Before Monday, if HDB resale flats were tradeable investment products on the screen of international ratings agencies, they would have attained a triple-A rating; so highly regarded were they by property investors.
However, all that changed when the Government announced measures to effectively close them to new investors and speculators. The new rules disallow concurrent ownership of HDB flats and private residential properties if the owner has not stayed in his public housing flat for five years.
Private property owners who buy an HDB flat now have to dispose of their private homes within six months.
When the ownership rules for HDB resale flats were relaxed just a few years ago – when prices were still depressed – no one could have foreseen how they would go on to outperform the private housing market in terms of rental yields and capital appreciation within just a few quarters.
In terms of risk, they were probably the safest investment property to spend your savings on. Almost as good as Singapore Government bonds, HDB flats were a safe haven compared to the surrounding financial turbulence.
Many had expected the opening of the two integrated resorts to strongly drive up the demand for private housing. As a result, values were chased up to unrealistic levels, only to disappoint when the widely anticipated boom did not materialise. Instead, the unrealistic price levels for private properties drove demand towards the public housing sector and kept them there.
Rental demand from both foreign workers and expatriates for public housing flats grew. Rental yields rose and soon caught the eyes of investors. Soon, more people began to buy them as investment properties – a trend noticeable as far back as 12 to 18 months ago.
At the same time, more and more would-be HDB upgraders could not cross the widening gap between the private and public housing sectors. Upgrading became restricted to a bigger flat type or a newer flat in a better location.
In the meantime, newly-formed households were moving into the housing market. Unlike in the private housing market, where a premium is paid for properties under construction, the premium in the public housing market is for completed flats or those nearing completion.
This is because demand for the former is driven by investors who pay more for the opportunity to speculate, while demand for the latter is driven by the need for immediate occupation.
Without the release of flats from upgraders, additional supply could only come from newly-maturing flats whose owners had occupied their properties for five years. New annual supply from this source is fixed as it is tied to events which happened seven to eight years ago.
Before long, a shortage developed and was made more acute by investors who were crowding out genuine households and raising overall sentiment and prices with their record-price buys. It did not help that new flat prices were linked to prices for resale flats which were fast becoming a full-fledged investment product and a safe haven from the excessive liquidity in the market.
New flats, with their myriad ownership rules, are definitely not investment products. They can never be truly comparable to resale flats. They are poles apart, as different as night and day. To make price adjustments from one to the other is to compare Singapore apartments in Woodlands to apartments just across the Causeway in Johor Baru. They may look the same and distance-wise, not far from each other but one commands a value significantly higher than the other.
The new rules announced on Monday bring them back a lot closer – in terms of minimum occupation period and ownership restrictions. This can only be good for the market. It makes the job of those who decide on the prices of new flats a lot easier.
To those who complain, these are not really new rules. We are just falling back on old ones which worked well in the past.
To investors, if you cannot afford to live in a private property and invest in another in the first place but want to live in an HDB flat and invest in one, you are probably the most vulnerable to a sudden and sharp downward price correction.
It may not be immediately obvious to you, but like a gambling addict, you need protection from yourself.
By Colin Tan, head of research and consultancy at Chesterton Suntec International.