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.

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.

The recent property frenzy has been fueled partly by the number of HDB upgraders in the mass market segment.

As the price of a HDB resale unit can cost up to $400-500k, it is no wonder that people decide to pay a bit more to get for themselves a private apartment. The HDB resale price index for 2Q2009 is at 140.2, the highest ever.

For those who are looking at buying or selling their HDB unit, you might want to attend this HDB resale seminar organised by HDB. It covers topics like:

• Resale Policies and Procedures
• Financial Planning for Homeownership
• Procedure for HDB/Bank Loan
• Option to Purchase
• Resale Checklist for Housing Agents
• HDB InfoWEB and e-Services
• Using Your CPF for HDB Housing

Seminars are delivered in English, Mandarin and Malay. To see the dates and to register for the talk, you can visit the HDB website. There is a fee of $25 and seats are limited to 100 people for each session.

Given that the amount of money spent on a HDB flat can add up to a significant percentage of a person’s income over the years, it might be worthwhile to plan your HDB purchase or sale carefully.

When I opened up the newspapers today, I saw the headline “HDB Flat Buyers Pay Less Cash Upfront” screaming at me on the front page. I got pretty annoyed about the article after I finished reading it.

That same headline could have been rewritten as “HDB Resale Flat Prices Continue to Rise“, and it would have fit the original article just as well. In fact I think it fits it even better.

The article states that the median cash-over-valuation (COV) prices in many popular estates have gone down. This is due to the increase in the market valuation of the flats.

“With valuations going up, the COV is coming down and this makes it more affordable”, someone was quoted as saying.

How misleading.

Granted, the lower COV means that buyers need to fork out less cash upfront. However, they are going to pay more for their flat and this is going to make them financially worse off in the long run.

Able to fork out the upfront cash does not equate to being able to afford a flat.

If I tell you that you can buy a Porsche for no money down compared to paying a 10% deposit previously, does that make it any bit more affordable for you? Whether you can afford it or not will also depend on whether you can service the monthly installments.

There was an example given in the article about a five-room flat in Bukit Batok.

In the fourth quarter of last year, the median valuation was $389k, the median COV was $41k and the median price was $430k.

Barely 6 months later, the valuation is $420k, the COV is $30k and the price is $450k.

This is an increase of 20k or about 4.7% of the flat’s price in less than half a year.

If you read the entire article, you will realise that the author, Jessica Cheam, is trying to paint an optimistic picture about the affordability of HDB flats – despite the increase in their prices.With rampant inflation, the national newspaper is probably trying to do its part to reassure the public. Seriously, I think they can do much better than this.

Ironically, another section of the newspaper shows the cost of three HDB resale flats in the Holland area.

The 3-room was going for $378k, the 4-room for $465k and the 5-room for $680k.

The (rapidly) rising property prices is a real cause of concern.

If left unchecked, how are the lower income families going to be able to afford basic housing for themselves?