The government’s efforts to control demand for HDB resale flats through various measures have proven to be ineffective, as prices have risen by over 50% since 2Q2019. This highlights the fact that interventions on the demand side have limited impact when the supply of housing fails to meet the needs of the population.
While the authorities have tightened the loan-to-value (LTV) ratio for HDB loans and raised the medium-term interest rate used to calculate the mortgage servicing ratio (MSR), these measures have only caused a temporary delay in purchases. This is because resale flats are still in demand as they serve an essential housing need. As a result, buyers return to the market once they become eligible, and prices continue to rise.
On the other hand, the government’s response to the supply shortage has been to increase the launch of Build-To-Order (BTO) and Sale of Balance Flats (SBF). These flats, offered directly by HDB, are more affordable and help to absorb demand. This strategy has been successful in the past, as high BTO booking volumes in FY2011 and FY2012 coincided with a slowdown in resale price growth. However, when the BTO supply was reduced from FY2015 to FY2018, resale prices bottomed out.
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The Covid-19 pandemic has further exacerbated the supply shortage, as construction delays and work-from-home arrangements pushed homebuying activity to new highs. Despite efforts to increase BTO supply, prices continued to rise, reinforcing the importance of sustained booking volumes above 21,000 units per year to moderate resale price growth.
Conventional wisdom suggests that Sale of Balance Flats (SBF) should have a more immediate impact on resale prices, as these units are often completed or near-completion. However, there is no clear correlation between SBF bookings and resale price movements, as buyers may be deterred by limited flat availability, lower ballot success rates, and restrictions under the Ethnic Integration Policy (EIP).
In contrast, the relationship between BTO booking volumes and resale prices is more pronounced. High BTO booking volumes have consistently corresponded with price moderation. The evidence suggests that a sustained booking volume of over 21,000 BTO flats per year is necessary to cool resale price growth. To achieve this, HDB may need to launch between 23,000 and 25,000 BTO flats annually.
The release of flats that have just met their Minimum Occupation Period (MOP) may also lift overall resale prices, as these units are typically newer and more desirable. However, the correlation between newly MOP flats and resale prices is weak in the year of MOP, but strengthens with a two-year lag. This suggests that most flat owners do not sell immediately after fulfilling the MOP, but rather one to two years later.
In conclusion, HDB faces a complex challenge in managing public housing affordability while maintaining demand for executive condominiums and private housing. While oversupply in the BTO segment may soften resale prices in the short term, it could potentially inflate them later when these flats re-enter the market post-MOP. Ultimately, increasing the supply of BTO and SBF flats consistently is the most effective way to ensure housing affordability and stability in the resale market.