First House Problem
Fingers crossed, couples praying to get their HDB choice unit from the Build-To-Order (BTO) exercise this month – this sounds all too familiar. It feels almost like a tradition from our parents that BTO should always be our first home. After all, this was how many of them made their first pot of gold. It is indeed true that housing may be the easy way for us to gain wealth because it becomes our asset when we sell our property at a gain. By making a few right decisions in housing, you may be able to reach financial freedom faster than your peers. It is of paramount importance to evaluate the differences between an Executive Condominium (EC) and HDB in order to understand why an EC should ideally be your first choice of housing.
EC is a form of hybrid housing between HDB and private developer. Similar to the HDB, there are restrictions on who is eligible to apply. As mentioned by Minister Khaw Boon Wan, “buying an EC is like buying a Lexus at (Toyota) Corolla price”. Typically, ECs are priced 20 to 25 percent below private condominium. After 5 years of Minimum Occupation Period (MOP), prices tend to appreciate just as BTOs do. However, after 10 years from the Temporary Occupation Permit (TOP) or the collection of keys, EC would be fully privatised and can then be sold to foreigners. This is a critical evaluation point because EC prices would converge to the likes of private condominiums, despite the initial cost being substantially lower than that of private condominiums.
Convergence Of EC Price To Private Condominium
These are the ECs that have privatised in Singapore. Indeed, EC is not a sure win. Any divergence could be attributed to various factors. You should always evaluate their appreciation potential carefully, based on certain aspects which I will be elaborating further. That being said, these are pointers to guide your decision-making. We still see a healthy capital appreciation for ECs and this is much tougher to achieve with BTO.
The weak capital appreciation for some of the ECs at privatisation was due to the timing of entry point. 1996 was the peak of property prices before the Asian Financial Crisis at 1997-1998. However, since the property market is bottoming out, it is highly unlikely that we are anywhere near the peak of the property cycle. Hence, it is unlikely that the ECs purchased now would fare the same way as the 1996 ECs. Also, this is a great opportunity for buyers to enter as there is much more capital appreciation to enjoy when you enter at a lower entry point.
Supply Of HDBs VS Supply Of ECs
We all know that the supply of HDBs has been held steady, but the supply of ECs has been on the decline in recent years. This year, there may only be up to 3 EC launches (2 out of 3 confirmed only this year) and only one reserve site for EC which remains unsold. Furthermore, there is a 15 months waiting period before the developer can launch the sale of the EC after the purchase from the Government Land Sale. What this means is that there may only be one EC launch next year if the 3rd EC does not launch this year. As the property market picks up coupled with a decline in supply, we are optimistic that prices for ECs would steadily climb as well.
Many people believe that instead of purchasing an EC right now, ECs may be better only as a 2nd house after selling their first BTO. A critical point to note is that ECs have a monthly household income cap of $14,000.
Let us now consider a very common case amongst young couples these days. Upon graduation, you intend to work for a year before you apply for a BTO flat. An average BTO flat take 3 years to complete, and upon collecting your keys, there will be another 5 years of MOP which you need to fulfill. You would have been working for 9 years by this time. At this juncture, you are in your mid 30s and it is no surprise if you and your spouse are earning beyond the income limit of $14,000. Even when you are financially ready to commit to an EC, you could possibly realize that you are not eligible to buy an EC. Yet, you are not ready to upgrade to a private condominium as well. This could leave you sandwiched and hence, buying BTO as your first home has this form of risk that you need to consider when deciding whether to purchase a BTO or an EC as your very first home.
I wish to acknowledge that indeed for some of you, you may be contented with applying for a BTO flat because you have no intention of upgrading in the future and believe that this article is irrelevant to you. However, to most of us, a property is a very expensive ‘asset’ to own and I believe it is of great assurance to know that your house is highly valued in the market as an insurance if you were to decide to move in the later years for unexpected reasons. The choice is yours.
Guest Contributor: Nicholas Woon
Nicholas is a property agent in ERA Realty Pte Ltd and has helped his clients with buying an EC unit as their first home.