HDB versus Private housing prices

Recently, the HDB resale price index increased by 1.2 points to sit nicely at 140. This is following a first quarter fall of 0.8 points. Fistly, let me talk about the resale price index and elaborate what it actually calculates to readers who are not too familiar with this concept.

An index is created to give everyone a sense of how much something has gone up or down in prices. With regards to the HDB resale price index, the base for comparison is the fourth quarter of 1998. Basically this was the "starting point" or "base price". The index fell to 98.5 in the first quarter 1999 which meant that prices fell 1.5% AS COMPARED TO 4TH QUARTER 1998. We must always remember that it is relative to the base quarter.

Let me quote you a line.

HDB resale prices up 1.2%
Jul 2, 2009 - The Straits Times
Jessica Cheam

"PRICES of HDB flats have staged a surprising comeback, reversing a first-quarter dip of 0.8 per cent to rise 1.2 per cent in the second quarter and reach a historical high."

How do you get this drop of 0.8 per cent? You just take 1st quarter 2009 index relative to the base divided by 4th quarter 2008 relative to the base. ie. 138.3/139.4 = 99.2% which means a loss of 0.8%.

Ok now back to the topic. Let's actually look at how the data is collated BEFORE we comment on anything.

Let's assume 2 sets of buyers. Buyer A purchased a private residential property on the resale market on 1st January. Buyer B purchased a HDB resale property on 1st January as well.

For private residential property in the resale market:
Buyer A places consideration to purchase an option for 14 days. He must come back to the vendor (seller) before 4pm on 14th January to give the vendor the exercise fee to exercise the option. Assuming he exercises the option on the 14th, he will need to stamp the property to declare his interest in it. This usually is done within 21 days from the date he exercised the option. The latest would be 4th of Fubruary. At that point in time, the data is captured by URA and posted on their website. The transaction is captured even before the buyer takes possession of the property.

For public housing ie. HDB on the resale market:
Buyer B places consideration to purchase an option for 14 days. He must come back to the vendor (seller) before 4pm on 14th January to give the vendor the exercise fee to exercise the option. Assuming that he does exercise, both he and the vendor must decide when they should hand over the option to HDB. This is due to the fact that the vendor may have to look for another place to purchase. This period can range anywhere from a couple of weeks to a couple of months. This period has to be agreed by all parties and it has to be documented on page 4 of the HDB option. Assuming it takes 3 months for the vendor to find another place. Which means that by the time the document is passed to HDB it will be 14th of April. HDB will then give everyone a date to meet at HDB Hub Toa Payoh to sign all documents. It is normally 1 1/2 to 2 months after the documents are handed over. Let's assume the date is 1st of June. After the 1st of June, everyone has to wait another 1 1/2 to 2 months for the completion of the sale. The sale is completed on 14th July. Only here will HDB log in the price into it's website.

Take notice: both properties bought on the same day but the market reflects the private property sale much much earlier than the HDB property.

Some people who are unaware of this may think that HDB prices are resilient and holding up well. I have been hearing the term "mass market" till I'm rather sick of it. A condo in certain areas can be bought for less than a HDB flat in prime areas like Bukit Merah. The price gap has shrunk considerably. Yet the price movement for both are distinctively different.

Prices for HDB resale market are much more distinctively sticky due to the fact that the method of data reflection is distinctively different from private property. A buyer will see the fall in private property much earlier than he sees a fall in HDB. Risk adverse individuals will think that it is safer to purchase a HDB rather than a private property as the HDB value will hold much better.

HDB prices should come down. I'm not guaranteeing it as many other factors may step in and help support the price. However if it does take a while to fall due to the reason I've pointed out, it may take the same long while to rise back up again. A fair market provides assymetric information and I feel the reflected HDB resale numbers are not as accurate as can be.