Keen eye readers would pick up on the tag line of this website: skip public, and own private. But have you ever thought, maybe you should skip public and own an executive condominium instead? Or why even skip BTO when it is so profitable? Let’s discuss the merits of going the different routes. And under what situations does it makes the most sense to take each of these routes.
The basics of an Executive Condominium
Before we talk about skipping public housing, otherwise known locally as, Housing Development Board Flats (HDB). Allow me to cover the basics of an EC. Skip ahead to the next sections if you’re familiar with this class of property.
An executive condominium is a hybrid class of property. It starts off similar to a HDB and with the passage of time, becomes fully privatise. It was created to cater to the sandwich class. Those whose household income exceeds $14,000 per month but yet find a private property not quite affordable.
As it is considered a form of subsidised housing, executive condominiums come with a set of eligibility criteria similar to that of public housing. EC applicants must either form a family nucleus. Or, if they are singles of at least 35 years old, they can pair up and apply. The combined or monthly household income of applicants must not exceed $16,000.
And only Singapore citizens or permanent residents are eligible. Lastly, owners of an executive condominium brought directly from a developer must also fulfil the same 5-year minimum occupation period (MOP) before it can be sold to other Singaporeans or PRs. Sales to foreigners can be done after a 10-year wait.
Other than these restrictions, an executive condominium is essentially pretty similar to any mass-market condominiums. They have a full suite of condominium facilities. But subtle differences like the sophistication of design and quality of finishing does pale a little compared to the private condos.
In addition, the ECs tends to be located in the suburbs and may not always be near train stations. However, ECs can be about 20% less than similar condos during launch. And aspiring homeowners meeting eligibility conditions get to enjoy a $30,000 grant from the government. In the later section, we shall take a look at the price appreciation of ECs versus condos.
First-timers
Who typically buys ECs? From anecdotal evidence, I would say a huge majority are first-timers. Moreover, the government reserve 70% of the flat supply for first-timer families during the first month of the initial launch period. When a couple consists of a first-timer and a second-timer, the couple will still be considered as a first-timer family. Lastly, as first-timers, you get to apply for two types of CPF Housing Grants, if you’re eligible.
- Family Grant, or
- Half-Housing Grant
Do check out HDB’s website to know the amount you are eligible for and other details. This grant can be as high as $30,000 for a pure SC family with a household income of less than $10,000 per month. TIP: do note, any CPF grant you obtain, is considered a deposit to your CPF account and then withdrawn for the property. Thus, interest accrues on this amount and you will need to return this amount plus the accrued interest upon the sale of this property!
Second-timers
Second-timers are families that have enjoyed a subsidised flat once or have obtained a grant for their purchase of a resale flat. An interesting point to note is that, for a second-timer, when applying for a brand new executive condominium. They are not required to pay the Additional Buyer’s Stamp Duty (ABSD). Nor is their ability to maximise their Loan-to-Value reduced.
Qualifying checklist
Why skip public housing?
Let me recap on the broad reasons why some of you might want to skip public and go straight to an EC or a condo:
- Time is wasting away
- Depreciating value
- Leverage
- Capital appreciation
- Unlock its value
- Location
A caveat before we elaborate on each point. Skipping public isn’t for everyone. A roof over your head, a place to call home is more important. If your finances and circumstances require you to start off with a HDB, that is perfectly fine. You should do your own research and if need be, speak to a professional, to do what is best for your unique situation.
Time is wasting away
Let’s take a look at the BTO process. You wait for your preferred town to have units launched for sale. Put in an application. It may or may not be successful. If not, apply again 3 months later, but it is likely not the same town. If successful, what is the queue number? Does it give you a fighting chance of selecting an acceptable unit?
Congratulations! You booked your flat. Now comes the waiting. This will be a 3 to a 4-year wait. And when you get your keys, the clock starts for the Minimum Occupation Period (MOP) – that is another 5 years.
All in, it could easily add up to almost a decade.
Although both HDBs and ECs have MOPs. Executive condominiums are different, the selection process is much faster. And upgrading from HDB to private is a bigger gap than from EC to a condo.
If you are in your mid-20s to early 30s, that’s still probably fine. Because when you are free to upgrade. You are probably only in your mid-30s, where you are still able to stretch your next loan to near the maximum tenure.
Currently, our financial institutions aren’t allowed to loan you beyond 65 years old at maximum loan-to-value, or for a maximum loan tenure of 30 years.
Therefore, if you are older than 35, your loan tenure will be shortened. Making your monthly repayment that much higher.
Depreciating value
This affects mainly the older resale HDBs. As all public housing are leasehold, as the lease runs down, so must its value. But isn’t that the same for leasehold private properties? Yes, it is.
However, a key difference lies in the ability of the owners of the private property to decide on their destiny.
They could collectively sell the property to a developer who will then redevelop the plot of land and apply to the government to top up the lease of the land.
HDBs on the other hand, are at the mercy of the government. And the government has explicitly stated that the Selective En-bloc Redevelopment Scheme (SERS) isn’t a given. Till date, only 4% of all HDB stock has undergone SERS.
Leverage
Mortgage loans for HDB and EC are governed under MSR or Mortgage Servicing Ratio. Essentially, this law only allows the borrower to service a monthly mortgage payment of not more than 30% of the borrower’s income.
Conversely, for a private property loan, the borrower is governed under the TDSR rule. Otherwise also known as the Total Debt Servicing Ratio. This rule states that the total debt, which a mortgage falls under, should not exceed 60% of the borrower’s income.
Although the HDB or EC mortgagee will also need to fulfil TDSR requirements. This borrower can only loan up to 30% of his income. While the private property owner can maximise her loan, assuming she doesn’t carry other debt, to a maximum of 60%.
Put in another way, the MSR acts as a cap on the price of HDB and EC as prices can’t rise as fast as private condos.
Capital appreciation
Since 2013, the trend for HDB prices has been on a decline. This is in line with the general property market trend after the harshest property cooling measure was introduced.
But while the private property market staged a recovery from 2015, the public housing market continued to languish.
The HDB market was dealt another severe blow when the Minister of National Development, Lawrence Wong, wrote in his ministry’s blog, to temper the exuberant prices of older resale flats.
He reminded buyers of old resale flats not to punt on the expectation that their flats would be redeveloped and they will be compensated with a new flat of a fresh 99-year lease.
In addition, flats that have their lease run out will have zero value.
Although what Mr Wong had written isn’t something new or unknown. The public chose to turn a blind eye to the crux of the matter. And came around to reckon with the fact only when he came out and state it explicitly.
On the bright side, HDB is the bedrock of housing. You can be assured that the government will always seek to keep it affordable for the masses. Correspondingly, you can also expect the prices to be stable in a crisis.
An interesting observation. Sales volume started picking up as prices started coming down in 2013.
Prices started stabilizing in 2019 and may possibly start to recover after September of the same year. As it was then that the government announced a slew of support measures for the HDB market.
Then COVID happen.
The Enhanced CPF Housing Grant (EHG) was introduced to replace the existing AHG and SHG. To benefit more first-time home seekers.
The EHG will be available to eligible buyers, regardless of whether they purchase a new or resale flat.
There are also no restrictions on flat buyers’ choice of flat type and location. This was the shot in the arm for the HDB market.
Now that the government is offering up to $80,000 to first-timers, this is going to support the HDB market greatly. And almost immediately we saw in the next two BTO exercise, more people are vying for the larger flats.
In the past, HDB used to priced their new flats using the construction cost-based approach.
But starting from the 1980s, it started adding in the cost of land. Tweaking the land component roughly every decade until 2007 when it then switched to a market resale-based pricing approach.
Then completely turned that pricing model on its head and chose instead to base their BTO prices on the prevailing median house prices (including approximate transaction cost).
From the bottom-up approach of the past to a top-down approach currently.
This is partly why we can no longer expect the sort of returns our parents experienced in the past.
Unlock its value
Many clients, even those with private property, aren’t aware of this difference.
For private property owners, they can approach their banks to do a mortgage withdrawal loan. Essentially allowing them to free up any equity they have in their property. Or in other words, to gear up.
This can happen when the value of the property increases or when the mortgagee has paid back an appreciable amount of the principal sum.
Let’s say for example the prevailing maximum allowable loan-to-value is 75%. You brought your property 10 years ago for $1,000,000.
You took a loan of $800,000. And over the years you have paid up $200,000 of the $800,000 owed. Now, this property is worth $1,200,000.
The bank can loan you 75% of $1,200,000, which is $900,000. But you will have to settle the original outstanding loan of $600,000 before leaving you with a balance of $300,000.
You can’t do this for a HDB. It doesn’t matter if the HDB was brought with a HDB loan or a bank loan.
Through the course of my work, I’ve come across owners of private property sitting on substantial amount equity, drawing on that equity in times of need or opportunity.
Likewise, I’ve also come across owners of HDB who brought their flat for $300,000 and now it is worth $600,000.
But when they need funds to start a business or to pay medical bills, their only option is to sell the flat. What happens to the roof over their heads then?
Location
BTOs are generally located in the suburbs. Occasionally there will be prime location HDBs. They are extremely popular, as you might expect. Competition for it is stiff and it all comes down to luck.
Moreover, the government has indicated that they will moderate the lottery effect of such cases going forward.
Examples of such past launches are The Pinnacle @ Duxton, those at Dawson, City View @ Boon Keng, Central Horizon at Toa Payoh, just to name a few.
Location in selecting your property as a home or as an investment is a major factor for success or failure. Question is, how long are you willing to wait for the right launch and how much of an opportunity cost you will have to give up waiting for that launch? Which location to purchase your next home?
Look to my article on the 6 point checklist for a property hotspot to identify the next hotspot location to invest.
Why choose EC instead?
The next few charts should put to rest all arguments as to which type of property gives the best returns.
15-year average price comparison between HDB, EC and Condo comparison chart
10-year average price comparison between HDB, EC and Condo
5-year average price comparison between HDB, EC and Condo
Well, if only things were that simple. Let’s discuss a little further.
So it seems HDB isn’t a good investment at all. Wait a second. The charts above show RESALE prices. It doesn’t take into consideration the purchase price of a BTO. But as covered earlier in the Why skip public housing – Capital appreciation section. The spread between BTO prices and resale prices have narrowed ever since HDB started using median house prices to price their BTOs.
However, the average prices for the executive condos and private condos took into account new launches and resale prices.
Yet another point to note for the charts above is the gap between the three classes of properties. When the gap narrows between the assets, it is an opportune time to be upgrading to a pricier asset. Conversely, when the gap widens, it is an excellent time to divest for retirement.
Well, does that mean one should just stick to an EC and forget about condominiums? The answer isn’t that straightforward and will depend on your situation.
Is there a case for choosing private?
Executive condominiums are a pretty homogenous class of property. Unlike condos, they are built to be utilitarian. Therefore, if a townhouse is better suited to your needs, private condos are your best bet.
ECs are also located in new towns or far out in the suburbs. What if you want to send your kids to brand name schools in the Bukit Timah vicinity? Or to live near the central business district?
Should you prefer more exclusive properties, you should train your sights on private properties. Maybe something with a freehold tenure? And prices? The sky is the limit when it comes to private property. Dyson’s penthouse cost a cool $73mil.
Summary
If you are a first-time homeowner and is eligible, then you should skip public and own an executive condominium!
However, if it is a stretch currently, then BTO is the next best option.
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