Why property curbs may not result in affordable ECs

COMMENT

A few weeks ago, news broke that a new Executive Condominium unit at CityLife@Tampines was going for $2.05 million.

Naturally, the public reacted strongly to that news. In response, the Minister of National Development, Khaw Boon Wan, tasked his ministry to look into the matter, as the pricing seemed to run contrary to the intent of the EC scheme.

In the most recent series of property cooling measures (released on 11 Jan 2013), the government took action to control the EC market and one of the measures included putting a 160 sq m size limit on new ECs. While it is intended to plug the loophole that allows developers to sell excessively large EC units, which results in high prices, the question is whether it is enough to address the key issues of price and affordability.

Original intent of the EC scheme – to help the “sandwiched” class

If we were to trace the genesis of the EC scheme, the main objective of the initiative was to help Singaporeans “who can afford more than a HDB flat but find private property to be out of their reach”. Hence many expect ECs to be more affordable than private properties. So what sort of price range have new ECs been launching at?

The number of ECs launched since 1996 is 38. Figure 1 shows ECs listed according to their tenure start date as well as the range of launch prices. To illustrate, Eastvale is one of the earliest ECs and the launch price was between $419,600 to $728,800, while Waterbay is one of the latest developments and was launched between $585,600 and $1,288,000.

Figure 1: Price range of new ECs launched by developers since 1996 (total = 38)

Source: URA and Ascendant Assets Pte Ltd

Based on Figure 1, it can be seen that, with the exception of Pinevale, Windermere and Chestervale, the maximum price for new ECs launched from 1996 till 2004 were all below the $1million mark. In comparison, almost all of the new ECs launched since 2010 have units beyond the $1million price tag.

What’s the fuss over a $2-million Executive Condominium unit?

To put things into perspective, the most expensive EC sold prior to the $2.05-milion unit was priced at $1.88 million for a resale unit at Bishan Loft (1990 sq ft unit purchased in 2001) as well as The Quintet (3,486 sq ft unit purchased on 2004).

However, it is worth noting that these 2 units were sold close or after the 10-year mark (when all resale restrictions were lifted), hence it is understandable that some of these prime units were able to fetch high prices due to the prevailing open market condition. Even then, the original launch prices of these 2 units were less than $850,000, and at that launch price, it was something that many Singaporeans could afford.

Will limiting the size result in more affordable ECs?

Large EC units are not something new and they have been around since the start of the EC scheme. A case-in-point would be Eastvale, one of the first ECs launched, which had units as large as 223 sq m. A detailed breakdown on ECs and the largest unit in the development is shown in Figure 2. From Figure 2, it can be seen that all EC developments, with the exception of La Casa, Whitewater, Heron Bay and Austville Residences, have units that are larger than the 160 sq m limit set by the government. Thus setting EC sizes to just 160 sq m, from the housing standpoint, may limit the variety as well as housing options that buyers used to have.

Figure 2: Analysis of ECs and the largest units in the development

Source: URA and Ascendant Assets Pte Ltd

While limiting the maximum size of ECs to 160 sq m could be one way of making them more affordable, it may not achieve the intended result as developers still have the flexibility of adjusting the unit price (i.e. price per square foot). To illustrate, if the developers were to price new ECs at a unit price to $1,162 psf or more, a unit with the size of 160 sq m could still end up costing more than $2million. To put things into perspective, the most expensive new launch $psf is currently $888 psf for a unit at Tampines Trilliant (transacted in Apr 2012). If the demand for ECs remain strong, it is definitely possible for developers to gradually increase the psf prices.

Will demand for ECs remain strong?

We are of the view that the demand for ECs could remain strong in the near future. One reason is the change in buyer demographics. More cash-rich Singaporeans/PRs are now moving into the new EC market as they are put off by the high prices of private properties as well as large Cash-Over-Value (COV) amounts that resale HDB owners are currently asking for.

Another reason is that many consumers now view ECs on par with private properties. Private properties were more sought after in the past as there was hardly any control to the buying and selling process. With the flexibility of private properties curtailed by the numerous rounds of property cooling measures, EC units presently look as attractive as private properties (see Figure 3 for a comparison of restrictions).

Figure 3: Comparing the restrictions between ECs and Private Properties

Source: Ascendant Assets

Based on these two considerations, unless there are other measures put in place, demand for ECs will likely remain strong. That in turn will see developers raising psf prices. In other words, even with a size limit in place, without any direct control on how much developers can sell their units for, it is still possible for them to sell ECs at record prices.

Conclusion

There is no doubt that the government is closely monitoring the EC market and they will put more measures in place if the need arises. The present market euphoria in the EC market could be seen as a consequence of excess liquidity that Singaporeans/PRs, who have been forced out of the private property market due to the many rounds of cooling measures, have and they are looking for attractive deals.

Only time will tell if the latest measures to control the EC market would be effective in making ECs more affordable in time to come. However, if more liquidity, from say, a fourth round of quantitative easing, were to be introduced into the global financial remains, there is no doubt that developers would increase their psf price to remain profitable. At that stage, even though units could still be 160 sq m or less, prices of $2mil or more could be the norm.

Mr Getty Goh has a Masters in Real Estate and a Bachelors in Building from the National University of Singapore. He conducts frequent talks on the topic of property investing. To sign up for his next sharing, please visit www.BuyByeProperty.com. For those who wish to know more about what are some of the factors that would impact the profitability of a development, please drop him an email to find out more.