ECs within easier reach than resale five-room flats?

Details of new Housing and Development Board (HDB) schemes to help lower- and lower-middle-income Singaporean families own their homes were unveiled on Aug 27, following the broad measures announced at the National Day Rally.

The schemes include additional grants for first-time buyers for up to four-room flats and a step-up grant for those upgrading from two-room to three-room flats. It is heartening to see the caring thought behind these schemes.

Measures were also announced to stabilise HDB resale prices further. Build-to-Order (BTO) prices have been kept steady since the 2011 General Election, but resale prices have continued to rise by about 20 per cent in the last two years and the National Development Minister had indicated that he would like to instil more prudence in home buyers with regard to their household debt.

With the latest measures, new loans taken from the HDB for BTOs or resale flats will see the repayment period reduced from 30 to 25 years, and the Mortgage Servicing Ratio (MSR) limit reduced from 35 per cent to 30 per cent. HDB buyers also need to satisfy the 60 per cent Total Debt Service Ratio (TDSR) limit.

For a young high-flying couple whose household income is S$8,000 and are buying their first BTO flat, a 25-year loan from the HDB at 30 per cent MSR (S$2,400 a month) would allow the couple to borrow S$529,000. This means that almost all five-room BTOs, including many in matured estates, are within their reach so long as they have sufficient savings for the 10 per cent downpayment.

However, for this same couple, a resale five-room flat that costs, say, S$800,000 would require at least S$270,000 to be paid upfront with a S$529,000 loan. This upfront payment would be quite a stretch as they have yet to accumulate much in their CPF.


But let us look at another scenario. A couple with S$10,000 income (the maximum that qualifies them for HDB BTOs) can afford to take a loan of S$661,000 over 25 years at 30 per cent MSR. With this loan, they can also afford many types of resale HDB flats, especially if they are second-timers who have already built up equity in their current HDB flat.

This same couple — who would be considered part of the nation’s “sandwiched class” — might also consider a new Executive Condominium (EC) where only the rules of TDSR apply.

TDSR takes into account other financial liabilities such as car loans, student loans, insurance payments, credit overdraft and so on. A maximum of 60 per cent of household income can be used to repay a mortgage for a new home purchase, over a maximum period of 30 years.

If they buy a brand-new, taxpayer-subsidised EC, they can borrow S$1.33 million over 30 years (before the borrowers reach their weighted average age of 65) if they have no other liabilities such as car loans. This loan quantum is twice the S$661,000 they can borrow from the HDB for a flat.

This couple could, therefore, buy an EC of over S$1.6 million if they are able to pool together cash and CPF of around S$370,000 (20 per cent downpayment and about 3 per cent normal stamp duty).

A curious fact: EC buyers are allowed to exclude their existing home loan commitment from the TDSR calculations if their current property is sold within six months of the ECs getting Temporary Occupation Permit. However, under the same scenario where the couple has no other liabilities except for their existing home loan, they will not be able to afford a private residential unit at S$1.6 million — their current home loan would have to be taken into account in the TDSR calculations.

In short, for families in the higher income range of S$8,000 to S$12,000 a month, purchasing a new EC is a really attractive proposition because of the HDB loan restrictions on the one hand, and the TDSR restrictions on purchasing private properties on the other.

In fact, it may be easier to stretch one’s upfront payment to buy a new EC with a larger loan quantum than, say, a S$800,000 resale five-room flat in prime estates such as Dawson, Bukit Merah or Marine Parade.


Looking ahead, as home buyers do their sums and compare the alternatives available, we can expect the following. One, demand for three-room and four-room flats will increase at the expense of larger flats, as buyers are restricted on their loan quantums due to tighter MSR. As there is a shortage of supply of resale three-room flats, we might expect Cash-over-Valuation (CoV) to increase in this category. Demand will also favour BTOs as they are cheaper, with more grants available and higher borrowing limit, than resale flats.

Two, demand for five-room HDB resale flats will decline, particularly in the prime estates, where current resale prices are in excess of S$800,000. Only buyers with a lot of upfront equity will have the means to purchase these flats. Expect CoVs, and in particular V (Valuation), to drop.

Three, demand for ECs will increase especially for HDB upgraders who are considering whether to: (a) upgrade to a prime resale flat under tighter loan restrictions, or (b) upgrade to a brand-new EC which allows higher loan quantums.

The combination of the curbs on HDB loans and TDSR on private properties has aligned the winds favourably for ECs to be the most compelling residential category for HDB upgraders and middle-income new home buyers.

ECs are at the outset subsidised via lower land cost. And after 10 years of living in them, ECs probably have better profit potential following privatisation and price-normalisation with private condominiums nearby. So, given all this in total — the unique loan scenario, the first-timer grant, the resale potential — are ECs more than ever a privileged taxpayer-subsidised housing class?

By Ku Swee Yong – a property agent and CEO of real estate agency International Property Advisor. He is the author of two best-sellers: Building Your Real Estate Riches and Real Estate Riches.

Source : Today – 5 Aug 2013