Singapore - ECs: Easing your way into private housing

THE Housing and Development Board (HDB) moderated its 17-year-old income ceiling policy when Prime Minister Lee Hsien Loong announced during the 2011 National Day Rally that the monthly household income ceiling would be increased from $8,000 to $10,000 for those buying HDB's build-to-order (BTO) flats, and from $10,000 to $12,000 for executive condominiums (ECs).

This announcement brought relief to the middle-income group, also known as the "sandwich class", whose monthly household incomes are in the range of $8,000 to $12,000.

Couples in such households now have a wider option of homes - new BTO flats or EC units - where they used to be limited to the option of purchasing HDB resale flats or mass market private condos.

For the past five years, from Q4 2006 to Q4 2011, HDB's resale flat price index has risen 83.8 per cent.

However, with the release of about 28,000 new flats under the BTO system and Sale of Balance Flats exercise in 2011 plus another 25,000 BTO units in 2012, we are expecting prices to stabilise and have a cooling effect on the resale market as more young couples turn from resale HDB flats with high cash over valuation (COV) premiums to a wider choice of new BTO flats with a lower price tag or executive condominiums (ECs).

ECs are favoured by many homebuyers with the recent increased income ceiling as they cater to Singaporeans aspiring to own a private property.

The government's ramping up of supply of new EC units through the Government Land Sales Programme is definitely of great help for higher-income Singaporeans to own private condominium units in an affordable way.

Let's take a look at how ECs came about in the earlier days.

In the mid-1990s, the spike in private property prices was so fast that much of the young generation found their dream house out of reach. To meet the hopes of these younger people, ECs were introduced, targeting young graduates and professionals who wanted more than a HDB flat but could not afford a private property.

ECs are a hybrid of public and private housing with initial buyer eligibility and resale conditions similar to HDB homes for the first five years.

These restrictions are completely lifted 10 years after the completion of an EC project. Similar to private condominiums in terms of facilities and designs, ECs are developed and sold by private developers on 99-year leasehold sites under the Government Land Sales Programme.

When ECs were first introduced, they were very popular.

However, from 2005 to 2009, no EC project was launched in Singapore as demand for private property dropped significantly after the Sars epidemic in 2003 and the economic crisis in 2008. The demand for ECs was depressed as 99-year leasehold suburban private condo prices were affordable.

Homebuyers were opting for mass market private condominiums as these do not have buyer eligibility and resale restrictions.

Thus, the government left it to the works of the market and did not see a need to make EC sites available during that period of time.

Making a comeback

EC projects made a comeback in 2010, mainly due to the fact that many first-timers have higher combined incomes exceeding the $8,000 monthly household income ceiling for HDB's BTO flats. At the same time, however, prices of 99-year mass market private condos recovered sharply after the global financial crisis, once again slipping out of the reach of many first-time buyers.

Many young couples are getting married at a later age, which puts them into the middle-management pay group and these are the "sandwich class" who may have little choice but to consider getting either the highly-priced HDB resale flats or shoebox units in mass market private condo projects.

Many in this segment of homebuyers were priced out of the EC market due to the $10,000 monthly income ceiling policy at the time.

In the 2011 General Elections, affordable housing was a key concern for many Singaporeans and many dreams will be shattered if Singaporeans' aspiration of owning a private property becomes unattainable. Thus, with the escalating private home prices, the government had decided to increase the income ceiling and augment the supply of ECs to cater to the needs of the "sandwich class".

The total stock of completed EC units was 10,430 at end-Q4 2011. In addition, there are 6,058 EC units in the pipeline. Another 2,900 units could be generated from EC sites that will be released for sale via the first half 2012 Government Land Sales Programme.

It is an unprecedented move to increase the supply of so many ECs within a year, compared to approximately 15,000 ECs introduced in the last 15 years. Let's look further at the attractiveness of ECs.

In general, such properties are 20 to 25 per cent cheaper than similar-sized 99-year leasehold private condos. The other perk associated with EC ownership is the ability to qualify for a CPF housing grant of $30,000 to be used as part of the downpayment for first timers. Second-timers can save on the resale levy on the sale of their HDB flats when they purchase new EC projects which were launched from 2009 onwards.

Affordablility of ECs

ECs are relatively more affordable compared with private properties because of the restrictive criteria in qualifying for ownership and the minimum occupation period. Couples earning $12,000 (combined monthly income) or above do not qualify to buy a new EC unit from a developer.

Also, EC buyers cannot sell their units within the first five years from the date of the Temporary Occupation Permit (TOP) of the project. It is only after the fifth year that these EC owners are allowed to sell their units, and that too only to Singaporeans and Singapore Permanent Residents (PRs). After the 10th year from the TOP date, EC owners can then sell their units in the open market, including to foreigners and companies.

In 2010, many sites were released for EC development. It is clear that whenever there is a need, ECs will play their role in bridging the gap between the HDB and private property markets. The new launches of EC projects in 2011 include the Arc at Tampines, which was the first EC project to benefit from the increase in income ceiling, with 220 of 574 units sold on the first day of the launch.

In line with HDB's plan to increase the supply of ECs, prices of ECs are expected to moderate from the current range of $750 per square foot to $700 psf in the coming months. This is definitely lower than current mass market condominium prices averaging at about $900 psf.

Currently, more than 20 EC projects have passed the five-year period and about half of them have fulfilled the 10-year requirement, which means foreigners can buy into such projects.

Thus, the capital appreciation from owning an EC unit is rather positive, especially after it is privatised, allowing it to be sold in the open market.

Based on statistics in Table A, ECs that were completed in the 1990s have seen their prices almost double compared with the prices when the first owners bought them, especially after they were fully privatised. Capital appreciation is 100 per cent in projects such as Eastvale, Westmere, Simei Green, Windermere and Chestervale.

ECs are definitely a good option for many to consider especially for HDB upgraders, due to the limited supply and their value after 10 years.

Some ECs that are in the five to 10-year completion period (Table B) are already seeing their prices escalating to as high as $919 psf such as Bishan Loft, based on the last transaction in December 2011.

In conclusion, Singaporeans are looking forward to the opportunity of owning a private property at more affordable prices and the alternative of upgrading to an EC will definitely be fulfilling many Singaporeans' dreams. HDB flats have reached their peak and are likely to undergo a correction - or at least see muted price growth - in the next few years.

On a longer-term perspective, upgrading to an EC that is six to eight years from completion will definitely reap greater benefits as upon its 10th year, the capital appreciation and returns are expected to be higher.

Mohamed Ismail

The Business Times.

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