ST : Don't sell that HDB flat

Sep 5, 2010

small change

Don't sell that HDB flat

With new rules, it has become something that sometimes money can't buy

By Dennis Chan

The anti-speculation measures to cool the property market, particularly with regard to public housing, have turned some conventional wisdom about buying a Housing Board flat on its head.

A few months ago, I wrote a column encouraging first-time buyers to be less choosy and to go ahead and get that new flat directly from the HDB; never mind if it is located in far-flung estates like Sengkang and Punggol.

Now I'm not so sure.

Changes in the rules on public housing last week mean that it is imperative for buyers to take extra care in selecting their flats, as there are longer-term implications to their choice than was the case previously.

Before I go on, let's recap the key changes in order to understand how far-reaching the impact they may have on HDB prices as well as on the psychology of home buyers and home owners.

The new restrictions are:

· Private property owners who buy an HDB flat must dispose of their private home within six months of buying the flat.

· If you are an HDB flat owner, you must have lived in your flat for at least five years before you can buy a private property.

· You must live in your HDB flat for five years before you can sell it, regardless of whether you bought directly from the HDB or in the open market. The lock-in is known as the minimum occupation period.

· Buyers with outstanding loans must put down

30 per cent of home valuation, of which 10 per cent must be in cash.

So what are the implications?

First off, the mobility of HDB home owners has been curtailed sharply.

Consider the situation at the start of the year. If you had bought a non-subsidised resale flat and did not take a loan from the HDB, you could sell it after one year.

In March, the time bar was raised to three years. It's now five, effective from last Monday. This change has no impact on first-time buyers who receive a housing subsidy as they have been required all along to occupy their flat for five years.

But it has a big impact on upgraders and downgraders.

The extended minimum occupation period will take away much of the speculative activity, effectively removing a layer of demand from the market.

Another source of demand - that from private property owners - has also been filtered out.

In the past, one in 10 resale flat buyers also owns private property. This is not an insignificant number, given that such buyers tend to gravitate towards the more affluent segment of the HDB market. They prefer flats in popular estates like Bishan, Marine Parade, Central and Queenstown, where prices and rentals are among the highest on the island.

Without the support of cash-rich private property owners, the days of a buyer paying an astronomical sum over and above a flat's valuation are over.

The slackening demand should lead to a moderation in resale flat prices. They could even fall if buyers are spooked badly.

However, it's not all a one-way street on the demand side. If prices were to fall to a level affordable to a first-time buyer, new demand may form as people who were previously put off by the high prices start to shop around again.

This takes me back to my earlier point: Is it still worthwhile for a first-time buyer to buy a new flat?

For the majority, the answer is 'yes' as the incentives for first-time buyers remain attractive. Flat selection priority given to first-time buyers, a generous loan quantum of up to 90 per cent, flat prices significantly below the market level, fresh 99-year leases, and zero cash premium over valuation are some of the advantages of buying new flats.

But for a small group of first-timers, it may be better to consider buying resale instead of new flats, if prices fall to affordable levels.

The extension of the minimum occupation period and the broadening of its use to encompass private property purchases mean that settling for a less-than-ideal home could cramp future housing and investment options.

Take, for example, the life cycle of an upwardly mobile couple.

A well-trodden path for them would be to buy a subsidised new flat and then upgrade to a bigger resale flat, before moving on to owning a private home.

This three-step upgrading plan can be realised through a combination of rising home equity, increased savings and improved earning power as their careers progress.

Prior to March, it could have been achieved in six years - by living five years in the first flat and putting up another year in the second flat.

Now, they will have to wait at least 10 years if they take this path. Perhaps even longer, if the HDB market grows sluggishly as a result of too many ownership restrictions.

It gets more complicated if they want to buy an uncompleted property as they will not be able to execute a sell-and-buy deal back to back that will allow them to take an 80 per cent loan on their new home.

Buying a condo during its launch, for instance, will mean stumping up more cash upfront as banks can lend up to only 70 per cent.

Therefore, if you buy from the resale market, make sure you choose your flat wisely since it is a place that you will have to be content with for the long haul. That means keeping the flat beyond the minimum occupation period.

Bear in mind the high opportunity cost each time you move house due to the five-year lock-in rule.

So don't move house if you are currently an HDB home owner and have plans to invest in a private property in the near future.

As far as possible - I know this can be hard - avoid flats that may be picked for the Government's Selective En Bloc Redevelopment Scheme because the replacement flat that you get in exchange will lock you in on a fresh five-year term.

Also, you should not sell your HDB flat if you currently own a private property as well, unless you intend to say goodbye to public housing ownership for good.

Once you sell your HDB flat, you are allowed to buy another one only if you are prepared to give up private property ownership for five years - a pretty drastic outcome.

Under the circumstances, it's better to rent out your HDB flat than to sell it, even if you were to receive an enticing offer.

After all, rental return from an HDB flat is generally superior to what private residences can achieve.

Whether for your own stay or rental income, one should not give up owning an HDB flat as it keeps its value better than a leasehold private apartment or condo.

The bottom line is: Do not sell that prized HDB flat. Thanks to the new rules, it has become something that money can't buy, if you are a private property owner and intend to remain one.

Either that or hope for a reversal of this rule in the future.

dennis@sph.com.sg