The Housing & Development Board (HDB) recently unveiled policy changes designed to hurt speculators and make it more expensive for non-Singaporeans to buy government-subsidised flats. These changes include:

1) It will now be possible to apply for a second concessionary loan, even if you are downgrading. However, the quantum of the second concessionary loan will be reduced by the full CPF proceeds and part of the cash proceeds from the sale of the existing or immediate past HDB flats.
2) Minimum occupation period for resale of non-subsidised flats has been increased to 3 years.
3) Lease buyback scheme extended to those who previously owned 4-room and bigger flats.
4) In case of Singapore PRs who marry citizens, HDB will withhold $10k of the housing subsidy until the SPR takes up citizenship or they have a Singapore citizen child.
5) New non-Malaysia SPR quota of 5% at neighbourhood level and 8% at block level.
6) Ethnic limit for Indian/Others raised to 12% at neighbourhood level and 15% at block level.

We are now starting to see more and more measures being put in place to prevent a runaway increase in HDB and private property prices.

Prices have already gone up a lot mainly because the increase in HDB supply over the past couple of years was insufficient to meet the increase in demand from a fast growing population. Price is always a function of demand and supply – as simple as that.

When all these changes take effect (and our population starts to decrease due to more stringent criteria on foreign workers), HDB prices should stabilize and perhaps even drop. However, I don’t expect a drastic drop as the cost would be too huge for the government to let it happen.

MAS, MND and MOF made a joint statement on Friday announcing the following measures to ensure a stable and sustainable property market:

1) Introducing a Seller’s Stamp Duty (SSD) on all residential properties and residential lands that are bought after today and sold within 1 year from the date of purchase; and

2) Lowering the Loan-to-Value (LTV) limit to 80% for all housing loans provided by financial institutions regulated by the Monetary Authority of Singapore (MAS)

The steps are essential (and probably insufficient on its own) to prevent a bubble from forming in our property market.

Full details of the changes can be found here:

http://www.mnd.gov.sg/newsroom/newsreleases/2010/news19022010.htm

Fresh data from the Housing Board (HDB) showed that the median cash over valuation (COV) for HDB resale units rose to $24,000 in the fourth quarter of 2009. That is double the $12,000 median in the previous three months and breaks the COV record of $22,000 achieved in the fourth quarter of 2007.

The top three towns had medians of $50k, $50k and $38k for executive units; $40k, $33k and $31.5k for 5-room units; and $35k, $35k and $30k for 4-room units respectively.

There was even a 5 room resale HDB unit sold for $730,000 with a whopping COV of $85,000.

For those who did not study statistics, median is defined as the numerical value separating the higher half of a sample from the lower half.

Say, if there were a total of 7 transactions with COV of $10k, 15k, 17k, 19k, 22k, 25k and 30k, the median would be the 4th value or $19k. This is different from the average which will take the total of all transactions divided by seven.

The ever rising COV is driven by a mismatch of the number of families with immediate housing needs compared to the number of sellers and new units. The problem is accelerated by the fact that only 11,000 HDB units were built over the last three years.

History has shown time and again that asset prices cannot go up indefinitely. Yet, human tendency is always very much inclined towards following trends – more so when the trend is very strong. This behavior is a common factor towards the formation of asset bubbles.

If prices are rising, people will believe they will continue to rise and rush to buy.

At the end of the day, it is always prudent to buy something that is affordable than to overstretch the budget. After all, a HDB unit is just a 99 lease – you do not even own the unit and technically, the price should depreciate back to zero at the end of the 99-years lease!

There was this article Cool Response to Smaller HDB Flats which stated that demand for smaller HDB flats is not as strong as expected.

The numbers from HDB show the application rates for smaller flat types ranged from about 40 per cent to three times the number of flats offered – less than the typical four to five times seen for four- and five-room units.

The article prompted a response from Leong Sze Hian, which was only published in the online version of Strait’s Times forum and not in the print version.

Cool response to smaller HDB flats: It’s not just a matter of preference – Leong Sze Hian

Mr Leong explained that the lower demand could be due to the household income cap of $2000 and $3000 for 2 and 3-room flats respectively.

He also questioned HDB’s argument that HDB flats are generally affordable as most people spend no more than 30% of their income to service their mortgage. Mr Leong pointed out that this argument is fundamentally flawed as it failed to take into account those who could not afford HDB flats because buying one would leave them with too huge a loan to service (more than 30% of income). Or those who give up their flats because they couldn’t service the loans.

If the people who own landed property spent only 30% of their annual income on their property, does that mean that landed properties are affordable?

A better indicator of affordability could be median and lower incomes as a multiple to HDB prices. Generally, the income levels have been lagging behind the rise in HDB prices.

As of September 2009, 30770 HDB loans were in arrears of over three months. This is 7% of the total number of HDB loans.The default rates for HDB bank loans are not available.

If you depend on financing your home property loan using your CPF OA, do you know that you might be hit with a scenario where you can’t use your OA to pay for your housing many years down the road? (This does not apply to new HDB apartments purchased using a HDB loan)

Here are three terms you need to be aware of:

• CPF Withdrawal Limit
• Valuation Limit
• Available Housing Withdrawal Limit (AHWL)

CPF Withdrawal Limit

This is the maximum amount of CPF that you can use to pay for your housing. It varies from 150% to 120% of the loan amount depending on when you bought the property. From 1st Jan 2008 onwards, the limit is 120%. Note that if you refinance your housing loan, the prevailing CPF withdrawal limit will apply to your new loan.

Depending on the interest rate of the loan, the CPF withdrawal limit is likely to be hit towards the 2nd half or tail end of the loan.

Once this limit is hit, you can’t use any more CPF monies to pay for your housing loan.

Valuation Limit (VL)

This is the lower of:

• Purchase price of property
• Valuation of property at time of purchase

Once your CPF withdrawals (for paying the property) reaches the VL, you will not be able to use your CPF to pay for your housing loan unless you have the Avaliable Housing Withdrawal Limit (AHWL).

Obviously, the Valuation Limit will be hit before the CPF withdrawal limit is hit. It can also be reached in the early years of a loan if someone uses spare monies in the OA to pay down the housing loan rapidly.

Use this CPF calculator to estimate your CPF Withdrawal Limit and Valuation Limit.

Avaliable Housing Withdrawal Limit (AHWL)

For those below 55, the AHWL is the balance available after setting aside the Minimum Sum component. Savings in the OA, SA and amounts withdrawn for investment can be used to meet the prevailing Minimum Sum cash component.

CPF has a  calculator that helps you estimate your AHWL.

While the terms might sound confusing, any potential property owner should definitely try to understand the implications of these limits on their housing loan repayments before they buy any new property (or refinance an existing one).

Not doing so might result in an unpleasant surprise many years down the road, especially if there is not enough free cashflow to be diverted towards the housing loan.