Complaining about the price of homes in Singapore is a national past-time. But deep down in our hearts, we know that Build To Order (BTO) flats are offered by the government at a great discount.
For instance, 4-room flats in the recent Sep 2019 Tampines GreenGlen BTO project were priced at $312,000 and above. This figure does not take into account CPF Housing Grants, which considerably lower the actual amount paid by many buyers.
By contrast, in the last 6 months, resale 4-room flats in Tampines with at least 90 years left on the lease sold for at least $475,000, with some even surpassing the $550,000 mark.
Related article: Are Resale Units Really More Expensive Than BTOs?
That being said, complaints about BTO prices are not going to go away anytime soon. But really, things are not as bad as naysayers might lead you to believe. In fact, there are many reasons to be optimistic about the affordability of BTO flats.
How does HDB decide the BTO flat prices?
Once upon a time, BTO flat prices used to be pegged to the price of resale flats. In a country where people often worry about housing prices rising out of their reach over time, this was obviously not very comforting as it meant that BTO flat buyers were subject to the whims of the market.
Today, this is no longer the case. Since 2011, BTO flat prices have been set according to a cost-plus model. This means that the price is determined by adding a markup to the cost of construction of the flat. This pricing method offers greater stability as the cost of labour and materials is generally less volatile than property prices.
The government is also working on a new pricing model for upcoming BTO flats in the Greater Southern Waterfront area, which are sure to be extremely sought-after and have the potential to accrue sharply in value once their Minimum Occupation Period (MOP) is over.
What happens when BTO flats are too cheap?
While the goal of the BTO system is to make housing affordable for Singaporeans, making BTOs too cheap can also be detrimental to home owners’ interests.
Extremely cheap BTOs could lead to owners making huge profits when they sell the flats. This phenomenon is called the “lottery effect” and was observed when a number of Pinnacle@Duxton owners sold their flats for over $1 million.
This could lead to a growing income gap between middle-class flat owners who have the means to sell their flats and move into a different property, and lower-income flat owners who cannot afford to do so.
On the other end of the scale, overly cheap BTO flats might also depress the resale market in certain areas. For instance, flats in less desirable locations might see their values getting depressed, thus further widening the gap between property prices on prime land and those in far-flung areas.
Making BTO flats cheap would make it more affordable for Singaporean couples to buy flats at an earlier age. While this might achieve the government’s goal of boosting the birth rate, committing to housing too early might be detrimental for the buyer.
Unlike renters, who can decide to move closer to their workplace after getting a new job or receiving a raise, flat owners are obliged to live in their flat for at least the duration of the five-year MOP. This means that young couples who rush to snap up the cheapest BTOs in far-flung locations might have to resign themselves to a long and grinding commute for years, or not be able to live closer to their parents.
So how should BTOs be priced?
Due to the wait of several years between a BTO launch and the collection of keys, it is fair that BTO flats be priced significantly lower than their built counterparts. This phenomenon can also be observed in the difference in prices of new condo launches and completed condos.
The difference in BTO launch prices and resale prices should approximately mirror that between new condo launches and completed condos, although factors like CPF Housing Grants and the MOP need to be taken into consideration.
As BTO flat buyers are losing 3 to 4 years’ worth of use of their flat as they wait for it to be built, BTO launch prices should approximately be equal to resale prices minus 3 to 4 years’ worth of annual value.
A lot can happen in 3 to 4 years, and sometimes the area in which a BTO is being built becomes much more sought-after over that period thanks to new or upgraded infrastructure like new MRT stations and shopping malls. In that case, it is appropriate for resale flat prices to rise further on the back of these improvements in infrastructure.
Conversely, BTO flat buyers should not have to pay higher prices because of future and as-yet unrealised improvements in infrastructure as there is no guarantee that they will be successfully carried out. In addition, the building of new infrastructure sometimes involves years of heavy construction as in the case of Punggol, the inconveniences of which would have to be borne by the buyer.
But what about those who can barely afford BTO flats?
What if you have looked at the CPF Housing Grants you’re eligible for, but still think a BTO flat is out of reach?
One way to save costs is to comparison-shop for home loans in order to keep your interest payments at a minimum. While HDB loans sometimes come with higher interest rates than bank loans, they do offer a greater degree of stability. The current HDB concessionary interest rate is 2.6%.
On the other hand, if you opt for a bank loan, be sure to compare the interest rates and loan packages of the different banks and be prepared to refinance later on, as doing so can save you quite a bit of money.
You can read about the key differences between an HDB housing loan vs a bank loan.
When all is said and done, the Singapore housing market is one of the world’s most sought-after. Compared to their resale and private counterparts, BTO flat prices are extremely attractive and make it possible to own a piece of one of the world’s most expensive cities at a relatively affordable price.
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