HDB upgraders have been a dominant force in the property market, over the past few years.

As of the past year however, this may be changing – fewer HDB owners have bought private properties in 1H 2022, and the most notable drop was in upgraders buying new non-landed homes.

Have prices gotten to the point where HDB upgraders are now simply priced out of new launches?

Fewer HDB upgraders in 1H 2022

According to the URA database, around 3,649 private home transactions in 1H 2022 came from buyers with HDB addresses; down significantly from 4,942 transactions in the same period last year. 

The most notable decline, however, came from new launch properties.

In 1H 2021, around 2,012 new launch transactions came from buyers with HDB addresses. As of 1H 2022, there were only 975 such transactions. 

This may be one sign that private home prices are reaching a ceiling, and that HDB upgraders are close to being priced out. 

That said, we must also be aware that this could also just be a consequence of the falling supply of new launch condos.

As you can see from the above, the total number of new condo units launched in 1H 2022 is only at 2,569 units. This is compared to 1H 2021, where there were a total of 6,072 units launched.

Prices of new, non-landed private homes have soared over the past year

According to Square Foot Research, prices have been on a steady uptrend since December of last year, and averaged $2,518 psf as of end-August 2022. 

Note that back in August 2021, new home prices averaged just $1,794 psf, marking a sharp increase of 40.3 per cent over 12 months. 

According to realtors we spoke to, the current "sweet spot" for HDB upgraders is a quantum of $1.5 million to $1.8 million.

However, HDB upgraders are typically family units who need at least a three to four-bedder condo; many upgraders will reject any units that are not at least 900+ sq ft. 

For reference, a four-room flat is typically around 1,027 sq ft, whilst a five-room flat is around 1,280 sq ft.

Based on the average prices above, a new launch unit the size of a four-room flat (1,027 sq ft) could cost around $2.58 million – way past the budget of most HDB upgraders. 

Looking past island-wide averages, you can check out the prices for some new launches nearing completion in this article. Sadly, you'll see that many of the condos on the list are still out of reach for HDB upgraders. 

Also, these numbers are before taking into account other factors, such as stamp duties and a lower Total Debt Servicing Ratio (TDSR). 

And while the above is quite a generalised look, it still does paint the picture that the prices gaps between HDB resale flats and new launch condos are just getting bigger.

Although again we must note that the number of OCR launches over 2021/2022 so far has been much less than the previous few years. As the numbers are more skewed towards CCR and RCR launches, this could also mean a higher average price overall.

Developers don't have much room to lower prices 

If anything, prices of new launches are just going to get higher, and a price of $2,000 psf seems to be the new norm in the future.

That's not to say that the price increases are because developers are getting greedy.

On the contrary, developer margins are currently quite thin, despite the high apparent prices.

Developers faced unexpectedly high costs during the Covid-19 pandemic – and are perhaps now headed into yet another volatile situation, as the war in Europe threatens to raise energy costs. 

On top of this, developers were impacted by the rise in ABSD rates from the December cooling measures.

They now have to pay 40 per cent of the land price in ABSD, of which only 35 per cent is remissible. Perhaps one of the biggest contributors to price is the need to bid aggressively for land, as developers struggle with depleted land banks. 

Another factor may be the rising commission rates for new launch sales. Unlike commissions for selling resale properties, which are around two per cent, developers can pay commissions of as high as four to five per cent – a cost that ultimately transfers to buyers. 

Under these circumstances it's unlikely that developers can charge less, even if HDB upgraders stop biting. 

We should add that there are also fewer transactions due to fewer new launches

While new launch prices are the main issue, note that the lower number of transactions also stems from fewer launches.

There are expected to be just around 30 new launches for 2022, down from around 50+ new launches last year. 

As such, we would expect the number of new home transactions to be significantly lower than 2021, even setting aside the issue of price. 

This does not, however, change the fact that new launch affordability is an issue. 

December 2021 cooling measures could be dissuading some upgraders

Realtors mentioned two factors from the cooling measures, that could affect upgraders:

The first is the increased Additional Buyers Stamp Duty (ABSD). An HDB upgrader who chooses to purchase a new condo, before selling their flat, will have to pay the ABSD of 17 per cent. This is payable within 14 days of completing the transaction. 

They can apply for ABSD remission later (if they're married and one spouse is a Singaporean, and they sell their flat within six months). However, footing the high upfront cost of the ABSD may not be feasible. 

This might account for some upgraders delaying their purchase, as they focus on selling their flat before making their move. 

The second factor is the lowered TDSR. After the December cooling measures, the maximum monthly loan repayment is capped at 55 per cent of the buyers' monthly income, inclusive of other debt obligations. 

Note that the interest rate used to calculate monthly repayments, for TDSR purposes, is set at 3.5 per cent. 

The lower TDSR might mean buyers have to fork out a higher down payment, which is not always possible after CPF refunds. 

Some realtors have explained it's not the TDSR, but the cash-down portion that's the problem

Some realtors have said that qualifying for the TDSR is not the key difficulty, for many upgraders. Rather, the issue the required cash down. 

The first five per cent of a property has to be paid in cash. For those buying family-sized new launch properties in 2022, this initial cash down has often been in the range of $100,000 to $150,000. 

The key question for upgraders is this: after selling your flat, and paying off the existing home loan and CPF refund, will you have this amount left over in cash? 

One realtor said that:

"A lot of HDB upgraders expect to cover not only the down payment, but also other costs like renovation and furnishing, through the net proceeds. But with the high quantum of a new launch, they end up needing a much bigger cash outlay than they thought."

The realtor noted that, after these calculations, many buyers changed their minds even if they could get the cash, and pass the TDSR. He added that the upgraders still proceeded, albeit with cheaper resale equivalents. 

Expected increases in home loan rates may be weighing on some upgraders

In 2021, it was still possible to find three-year fixed rate loans at below two per cent. At our last check (July 2022), two and three-year fixed rate loans ranged between 2.75 to 3.08 per cent. 

This is due to the United Stated Federal Reserve hiking interest rates, to combat inflation. There's a knock-on effect on Singapore home loans: as the Fed continues to aggressively raise rates, local homeowners will start to pay more for their mortgage. 

This is likely to be a growing concern going forward, as the Fed has proven quite aggressive in implementing large rate hikes. In previous years, the Fed often used small rate hikes of 0.25 per cent; but today they're willing to spike interest rates by as much as 0.75 per cent at one go. 

This may result in renewed interest in resale condos 

Resale condo prices are also rising; but as of August 2022, they averaged just around $1,486 psf. For a 1,027 sq ft unit, this comes to an average of just $1.52 million – still well within the grasp of most HDB upgraders. 

With fewer new launches on the market, and the prices being higher than ever, it's likely that more HDB upgraders will be focusing on the resale market over the coming year (barring a sharp price drop in new launch units, which seems unlikely given rising land and construction costs). 

ALSO READ: Singapore sees the rise of million-dollar HDB flats

This article was first published in Stackedhomes.