Are ECs still relevant?

As public debate raged over the irony of Executive Condominiums (EC) priced at more than S$1.5 million being snapped up by buyers supposedly from the sandwiched class, Minister for National Development Khaw Boon Wan weighed in on the matter on Jan 7 in a blog posting titled “Who gets short-changed?”

Although he started out by addressing oversized ECs and their prices, Mr Khaw quickly went on to the broader issue of how developers allocated non-GFA (gross floor area) space between sellable strata areas and common areas. He ended the post saying he had tasked the Urban Redevelopment Authority (URA) to “review this policy and have it fixed”.

Four days later, the Government announced “additional measures to ensure a stable and sustainable property market”, comprising new and higher stamp duties, tighter loan-to-value ratios and other steps to cool the market.

Measures were also introduced to “ensure that ECs continue to serve as an affordable housing option for middle-income Singaporean families”.

Among the changes, the maximum size of EC units will now be capped at 160 sq m or about 1,722 sq ft, and dual-key EC units will be restricted to multigenerational families to prevent them from being deployed as income-generating investments before they are privatised. New rules have also been unveiled for roof terraces and personal enclosed spaces (PES) to be classified as GFA so open-air communal areas will not be compromised.

Beyond these quick solutions, I suggest the authorities delve deeper and review the entire EC scheme. What is the raison d’etre for the EC scheme and is it still relevant today?

Given the rising prices of Housing and Development Board (HDB) resale flats, a family upgrading from public housing to a S$1.5 million private property can sell the HDB flat to reduce the loans on the private home.

The HDB Resale Price Index has increased by about 150 per cent since early 1995 – the year when the EC scheme was announced, while the URA Private Residential Property Index has only increased by 30 per cent over the same period.

The gap between HDB flat prices and private property prices has therefore, in my opinion, actually narrowed and homeowners can, more than ever before, afford to upgrade to private property as average household incomes have also increased.

Upgrading to private property is therefore not such a stretch as it used to be in 1995, unless we include the scenario where upgraders keep their HDB flats for rental income while buying a private home to live in. This may be a reason why the HDB resale stock is so low as more people treat the HDB flat as an investment asset.

HDB flats are now generating income for more and more owners, shifting from their original intent of meeting the housing needs of Singaporeans. Eighteen years on, the HDB-to-private property upgraders and aspiring first-time homebuyers are no longer quite the sandwiched class of the 1990s that the EC scheme was designed for.

On pricing, the cap of 1,722 sq ft for each EC is not sufficient to address the issue of affordability. Such an EC can be priced at S$2 million and it would still fall outside the affordability range of a sandwiched-class household with an income ceiling of S$12,000.

Should we cap the maximum dollar quantum per EC unit at launch? Based on the household income ceiling of S$12,000 per month and assuming a loan for 80 per cent repayable over 30 years at an optimistically low 1.2 per cent per annum interest rate, EC units should not be priced above S$1.4 million, as the household will need to utilise close to 35 per cent of monthly income to service the mortgage.

We should review whether sandwiched-class families purchasing subsidised properties really need large open terraces or PES, even if the total unit sizes are capped at 1,722 sq ft each. Should there be a limit on the proportion of built-in areas versus open-air areas?

On space usage, the review should also be expanded to all types of property to bring clarity to the definitions of strata area, ledges, GFA, sellable floor areas, construction floor area that are non-GFA and non-strata, floor area calculation for cluster housing, etc.

It is a good small step to include PES and roof terraces as part of the GFA, similar to balconies; however, we should go deeper and examine the murky issues. Additional clarity on the definitions of floor area will protect buyers’ interests and allow real estate salespersons to better represent their products.

Investors have been attracted by deceivingly low dollar per sq ft prices of some properties, such as the super EC penthouse mentioned by Mr Khaw priced at S$470 psf. Investors are especially blind-sided in the cluster housing segment, where the total strata areas include not only PES and open roof terraces but also large void areas, car park spaces, air-con ledges, planters, balconies, bay windows, etc.

A cluster semi-detached house that I have seen in Bukit Timah exemplifies this point. In 2009, an investor thought he had made a good investment when he purchased the 4,700 sq ft freehold house at S$730 psf.

However, he realised he was short-changed when the void areas totalled 1,800 sq ft. Take away the strata areas of two car park spaces and the usable area including the stairwell, PES and balconies, the living area was reduced to about 2,600 sq ft, split over a basement, ground floor and two upper floors. Based on this, the effective purchase price for the usable area was more than S$1,300 psf, a high price by Bukit Timah standards during the Lehman crisis.

Not many investors of cluster housing are aware that they own strata areas in external void spaces above their roof terraces. We should make the definition of these spaces less ambiguous. We can also further sharpen the rules for oversized air-con ledges, planter boxes, GFA versus strata sellable areas, etc.

I am glad that Mr Khaw called for a review and I hope that it will be an ongoing one, even after the Jan 11 joint ministries’ press conference. Let us look forward to continued improvements to real estate policies for subsidised housing and clarity of definitions on floor areas. Homebuyers will welcome increased transparency surrounding the properties they are keen to purchase.

By Ku Swee Yong – CEO of real estate agency International Property Advisor and the author of two bestsellers: Building Your Real Estate Riches and Real Estate Riches.

Source : Today – 18 Jan 2013

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