Preventive Measures to Try to Neutralize the Inflationary Effects of the Higher HDB Housing Grants. But will it Work?
Introduction
As part of the announcement in the National Day Rally 2024, the government will increase the Enhanced Housing Grant (EHG) for households with monthly income of less than $9,001 and singles with monthly income of less than $4,501.
A day later, the same government announced that the Loan-to-Value (LTV) limit for HDB housing loans will be lowered by 5 percentage points from 80% to 75% of the property price of value, whichever is the lower. This is an attempt to cool the HDB resale market.
Like a dog chasing its own tail
In most markets, an increase in grants and subsidy to the buyers of a certain product will increase the demand for that product. This could lead to upwards pressure on the price of the project, especially when the supply of that product is quite inelastic, such as HDB flats.
As the prices of HDB resale flats increased, there would be pressure on the government to raise the public housing grants again and in even greater quantum. This could lead to a price spiral of HDB resale flats. Furthermore, it would also divert more government expenditure to housing grants.
The cycle of raising the housing grants and the rising HDB resale prices would be like a dog chasing its own tail. This would not lead to a happy ending.
Spill over effects on private housing market
The rising prices of HDB resale flats could also have a positive spill-over effect on the private housing market, contributing to upwards pressure on private residential property prices. This would not be welcomed by the government as it has been trying to tame the rising prices of private housing for more than a decade.
As HDB resale prices continue to grow robustly, an HDB flat owner could cash in his HDB flat in the resale market, and enjoy a bloated housing budget to acquire a private residential property or two as an HDB upgrader. His profit from the sale of his HDB flat will not be taxed under current regulations. This will result in rising demand for private housing and eventually sharper growth in private property prices.
Pre-emptive strike
The latest announcement by the government on 19 August to lower the Loan-to-Value limit for HDB housing loans is a small pre-emptive strike to neutralise the inflationary effects of the rise in the EHG. Lowering the LTV limit would trim the housing budgets of most potential buyers of HDB resale flats, especially those who are financially stretched and plans to draw out the maximum amount of credit available for their home purchases.
Limited impact
However, the impact of this round of cooling measures could be limited because only the LTV limit of loans from the HDB would be lowered by 5 percentage points from 80% to 75%. The LTV limit for loans granted by financial institutions remains unchanged at 75%.
To enhance the effectiveness of the cooling measure, the government could have lowered the LTV limit of housing loans granted by both the HDB and the private financial institutions.
Lowering the LTV limit would only address the demand side economics of the Singapore public housing market. To address the issues in the supply side of the housing market, the government must maintain the high supply of new HDB flats for another year or two.
I believe that the government is monitoring the market reaction and price movement after this round of cooling measure. They could be reserving the other types of cooling measures to be introduced in the future when necessary.
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