Valuation Process
Before 9 March 2014, the seller would be able to do the valuation of the flat before marketing for the unit. Then both seller and buyer would negotiate on the cash-over-valuation (COV) of the HDB. The COV is to be paid in cash only. This will explain why in the past there are many flats that were purchased above valuation that contributed to the appreciation of HDB price.
Today, the buyer does the valuation after receiving the Option to Purchase (OTP) from the seller. Both seller and buyer would have to agree upon the purchase price of the HDB before issuing the OTP. The valuation result would be available within 2 weeks and only the buyer would know the valuation result. The buyer can also decide whether or not to exercise the OTP.
In today’s market, buyers will be cautious to pay extra cash above the valuation and would normally offer at a market rate or lower to make sure they do not have to fork out extra cash for their resale flat. This is a step towards preventing HDB resale prices from spiralling upwards during a property bull run.
Point 3: Ongoing supply of BTO and Sale of Balance Flat (SBF)
Source: HDB
HDB is been constantly launching BTO and SBF to mainly first timers as well as second timers. Thus, other than resale HDB, the main bulk of the population are still able to choose from new flats that has a fresh lease versus older flats which is facing a lower lease period. Unless the location is highly favourable, a buyer will either has to fork out more cash for renovation, maintenance, or for purchasing the resale flat depending on the condition of the flat itself. Not forgetting in years to come, the resale buyer may need to face an even shorter balance of the lease period which may then affect the loan and the CPF usage.
As long as the supply of HDB is constantly introduced into the market to meet the demand of the population, the pricing for existing resale flats will stay at market rate and affordable for the public.
Given the above three reasons, the prices of HDB are affected by various factors to keep the prices affordable. Unless the government changes their policies, resale HDB flats will continue to stay around market value in the long run.