HDB Trades at Par in August
Gone are the Days of Inflated COV’s?
Remember the days when HDB buyers were paying Cash-Over-Valuations (COV) in the tens of thousands?
(The highest COV was $235,000 for an executive HDB flat in Bukit Batok in January 2013.)
Are those days over?
Using Transaction-Over-X-Value (T-O-X) as a proxy for COV, you can see from this graph that HDB buyers are largely paying market value, as measured by SRX Property’s X-Value.
X-Value is a computer’s estimate of the market value of a home. SRX Property’s X-Value system uses the sales comparison approach as the primary methodology for estimating the value of an apartment or a landed home.
It takes into account all the measureable variables in pricing a home, including location, property type, size, age, tenure (in case of private condominiums), built-in area and land area (in case of landed homes), and floor level. It does not take into consideration the condition and orientation of a home.
The buyer and seller then use the X-Value as a starting point for negotiations. If the buyer determines that the condition of the home makes it worth more than X-Value, he or she will transact above the X-Value. Likewise, he or she will pay below X-Value if the condition is poor.
TOX registers market pricing sentiment. A consistently negative TOX implies that buyers have the upper hand and are negotiating the price down. An increase in supply and Cooling Measures are examples of factors that can lead to a negative pricing sentiment.
A consistently positive TOX means that the sellers have the negotiating power. When demand exceeds supply, the market will push TOX into positive territory. A very high positive TOX could signal a market bubble.
A TOX at zero means the market is trading at par. In August, the entire HDB market, as a whole, traded at par. However, as we can see from the table below, not all HDB Towns are trading at par.
Most of the towns are trading within $10,000 of X-Value. However, there are some outliers like the Central Area, which is trading at a positive $50,000 TOX. This number is not statistically significant in itself as this town had less than 10 transactions across three property types. However, it does contribute to the market’s overall TOX number.
Data is factual but it can be elusive. When we look at numbers, we should be careful to put them in the proper context. What happens at the national level is not necessarily what is happening at the town level. Policy tools that work at the national level may not be as effective at the town or block level. Ultimately, local supply and demand factors combined with the cost of financing are the most influential determinants of price.
While it is too early to say definitively, the overall trend of the TOX suggests that the HDB market at the national level is beginning to stabilize. In 2013 and 2014, Government policy efforts were effective at breaking the high COV’s and causing the market to rebalance, as evident by the negative TOX.
In 2015, as evident by the TOX moving closer to the ZERO mark, the market seems to be stabilizing as it comes to terms with the Cooling Measures and the existing economic and financial situation. However, we will have to watch the TOX over the next few months before we can be more emphatic about our declaration that the overall market has rebalanced.
While it may be too early to declare that the HDB market has completely stabilized, the trends in TOX do suggest that the Cooling Measures have been effective in putting out the worst of the COV fires. In our view, three policy tools have been highly effective at vanquishing high COVs:
- An increase in supply as a result of an increase in Built-to-Order (BTO). This is a very effective policy tool because it acts like a twofer. Not only does HDB increase supply in the market by introducing new homes, it also increases supply by requiring BTO buyers to put their existing homes on the market in order to take the keys to their new BTO units;
- Removing the COV from the negotiation process. In an up market, the high COV helped drive market sentiment upwards and resulted in even more inflated COV’s, which in turn helped drive market sentiment up even more;
- TDSR / MSR / LTV. Total Debt Servicing Ratio (TDSR), Mortgage Servicing Ratio (MSR), Loan-to-Value limits, and other restrictions on financing have been effective at squashing the tendency of people to buy homes they cannot afford as a result of low interest rates. In other words, it has helped families stay within their comfort zone when it comes to financing.
Given the effectiveness of the above measures, it appears that the Government has found the right tools to keep the market in check. So while we cannot yet declare that the HDB market has completely stabilized, we are confident that inflated COV’s on a mass scale are a thing of the past (at least until something fundamentally changes the market).
However, as is always the case in real estate, ultimately each transaction is local and what is happening at the street or town level may differ from the national level. As a result, you should balance macro-analysis (i.e., T-O-X, price indices, etc.) with micro-research (i.e., X-Value, certified valuations, Home Report, etc). Macro-analysis is appropriate for understanding overall market sentiment and the impact of government policy on the market, but ultimately you should work with trusted advisors to drill down to what is happening at your street and neighborhood level before you transact a home.