HDB owners upgrading to private residential despite property cooling measures

In the wake of property cooling measures developers have begun to offer higher percentage price discounts in an attempt to offload stock, making upgrading to condominium living a tempting option for HDB owners. Using 5-room HDB owners as a case study, we examine if now is the right time for HDB upgraders to cash out of their flats, and invest in the private condominium market. To measure the ease of upgrading by HDB owners, we looked at the upgrade premium, which is the difference between median HDB resale price per square feet (psf) and median condominium resale price psf of equivalent sizes, i.e. 100 - 120 sq m or 1,076 -1,292sqft for each quarter.

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Quarterly upgrade premiums (2Q12 to 2Q14)

Source: Urban Redevelopment Authority

The upgrading option between a HDB 5-room flat and an equivalent-sized condominium has been steadily increasing since 2Q12, reaching its peak in 4Q13, before trending downwards in the recent 2 quarters. As of 2Q14, the upgrade premium declined to $650 per square feet ($ psf) from $669 psf observed in 1Q14, reaching the lowest levels since 3Q12. This represents a quarterly decline of approximately 2.9 percent. On a year-on-year basis, the premium has also softened by approximately 6.9 percent.

Source: Singapore Property Watch (SPW)

The above diagram illustrates the psf sales proceeds of a 5-room HDB flat as a percentage of purchase price psf of an equivalent-sized condominium. In turn, it measures the amount of down-payment for their next condominium purchase they might receive from the sale of their existing flats. In general, the higher the ratio, the more favourable it is for the HDB upgrader. On a historical basis, the percentage cash generated from the sale of the flats declined consistently from 2Q12’s 41.2 percent to 4Q13’s 37.5 percent of the condominium purchase prices. However, since 1Q14, the ratio has rebounded strongly to approximately 40.0 percent as of 2Q14.

For a HDB upgrader, the increasing trend in sales price of HDB 5-room flatsas a percentage of the condominium purchase price appears to serve as an indication that this is the right time to buy. However, before making the upgrading decision, one also has to take into consideration the various transaction costs, the tightening credit conditions imposed as part of the Total Debt Servicing Ratios (TDSR) ruling, household budgets, and whether the proceeds generated from the flat purchase are sufficient enough to pay off their existing HDB mortgages. Non-financial considerations needed to be taken into account include proximity to the child’s school accessibility, and the ambiences of the neighbourhood.

Summary

Based on the findings drawn from the two charts, along with the continuing trend of softening condominium prices, HDB upgraders will want to watch closely the size of the upgrade premiums closely to see if there is a continuing trend of the upgrade premium convergence going forward. Timing is key as they would need to sell their current flat before prices start falling from the ramped up supply of BTOs hitting the market in the next couple of years, to maximize their potential capital returns and minimise their upgrade premium. However, with no clear indications of when the TDSR ruling will be relaxed, HDB upgraders still need to assess their financial conditions before pledging themselves to condominium purchases.

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HDB owners upgrading to private residential despite property cooling measures

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