By Empower Advisory, Douglas Chow
Executive condos (EC) developers struggling to move inventory are set to receive a lifeline as HDB will raise the income ceilings for BTO HDB flats and ECs sometime in August or September 2015.
From the official reasoning, this regulation update is in response to the increase in median monthly household income from S$7,037 in 2011 (when the income ceilings were last raised), to $8,292 in 2015. Assuming a 30 yrs loan based on a household income of $8,292 with no other debt obligation, a typical household buyer of an EC/BTO flat can take a loan of up to about $550,000 under the existing Total Debt Servicing Ratio (TDSR)and Mortgage Service Ratio (MSR) framework. That is why in today’s market, the bulk of transactions is below $1 million as buyers can no longer qualify for huge loans, relying on cash and cpf to make up the difference. Many end up buying smaller units. Larger EC units are having a difficult time finding qualified and willing buyers.
With the income ceilings raised, larger EC units will more easily find buyers. We expect all currently unsold EC units, big and small, to benefit and this is a much needed lifeline to EC developers. MND is signaling to EC developers, “Sorry folks, I’m not going to lift cooling measures anytime soon. In the meantime, here’s a larger pool of potential buyers for you. Our SG50 gift to you.”
In principle, we agree that no one should be denied a chance to apply for a HDB BTO flat/EC, regardless of income level as long as that HDB BTO flat/EC remains a principle home of stay.
Some preliminary thoughts on ECs as a result of the upcoming change
1) Will EC developers start to raise prices? Yes, if they are confident that their units are priced competitively vis-a-vas the competition. No, if their focus is to clear their inventory as soon as they can. But they can hold off slashing their prices for now and adopt a wait and see approach.
2) Will EC developers start building bigger units that comes with a bumped up price tag to cater to the new pool of qualified higher income earners? Possibly, though price must be managed for affordability. It doesn’t mean that just because one can pay a price, one would want to pay that price.
3) Private developers will be at a disadvantage now that some of their customers can now qualify for comparatively cheaper ECs. Oops.
4) Will EC pricing inch up towards private development prices or private developments’ pricing inch down towards EC pricing?
5) Will the median income households be muscled out of the smaller units by larger income households? Will there be rules to ensure that larger income household are restricted to larger units only? The devil is in the details.
We are more concerned on the impact of BTO pricing and unit allocation now that higher income households can join in the fray. Already new BTOs are consistently oversubscribed.
1) Will lower and median income households miss out on their units because of competing applications by larger income household?
2) Will HDB build more flats or more rigorously divert qualified buyers who are out-balloted to balance flats (either repossessed or unsold flats from previous BTO launches) that number about a couple of thousands.
3) Will HDB BTO flats pricing start to increase even though they are priced at a discount from prevailing market price, there.
There are a lot of details that must be ironed out. As a former smart regulation advocate in the government, I hope the officers in charge think through every possible scenario and come up with a fair, sensible implementation. Policies are easy. As mentioned before, the devil is in the details and the policies’ implementation. The overwelming unhappiness over the quality of recent DBSS flats is a reminder that regulators must keep their eye on the ball, have the ability to see far ahead and anticipate problems down the road.
As of now, ECs developers will be cheering at this upcoming rule change. Private developers will have to continue their price discounts.
This article was first published at Empower Advisory