HDB’s largest launch of Build-To-Order (BTO) flats at a go. (full story here)

As speculated in a previous posting (Singapore’s public housing sector: what to expect), the new Minister in charge of housing is making an attempt to make his presence felt. In fact, he’s going into overdrive by ramping up supply from the previously projected figure of 22,000 to 25,000 BTO flats this year.

The first immediate concern is oversupply. Of course the people at MND and HDB are no fools. They have a fair idea of what the projected demand is and the amount of supply that’s likely to come onto the housing market in the near future so they definitely have a plan in place to pull back the supply once the bottleneck has been met. Minister Khaw Boon Wan says so himself in his blog (post here):

I have told HDB to do more.

First, to tender as soon as architectural drawings and tender documents are ready. Currently, a tender is called only after 70% of orders have been confirmed; hence “build to order”. Given robust demand, I told them to proceed to build, knowing that the orders will definitely come. In other words, build ahead of demand, during this period of demand backlog. We can return to normal BTO approach, after we have stabilised the situation.

Now, what do I make of all this?

While I don’t doubt the ability of MND and HDB and the good Minister himself, the whole reaction smells of a manager trying to meet near-term earnings (and we know how that mostly turns out- short-term happiness, long term pain for the property market). Why do I say this? Simply because the ramping of oversupply and counting on a pull-back at the appropriate time leaves very little room for margin of error.

In fact, my thesis is that the 25,000 units this year will fall short of continued demand which will prompt MND and HDB to continue with the Build-Ahead-of-Order a little longer and the overcapacity will cause pain when all these supply comes to the market.

Of course, raising the income ceiling will invite more demand for BTO flats as new couples who barely cross the current $8,000 income ceiling will flock back to the BTO market given the cheaper prices in the BTO market as compared to the DBSS and especially the Executive Condo (EC) market.

The lower income residents need not fear of course as there are income caps (which I do not think should be raised) on the 2 and 3 room flats. The ones to be worried are those in the resale, DBSS, EC and basically the rest of the mass residential market. Prices there will definitely come down. If Cash-Over-Valuation (COV) ever comes close to zero, property buyers rejoice.

When would there be such a scenario?

My best guess is a confluence of 3 factors: 1) after the bulk of the private supply of housing stock comes into the market in 2013, 2) when the bulk of the new generation of BTOs, DBSS and ECs are after the Minimum Occupation Period (MOP) and 3) a cyclical downturn in the business environment.

Oh yes, one more thing. Given the current ramp up in supply of flats and private property as well as the projected construction of the new MRT lines, I’d say 6.5 million people, here we come.

(For the mathematically inclined, that’s a 30% increase from the 5 million people we have on this island so far, or a compounded growth rate of 2.65% over the next 10 years which is more or less in line with the resident population growth rate we’ve had over the last 5 years. However, the housing stock is expected to increase a lot more. How much more? According to this report, table 4, 300% more in 2014 as compared to this year.)

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