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The future of ECs— Another cow for the slaughterhouse? 30 April 2013, TODAY |
Over the weekend, there was an unexpected mini bout of excitement amongst property agents, developers and residential property investors about Executive Condominiums (ECs). The Minister of National Development, Khaw Boon Wan, vocalised his thoughts that “something is wrong somewhere” with the EC scheme as it stands today. He hinted that the scheme should be tweaked.
Many questions were raised by the media, property agents and investors as to where the EC scheme might go. And without getting more details other than media reports, property agents and developers would not be able to respond to investors clearly without any risks of misrepresentation. Opinions around the interpretation of what Minister Khaw meant might be misconstrued, or worse, evolve into rumours.
While it is the intention of the authorities to stabilise residential property prices, the Minister’s comments sparked off some fervour. Investors who had not previously considered ECs but who are qualified to apply for ECs are now considering it for investment. The logic goes like this: “In case the EC scheme is shelved, I might lose the opportunity to make a capital gain on a subsidised public housing product that automatically becomes private property after it has been completed for ten years.” Advertisements immediately sprang up encouraging prospective clients to give ECs serious consideration. I would not be surprised if the interest level and the pace of sales increased for ECs over the past four days even though the EC product is limited to the fraction of the market that qualifies.
Perhaps it would be more prudent if the opinions and suggestions taken during the Singapore Conversation were considered in totality by the policy makers. Any changes to policies should be announced only after careful consideration. This will prevent the market from guessing and avoid speculative behavior that could destabilise the market.
I have previously questioned the raison d’etre of the EC scheme in previous articles in TODAY titled “Are ECs still relevant?” (published on 18 January 2013 in TODAY). The sandwiched-class of the mid-nineties when ECs were introduced is very different from the sandwiched class of today. The market size of HDB flats and private residential apartments have grown significantly, up from about 806,000 units in 1995 to 1.2 million units in 2012. Wages and salaries have grown and the number of choices for home buyers have widened. If a family considered themselves sandwiched because their household income is above the $10,000 per month that qualifies them for BTOs, then it is because they are not willing to consider resale HDB flats or older private properties.
What we seem to be doing with ECs is that we appear keen to satisfy the aspirations of a small group of relatively high-income families, who earn up to $144,000 annual income, and who want new homes that are subsidised by taxpayers.
In terms of priority for public housing, how does the EC scheme rank given that we have yet to meet the needs of some families that are economically or otherwise challenged?
As for the comments about the unfairness or inequity between BTOs and ECs — that EC owners receive more subsidies from the state, as well as derive more profits upon resale, as compared to BTOs, my reply is simply, “I am sorry but you must be mistaken.”
ECs sit on government land that is sold to private developers. The government makes profits on the land sales, albeit at smaller profits than if the land were sold for developing private condominiums. Therefore, in a way, there is some subsidy here in terms of profit opportunities foregone. ECs are then sold to buyers and developers derive their profits here. Those EC buyers who qualify for grants receive the grants as a subsidy by taxpayers.
For example, in Punggol Central, the land for private condominium Parc Centros was tendered on 15 December 2011 for $354.37 psf per plot ratio and the land for Waterbay (an EC) was tendered three months later on 29 March 2012 for $319.69 psf per plot ratio. The land values might be closer if Waterbay were designated for private condominiums. In this example, the foregone profits to the government coffers, that is, the subsidies for EC buyers is about $14 million.
In comparison, as explained in my article for the Institute of Policy Studies website published 19 April 2013 (see www.ipscommons.sg/index.php/categories/featured/135-re-examining-the-basis-for-public-housing-shelter-or-asset), HDB BTOs are built on state land and BTOs are priced at the cost of land plus construction with a small profit to the HDB. In addition, BTO buyers who qualify for grants will receive their grants. The foregone profit opportunities for such land, if sold to developers to develop private condominiums, is far greater than for ECs. And the selling prices do not include an additional layer of profits for private developers here. Therefore, at the point of purchase, BTOs are more heavily subsidised than ECs.
Count our blessings.
Ten years after TOP, ECs become private condominiums without owners having to pay any additional costs, unlike the privatisation of HUDCs. Some eyes may turn green that EC buyers receive higher profits when they resell. However, we should not forget that EC buyers fork out a larger quantum to fund their purchases, and very likely they shoulder a higher burden in terms of mortgage payments. So in the case of a severe residential market downturn, a $300,000 BTO flat may suffer a loss of $50,000 (or 17 per cent loss) but a $800,000 EC unit may decline by $200,000 in value (or 25 per cent loss).
This is a simple equation of risks versus rewards. And we have not even included the cost of owning an EC in terms of interest expenses or maintenance fees, etc.
While I disagree with the comments about ECs that were raised during the Singapore Conversation, I am unable to find strong reasons why ECs are relevant in today’s context. Especially not so when this scheme caters to families earning six-figure household incomes annually.
I say, let’s send this cow to the slaughterhouse.