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Why I think the new HDB classification system might do little for the property market (for now)

I was all ready to listen to the National Day Rally two weeks ago.

There are some property announcements which I am speculating that did not happen. For instance, the increase of income ceiling limit for new Executive Condominiums. Given that the current income ceiling for new Executive Condominiums is $16,000 and has been implemented since 2019, I was expecting that an increase in this income ceiling to be perhaps to be increased to $18,000. While it didn’t happen during the NDR, I still think there is a good chance it will happen in the next 12 months (same goes to a majority of my subscribers who answered the poll recently too).

What was quite unexpected was the new HDB classification system that was announced. I’m sure most of you here might have already known about this system (Standard, Plus, Premium). You may be forgiven if you misunderstood that as the new Apple phone launches.

Standard classification applies to most flats with standard restrictions of 5-year MOP. Plus classification applies to choice locations within regions and have tighter restrictions such as 10-year MOP, subsidy recovery upon resale, income ceiling restrictions for resales. Premium classification applies to choicest and most central locations with the tightest restrictions (including full BTO eligibility conditions upon resales). Contrary to what most people think, Plus is the only new classification added to the system. Prime was actually already put in place since Nov 2021. Plus classification is expected to be applied from H2 2024. Prime and Plus will not be applied retrospectively on current existing HDB projects.

Personally, I do find this classification system a sensible one for the long-term future of Singapore's housing situation. For the past 3 years, we have been seeing HDB resale prices rising a bit too quickly. While this rise in HDB resale prices might seem fair when viewed from a longer term horizon as it is in sync with the rise in median household income, the fact that the prices increase steeply in the past 3 years is enough to ring the warning bells in the system. If left unmonitored, public housing might no longer be affordable for the next generation. This classification system allows the government to moderate the demand for the BTO projects in the more desirable locations by reducing the lottery effects. At the same time, the income ceiling put in place could help to reduce the number of eligible buyers and in turn potentially reduce the HDB resale prices (more on that later on).

It isn’t sufficient that BTO projects are the only affordable public housing for the younger generations. It’s equally important that the HDB resale projects remain affordable for the younger generations too. BTO projects will form a smaller and smaller percentage of overall housing projects as the years go by, and it will be inevitable for the next generation to have more housing options as they look to start their families.

This is where it gets a bit debatable. While the new classification system reduces the pool of eligible buyers for resale flats in more desirable locations (where we are seeing many million dollar HDB flats now), the impact on the resale prices for such flats (Plus, Premium) might not be so straightforward. Homeowners of such flats might priced in the subsidies which will be clawed back from them in the resale prices and this could further drive up the resale prices.

This could even create a spiral effect of unintended consequences. With resale flats under such classifications putting up higher prices (due to clawing back of subsidies), the other resale flats in the same area might be putting up even higher prices as these flat owners can claim that their flats are more desirable with lesser restrictions for future resale conditions. While such flats might already start to have some lease decay then, we all understand that public housing in desirable locations are still always well sought-after (just look at the HDB flats in Toh Yi Drive).

While one might debate on the impact of such classification system on future resale prices (think 20-30 years down the road as it takes ~15 years from now for the Plus flats to be made available for the resale market), I think it’s pretty clear that this classification system could do little for the property market in the short term.

The fact that this system is not applied retrospectively means that we will still continue to see more and more million-dollar HDB flats in the prime areas (Ang Mo Kio, Clementi, Central Area etc). The current housing projects are not affected by this new classification system. In fact, they might seem to be even more desirable now as buyers might want to purchase these precious HDB projects which are free from any of these new restrictions.

For private property, I think the impact is minimal. Those who aspire to own private properties will not lament about the situation as this does not impact them at all. For those who are sitting on the fence between owning a private property or HDB resale flat in the same area, they still have the option of choosing the current HDB projects (which are free of any resale restrictions) if they want a more affordable housing option with a larger liveable space.

While I could see the well intentions behind this new classification system, I do not think the current property market will see much changes. The current property market (both public and private) are now already seeing signs of slowing down in terms of volumes and prices. If the market begins to show signs of heating up again, you will be sure that we will see the next round of cooling measures (which will definitely have more impact on the current property market) very soon. I also do believe that we should also see a revision in the income ceiling for both BTOs and new ECs relatively soon too.

With this new classification system, I guess the biggest beneficiaries are current homeowners of larger flat types like 5-room and Executive Mansionette etc in the prime areas. If you notice, the government is building very little of such larger flat types in new HDB projects in those prime areas. If you are holding on to one now, you might just be holding on to a unicorn.

Here are the results of what majority of my subscribers think about the new HDB classification system. Interested to take part in the polls? Join my Telegram channel. 200+ like-minded investors have already joined this channel. What are you waiting for?

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