Is 'soft landing' a hard target?

COMPARISON: The SRX Price Index for the HDB resale market is almost a perfect downward slope, whereas its private counterpart is a stubborn series of irregular ups and downs. ILLUSTRATION COURTESY OF SRX

COMMENTARY

Earlier this week, National Development Minister Khaw Boon Wan announced that the Housing Board will slow the supply of Build-to-Order (BTO) flats by 25 per cent next year.

This suggests the Government is trying to create a soft landing for HDB resale prices.

A bit of background before I justify this statement.

Since the introduction of the Total Debt Servicing Ratio (TDSR) cooling measure in June 2013, HDB resale prices have declined significantly.

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According to SRX Property, HDB resale prices are off 8.9 per cent since their peak in April 2013.

In May 2013, one month before the Government introduced TDSR, The Straits Times reported that Mr Khaw told participants at an Our Singapore Conversation dialogue on housing: "If housing prices keep rising, it won't be good. If we can maintain them or even lower them by a few per cent, for example 5 per cent, that's good. When I came into MND, that was my target."

Based on an 8.9 per cent decline, Mr Khaw's target has already been met.

Furthermore, it does not look like the decline in HDB resale prices has run out of steam.

The SRX Price Index has dropped for eight consecutive months, suggesting that the HDB resale market is on track for a double-digit decline of at least 10 per cent.

This is a significant watershed for any housing market. When prices start to fall into the double digit range, a malaise can befall home owners.

For most people, their homes are their most important financial asset. It is a measurement of their current well-being as well as that of their future.

For example, when prices are up, people are more confident that they will be able to trade up for a more expensive home or retire on the nest egg created by their home.

In other words, when prices are up, people tend to feel buoyant and more secure.

When prices go down, anxiety can set in. Therefore, it is possible that the Government is looking at current trends and reaching for an important policy tool - BTO supply - to slow down the decline of HDB prices.

I would suggest that the increase in the number of BTO flats has been more effective in containing property prices than the TDSR has.

I arrived at this conclusion by comparing the difference in price behaviour between the HDB and private, non-landed resale market.

As the SRX Property graph indicates, the SRX Price Index for the HDB resale market is almost a perfect downward slope, whereas its private counterpart is a stubborn series of irregular peaks, valleys and plateaus that has resulted in a decline of only 5.6 per cent since its peak in January 2013.

MORE CHOICES

By introducing a record number of BTO launches at below resale market price from 2011 to date, the Government effectively reduced demand for resale HDB flats as the same set of buyers are now faced with more choices.

At the same time, this policy increased the supply in the resale market as existing HDB owners must sell their flats after receiving the keys to their newly completed BTO flats.

Consequently, both lower demand and higher supply exerted downward pressure on HDB resale prices this year.

The fact that Mr Khaw expects to reduce BTO supply by 25 per cent is a strong indication that the Government is preparing itself to slow the decline in HDB resale prices.

The question is whether cutting BTO supply by 25 per cent is enough (or too much) to create a soft landing and ease home owners' concern about the value of their most important asset.