Two-bedroom units expected to remain popular among buyers

OWNING a private home - the alluring Singaporean Dream for many locals. However, the dream appeared to be fading into the distance, when prices ascended at a rapid pace from 2008 to 2013.

This, according to the Urban Redevelopment Authority's (URA) price index for private residential properties (including Executive Condominiums), which saw prices growing 21.5 per cent from Q2 2008 to Q2 2013 (Chart 1).

For investors who sought private residential homes at the entry level, one-bedroom apartments (typically with a floor area of less than 500 sq ft) are a natural choice, as the quantum of such shoebox units fits well into the budgets of HDB owners looking for an investment property.

After the new Total Debt Servicing Ratio (TDSR) regime came into effect in Q2 2013, sales of one-bedroom units rose to 16 per cent in Q1 2014, from 7 per cent in Q1 2013 (Chart 2). With larger capital outlays required, prospective owners then settled for the more comfortable investment of smaller homes.

However, by the beginning of 2018, signs that buyers were moving towards two-bedroom residential units emerged. In Q3 2017, approximately 16 per cent of units sold were sized between 600 to 800 sq ft, or the approximate size of a two-bedroom unit. By Q3 2018, the proportion increased to 27 per cent.

Several factors have compelled the popularity of two-bedroom units.

For one, prospective upgraders that previously saw their financial ability clipped by the TDSR accumulated sufficient capital over the years, and could now handle the downpayment of a bigger property. Additionally, recent concerns over the expiring leases of HDB flats pushed upgraders from the sidelines to the market.

Second, the large supply of homes completed in 2016 added pressure to the rental market for one-bedroom units, unlike two-bedroom units, especially those in choice districts, which have been able to hold up better despite downward pressure (Chart 3).

Third, the ramp-up in collective sales from 2017 to early 2018 provided a boost to many private home owners, who channelled their funds into the purchase of two-bedroom units. Post cooling measures on July 5 this year, the higher Additional Buyer's Stamp Duty (ABSD) also prompted a shift in focus for investors. With most prospective buyers from this segment seeking a house to live in, this has added to the momentum a shift to larger homes.

Notwithstanding, the rental differential between one-bedroom apartments and two-bedroom apartments narrowed from S$729 per month in Q1 2017 to S$633.20 per month in Q3 2018 (Chart 4). The lower differential, which initialised in 2017, propelled the appeal of two-bedroom units, as they were tougher to lease out in 2017. Nonetheless, recent trends indicate that the rents of both unit types are stabilising.

Two-bedroom units are expected to remain popular, as they cater to the needs of majority buyers. However, there may be spurts of demand for one-bedroom units, especially after new guidelines announced by the government on the derivation of the maximum number of units for land parcels. With the guidelines freshly in place, fewer one-bedroom units may be expected, leading prospective buyers that are equity constrained to favour two-bedroom units.

Still, the demand for private apartments in the Core Central Region is expected to remain popular. As at Q3 2018, prime districts near the Central Business District continue to command the highest rents (see map), a trend likely to endure.