Can a first-time homebuyer couple earning S$18,000 a month afford a new EC unit?

[SINGAPORE] Amid escalating prices for new executive condominium (EC) units, the government introduced tighter rules, which apply to EC government land sale sites with tender closing dates on or after May 8.

ECs were introduced in 1995 to provide a more affordable option for Singaporeans who aspire to own private housing.

ECs are strata-titled properties and are built and sold by private developers, with design features and facilities similar to condos. 

ECs are sold with initial eligibility and ownership restrictions, such as an income ceiling and a minimum occupation period (MOP). 

Among the changes, the MOP for new EC buyers was extended from five years to 10 years. They can rent out the whole unit, buy another residential property, or sell their EC unit to Singapore citizens and permanent residents after 10 years. After the 15th year, owners can sell their EC unit to any buyer.  

Also, the deferred payment scheme – where buyers of new uncompleted EC units can pay 20 per cent of the purchase price upfront, with the remaining 80 per cent deferred until the project obtains its Temporary Occupation Permit – was scrapped. All buyers will make progressive payments based on construction milestones.

The sale of a Canberra Drive EC site which can house an estimated 185 units, whose tender closes on Oct 1, will be the first site to be sold where the new rules apply.

However, any potential reduction in new EC land demand and pricing from the stricter rules could now be offset by the recent hike in the monthly household income ceiling from S$16,000 to S$18,000 for households looking to buy a new EC unit from developers.

The higher ceiling applies to new units in ECs with land sale tender closing dates on or after Aug 24.

Certainly, a high-income young local couple earning a combined S$18,000 per month or S$216,000 annually, who are looking to buy their first home, will be happy they are eligible to purchase a new EC unit.

Buying an EC home – which could be priced 20 to 30 per cent lower than comparable condo units – can offer a cost-effective way into private homeownership.

Affordability

However, is a new EC home affordable for a first-time homebuyer couple earning S$18,000 a month?

The median price of new EC units sold in August was S$1,865 per square foot (psf).

Assuming a new EC unit of close to 1,000 square feet (sq ft) – roughly the size of an Housing & Development Board (HDB) four-room flat – costs about S$1.8 million or over S$1,800 psf, this works out to a possibly stretched property price to annual income ratio of 8.3 times.

In contrast, a pricey HDB Build-To-Order (BTO) four-room flat may cost S$780,000 – about 4.1 times annual income of S$192,000.

The recently revised monthly household income ceiling for a couple buying a BTO flat is S$16,000, which translates to annual income of S$192,000.  

In the June BTO exercise, the indicative price range, excluding grants, of HDB four-room flats at Berlayar Rise – a Prime project located in the Greater Southern Waterfront – was S$592,000 to S$810,000. 

Seen another way, based on existing borrowing guidelines, a couple earning S$18,000 a month may be able to borrow up to just over S$1.1 million to buy a new EC unit that might cost S$1.8 million. This means the said couple has to find about S$700,000 in equity for their purchase.

Possibly, a young first-time homebuyer couple will be able to buy a new EC unit only if the couple receives parental financial assistance or has made a small fortune from financial investments.

Government intervention

Should the government intervene more to moderate new EC home prices in order to improve the affordability of such homes for first-time homebuyers?

Perhaps prices of units of close to 1,000 sq ft at new EC projects could largely be capped at about S$1.5 million to S$1.6 million, or about 6.9 to 7.4 times of annual income of S$216,000.

A buyer who borrows S$1.1 million to buy a home costing S$1.5 million to S$1.6 million would then need to come up with equity of between S$400,000 and S$500,000.

For sales of new EC sites in the future, consider requiring developers to price at least 70 to 80 per cent of homes being built in their projects at S$1.6 million per unit or less.

Having more affordably priced new EC homes will better meet the needs of young couples buying their first home who bust the income ceiling for buying new HDB flats, but meet the ceiling to buy EC units from developers.

In turn, levelling the playing field between high-income couples who receive parental assistance and those who don’t when buying new EC units is helpful, given concerns over potentially rising wealth inequality in a more mature Singapore. 

In addition, having more reasonably priced new EC units can result in more first-time homebuyers purchasing such homes, instead of families who are upgrading to an EC from an HDB BTO home.

Since the early days of independence, meeting housing aspirations of locals effectively has helped build social cohesion in the Republic.  

Constructing more new HDB flats, having shorter waiting times for completion of some new HDB units, building new public housing in attractive locations, keeping prices of new HDB flats affordable and ensuring HDB towns have comprehensive amenities have enabled many Singaporeans to meet their housing needs in HDB’s new sale and resale markets.

Still, many locals aspire for condo living. Helping talented and ambitious Singaporeans achieve condo ownership dreams anchors them to home as well as supports local couples who want to have children.

With escalating prices of new condo homes, buying a new condo unit is getting harder. Therefore, helping Singaporeans achieve condo ownership dreams via purchasing new EC units is even more critical.

Perhaps, there is strong rationale for the government, which has a track record of actively intervening in the housing market, to step in more to moderate new EC home prices.