Larger HDB resale flats to bear brunt of new property cooling measures; may drive up rents

The latest round of property cooling measures is a necessary and inevitable move to nip overleveraging in the bud. 

There are already growing signs of overheating in both the Housing Board resale and private home markets amid rising interest rates and a gloomier economic outlook.

That the medium-term interest rate floor of 3.5 per cent used to compute the total debt servicing ratio (TDSR) was recalibrated came as no surprise, as mortgage rates have already exceeded 3 per cent in recent months and if left unadjusted, will increase borrowers' financing risks.

But are the new measures, which most analysts concur are targeted more at the HDB market, too draconian given that headline-grabbing million-dollar flat sales accounted for just 1.4 per cent of total HDB resale transactions as of Sept 30?

The raising of the medium-term interest rate floor to 4 per cent per annum from 3.5 per cent is expected but modest, given the pace at which interest rates have climbed, analysts said.

For property loans granted by private lenders, the Monetary Authority of Singapore will raise the medium-term interest rate floor used to compute the TDSR and mortgage servicing ratio (MSR) by 0.5 percentage point.

TDSR, applicable to private home purchases, refers to the portion of a borrower's gross monthly income that goes towards repaying all monthly debt obligations, while MSR, for HDB purchases, refers to the portion that goes towards repaying all property loans.

Though modest, this could still take a toll on private home sales as buyers review their sums and options.

"In particular, it may weigh heavier on the sale of new executive condominiums (ECs) as EC buyers are subject to a stricter MSR of 30 per cent, as opposed to 55 per cent for private home buyers under the TDSR," said Mr Ismail Gafoor, chief executive of PropNex Realty.

The introduction of an interest rate floor of 3 per cent for computing the HDB concessionary loan amount is aimed at reining in surging resale flat prices. The loan-to-value limit for housing loans will be further lowered to 80 per cent from 85 per cent, after being cut from 90 per cent in December 2021.

In addition to further tightening home loan limits, a wait-out period of 15 months for current and former private home owners to buy a non-subsidised HDB resale flat has been imposed to moderate demand for such flats.

Previously, they were allowed to buy an HDB resale flat on the open market if they sell their private properties within six months of the purchase.

The 15-month period is a "temporary measure that will be reviewed based on overall demand and market changes", said the National Development Ministry.

It is aimed at slowing the flow of hot money from private home downgraders, especially buyers flush with collective sale proceeds, said Mr Lee Liat Yeang, senior partner in Dentons Rodyk's corporate real estate practice. 

They have been snapping up larger million-dollar flats, helping fuel a 12.7 per cent increase in HDB resale prices in 2021, and a further rise of 5.3 per cent in the first half of 2022.

HDB data showed that prices of larger resale flats such as five-room and executive flats have been rising much faster than smaller flats over the past year.

But the latest cooling moves could slow this trend and even push more demand to four-room and smaller flats, analysts said.

A smaller loan quantum may prompt buyers to downsize from plans to buy five-room flats, said Mr Nicholas Mak, head of research and consultancy at ERA Singapore.

He sees the volume of transacted million-dollar flats "slowing in the next three to four months before resuming their growth trajectory".

The wait-out period will not apply to seniors aged 55 and above who are moving from their private property to a four-room or smaller resale flat. This will boost the popularity of four-room and smaller flats.

"This may trigger a rise in the values of HDB four-room resale flats, as many of these can be found in mature estates with good locations, walking distance to MRT stations and were built in earlier years when the sizes of four-room units were larger at 100 sq m to 110 sq m," said Mr Leonard Tay, head of research, Knight Frank Singapore.

OrangeTee & Tie senior vice-president of research and analytics Christine Sun sees large flat sellers facing headwinds as the more stringent TDSR and MSR will mean buyers have to stump up more cash and take smaller loans, which will affect the amount of cash over valuation they offer.

She said HDB sales volume may fall by more than 10 per cent, especially for larger flats, while price growth will likely slow down and may even move into negative territory in the fourth quarter.

"We anticipate that price growth may be between 0 and -2 per cent for Q4 2022" Ms Sun said.

But the rental market may end up a beneficiary of the new measures as more private home downgraders will have to rent in the interim, during the 15-month wait, adding to rental demand.

This will likely continue to fuel already red-hot private housing rents, which jumped 11.2 per cent in the first six months of 2022, Mr Tay noted.