Will proposed supply lead to more proposals?

For any young Singaporean looking to get married and start a family, the new measures to help first-time buyers, together with those to maintain a stable and sustainable property market, should come as welcome news.

The Government and the Housing and Development Board (HDB) have done a good job in keeping the cost of public housing broadly in line with general inflation.

Recent research by Jones Lang LaSalle shows after adjusting for consumer price inflation, HDB flat prices had been largely rising at just below or in line with the rate of inflation from 1998 to 2007.

But in the last couple of years, HDB prices have started to accelerate away.

The recent rise in HDB flat prices beyond the general inflation rate is down to the supply and demand characteristics of the housing market.

So the announcement from the HDB that it will be offering 16,000 new flats this year is good news – as it is close to the number of households formed by first-time marriage, thereby broadly balancing supply with demand.

Household formation from first-time marriages in Singapore is around 17,500 per year. Not all of these young couples will want to live with their parents. Many will want a place of their own. Ramping up new flat supply to 16,000 units a year is a good start. However, it is likely that the HDB will need to further increase supply and go ahead with its preparations for 22,000 flats next year.

This additional supply will help to bring housing prices back into a long-term sustainable rate of increase and prevent prices from escalating out of control. In recent years, the rate of HDB market supply has been well below what is required to meet the first-time marriage rate. There are two reasons for this.

First, the HDB has done a good job of refurbishing and redeveloping older estates to meet the rising wealth and aspirations of the population. But the downside is that this temporarily reduces net additional supply into the market, as withdrawing the older flats reduces the net supply of new flats any particular year.

Second, and more importantly, is the move from walk-in selection to build-to-order. In the switch to build-to-order, on an annual basis, fewer flats are delivered and available to live in, due to the longer time to build the flats. The decision to switch to build-to-order was a sensible move as it maximised Singapore’s resources and stopped any oversupply of empty flats from occurring.

The downside is that it may take another two years to get supply back up to a rate that meets the demand from first-time marriages. The new HDB plans to shorten build-to-order waiting times from 3 years to 2.5 years will help alleviate this problem.

While the recent move to increase supply will bring the HDB market roughly in line with demand from first-time marriages, what is more difficult to determine is the number of flats required to meet the shortfall that has built up over the last few years.

So the recent moves by the Government and the statement by the HDB that it can ramp up supply to 22,000 units, if required, is welcome news for young couples currently living with their parents.

Furthermore, helping more newly-weds own a home of their own might have the welcome side effect of boosting the nation’s falling birth rates.

By Dr Megan Walters, head of research for Asia-Pacific capital markets, Jones Lang LaSalle.

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