Are HDB valuers overexploiting in today’s booming real estate market? , News about money

According to JLL, the number of HDB improvers moving into condos is currently up over 21% from last year.

The idea of ​​a condo buying frenzy, in the midst of a pandemic, seems worrying; and maybe it should, given the steady rise in prices we’ve seen over the past nine months. At current prices, it is possible that some HDB upgraders exceed the limits:

A quick explanation of the real estate market in 2021

For those who haven’t followed the real estate market, it can be difficult to understand how high the prices are. Here’s a quick snapshot:

From January to October, prices increased both in the HDB market and in the condominium market. The average island-wide condo costs around $ 1,705 psf, while resale apartments cost an average of $ 500 psf.

This puts condo prices about 20.7% above the last high of 2013; and remember that that year we saw the start of several rounds of cooling measures to bring down prices.

Fixed resale prices are also about 3.2 percent higher than their 2013 peak and are also at their highest level in over eight years.

The real estate market may have started to adjust to measures like the additional stamp duty for buyers (ABSD) and loan restrictions.

That said, the measures to kill Cash Over Valuation (COV), undertaken for the flat resale market around 2013, have clearly lost their bite. While the COV data is no longer published, the two real estate agents on the ground – as well as the news media – have seen it increase:

A third of resale apartments purchased in 2021 involved a VOC, compared to a fifth in 2020. In contrast, zero VOCs were a growing standard in late 2013 and were the norm for most of 2014 through mid-2019.


Despite higher fixed resale prices, are HDB valuers starting to overindebted?

  • Processors show a preference for large units
  • Lots of FOMO purchases
  • Low mortgage rates can make you feel affordable
  • CPF spent on down payments to meet TDSR

1. Upgraders show a preference for large units

It is sometimes pointed out that HDB upgrade companies tend to buy larger resale condos, where the average price is closer to $ 1,300 to $ 1,400 per square foot. However, that doesn’t mean much actually.

When it comes to affordability, the quantum and not the psf price is the key issue. Smaller units can go up to $ 3,000 per square foot, but total $ 1.3 million or less; Conversely, a 2,000-square-foot four-bed would cost $ 2.8 million, at just $ 1,400 per square foot.


According to research by Cushman and Wakefield, the median size of units purchased has increased by about 4.5% year over year. In the same linked report, Orange Tee & Tie noted a 72% increase in sales of new homes above 1,200 square feet, between Q4 2020 and Q1 2021.

On the ground, realtors have pointed out that for many developers, this doesn’t feel like an upgrade unless the new home is at least the same size as the previous one.

Note that most four-room apartments are at least 970 square feet, and similar-sized condos cost an average of $ 1.3 million (resale) or $ 1.84 million (re-launch); we will explain more about this in point 4 below.

In any case, the desire for larger houses means taking a larger quantum; and that ultimately means larger loans and down payments.

2. Lots of FOMO purchases

Fear of Missing (FOMO) has been a major driving force in 2020 and 2021. This is due to two factors:

First, rising home prices create the feat that if upgrade companies wait any longer, they will eventually be taken off the market. There is also the feeling that this is a “once in a lifetime” chance to take advantage of the explosion in the prices of resale apartments (note that between 2013 and around 2019, the prices of resale apartments did not ‘have experienced a steady decline).


The current growth in resale prices for dishes is likely unsustainable, driven by temporary factors like the surge in five-year apartments or the urgent housing needs of Covid-19.

As such, many revaluers fear missing out on good prices for their apartment; maybe ignoring that, even though they are selling high, they are also buying high anyway.

Second, there is an underlying fear that rising house prices could prompt government intervention. Some fear that new loan restrictions or higher stamp duties will kick in and prevent them from buying if they wait too long.

All of this could cause some buyers to take the plunge, long before they have enough savings. On the ground, for example, real estate agents have seen buyers turn to banks with higher interest rates, simply because those banks are willing to accept higher valuations – a move that could involve desperate need. larger loan amounts.

3. Low mortgage rates can make you look affordable


During economic crises, interest rates tend to fall. This is due to the rate cut by the US Federal Reserve, to stimulate their economy.

The last time this happened, during the global financial crisis, mortgage rates in Singapore fell to all-time highs. This fueled real estate purchases, due to low monthly payments and the prospect of “borrowing for free” (i.e. the interest rate on mortgage loans was lower than the CPF interest rate. ).

The same thing happened during Covid-19, with mortgage rates falling to an average of 1.3% per year. This is half of the HDB loan rate of 2.6% and lower than the current CPF rate of 2.5%.

The lower interest rate could create the appearance of affordability. However, an acceleration in federal rate hikes is now expected in the United States, starting early next year.

Now assuming a $ 1 million mortgage at 1.3%, for 25 years current borrowers would pay about $ 3,906 per month. An increase to 2% – the average in 2018 – would bring repayments to about $ 4,239 per month; a difference of $ 333 per month.

Incidentally, before the last financial crisis, mortgage rates averaged around four percent per year; and there is no guarantee that we will not return someday. A lot can change over a 25-year loan term.

4. CPF spent on down payments to meet TDSR

The total debt service ratio (TDSR) caps a borrower’s loan repayment at 60% of their monthly income; you can consult our guide for more details on how it works. In addition, the TDSR is calculated at an interest rate of 3.5%, regardless of the actual market rate.

Consider a condo with a price tag of $ 1.6 million. The maximum loan (75%) would be $ 1.2 million.

At 3.5% over 25 years, that’s a loan repayment of about $ 6,007 per month. This would require the borrower to have a minimum income of around $ 10,012 per month. That’s beyond the average income of most Singaporeans, and even some dual-income families might struggle to be successful.

How then, do some families manage it?

The answer is to borrow less (i.e. make a larger down payment). For example, if borrowers have a combined income of only $ 8,000 per month, their TDSR limit is only $ 4,800.

This is achievable if they lower the loan to around $ 960,000, which means a total down payment of $ 640,000.


Some may get lucky and cover this with the sale price of their HDB apartment, but this is rare. Even at the current high price of $ 500 psf, the average 5-room apartment (roughly 1,184 square feet) comes in at just $ 592,000. Keep in mind that these buyers must also cover buyers’ stamp duties, pay off the existing home loan, etc.

So the question here is: where do so many upgrade companies get the money for the down payment?

It is difficult to give an answer because most buyers are naturally discreet about their financial sources. However, there is a real possibility that this will involve wiping the CPF regular account down to the last dollar (with subsequent loan servicing), or in some cases having to tie in-laws.

If so, these buyers are likely going far beyond the 3-5-5 formula, which suggests that the home be capped at five times annual income, 30% of their monthly repayments, and that buyers have 30% of the necessary capital. in the front.

Of course, many buyers think this is way too conservative, so it really all depends on your personal risk appetite.

There are more controls in place, compared to 2008 – 2013

We don’t think we’ll see the market overheat like we did from 2008 to 2013 when prices went up about 60% overall. Some controls, like TDSR and ABSD, are in place to prevent this.

However, we see many HDB upgraders accepting prices that in 2018 alone would have pushed them back.

While private ownership might be a more valued asset in the future, that doesn’t necessarily mean you have to maximize everything to get the biggest home ownership you can afford.

Remember, what the bank or a mortgage calculator tells you is the maximum amount you can borrow, not the optimal amount to borrow.

Most people think they are making a rational decision because the bank deemed it safe (obviously most people won’t think of the worst-case scenario of losing their job), but the reality is that everyone has thresholds. different from what is a comfortable to pay in terms of mortgage each month.

READ ALSO: Older HDB Apartments Don’t Depreciate As Quickly As You Think. Here’s what the numbers show

This article first appeared in Stacked houses.