Monday, 29 May 2023

Property Crash- HDB reaffirms the launching and building of 100,000 flats from 2021-2025

In the latest news on HDB launch, HDB has continued its pledge to deliver 100,000 flats for launch in 2021 to 2025. This means from early 2025, 100,000 flats will flood the Singapore market until 2029.

146,000 new housing units in 5 years time

As what I have written in my previous housing post, without a dramatic increase in population, housing prices will tank with the addition of 146,000 confirmed new housing units. This is because the growth in foreigner population has been relatively slow; in turning leading to a large rental supply  in the market with rental demand from foreigners not catching up.This will force rental prices down.

I will not be surprised to see rental rates falling, unless Singapore decides to increase the foreigner population tap to save property investors.

Current OCR condo yields are at the low 4-4.2% and a reduction in rental rates will force yields to be far below the interest rates of property loans that are currently pegged to SORA. 

Do not forget among the housing types, HDB flats are eligible for the lower interest CPF loan provides at 2.6%, this means HDB owners who are renting out their flat can undercut private condo unit's investors. This may force OCR condo to fall to the 3% yield level based on current prices.

Effect of 3% Yield for Condo Units

If loan interest rates are 4.1% (current rate), while the rental yield is lower than that; the leverage effect will mean private unit investors will earn pittance even if they are renting out. And if they are unable to rent out, they are in a deeper cashflow negative state.

Magnitude of the Crash in the Private Market

With HDB housing loan able to sustain a compression in yields thanks to the 2.6% loan interest rate, I will be genuinely unsurprised that the private market can fall to a 3% yield because the premium of a swimming pool + gates will not be enough to justify a large differential from HDB flats.

Without a drastic increase in the foreigner population (e.g. +500,000 foreigners until 2027), I really forsee a compression in yields especially in the private condo market. My prediction is that yield rates will fall to a 3.2-3.5% level, this translates to a 20% drop in housing prices.

Current private property investors will suffer a loss or otherwise be continuously funding a loss making venture in their property market. This is the likely scenario. 

The saving grace will come from the government should it decide to increase the foreigner population dramatically or increase the annual citizen naturalisation rate drastically from its annual 21,000 rate; otherwise I believe a crash is imminent.

Who Benefits?

The fall in prices will definitely benefit the youths of Singaporeans who will enjoy the effects of an affordable house. Otherwise, current youths will continue to suffer from the effect of skyhigh housing prices especially in the HDB resale market that is directly correlated to the housing privates of the private condo market.

There is a side story if the government wants to help the future of the country or bail out the leveraged property investors who bought a house not to build a home but to profit from it.

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