How High Can EC Prices Go?

Last week I discussed about the high return rate among Executive Condominium (EC) buyers. Today I shall look at how high can an EC unit on a per sq ft (psf) basis be priced.

The latest EC project to open for e-applications or e-Apps is Lake Life at Taman Jurong. On 6 Oct 2014, it was reported that 1,200 applications was submitted for the 546-unit project. The strong turnout was no doubt aided by the Government plans for the Jurong Lake district.

But what was eye-popping was the psf quoted for the EC project. At $880-$890 psf, this will be the most expensive EC project to-date.

Type	Size (sf)	Quoted Price Range (psf)	Estimated Price (Top Range)
5 bedroom	1,604-1,711	$880-$890	$1.42-$1.52 million
4 bedroom	1,195-1,701	$880-$890	$1.06-$1.51 million
3 bedroom	1,023-1,711	$880-$890	$0.91-$1.52 million
2 bedroom	743-969	$880-$890	$0.66-$0.86 million

Source: Lake Life e-brochure, news reports, Real Property Advisory Singapore


Can a family with an income ceiling of $12,000/mth afford the EC?

For a couple age 30 years, their affordability would look like this:

Household Income	$12,000/mth	$10,000/mth	$8,000/mth
Mortgage Service Ratio (30%)	$3,600	$3,000	$2,400
Total Debt Servicing Ratio (60%)	Pass	Pass	Pass
Loan Tenure	30 years	30 years	30 years
Interest	1.50%	1.50%	1.50%
Loan Amount	$1.04 million	$869,000	$695,000
Purchase Price (80% loan)	$1.30 million	$1.09 million	$869,000
Size of 3 bedroom	1,023 sf	1,023 sf	1,023 sf
Maximum psf	$1,271	$1,065	$849

Source: Real Property Advisory Singapore


For a HDB upgrader, with more equity on hand, their affordability would look like this:

Household Income	$12,000/mth	$10,000/mth	$8,000/mth
Mortgage Service Ratio (30%)	$3,600	$3,000	$2,400
Total Debt Servicing Ratio (60%)	Pass	Pass	Pass
Loan Tenure	20 years	20 years	20 years
Interest	1.50%	1.50%	1.50%
Loan Amount	$745,000	$620,000	$497,000
Purchase Price (70% loan)	$1.06 million	$886,000	$710,000
Purchase Price (60% loan)	$1.24 million	$1.03 million	$828,000
Size of 3 bedroom	1,023 sf	1,023 sf	1,023 sf
Maximum psf (60% loan)	$1,212	$1,007	$809

Source: Real Property Advisory Singapore


Looking at the numbers above, theoretically the developer can price their project at above $1,000 psf if there is no mortgage service ratio (MSR) and maximum loan tenure limit.

To afford the most expensive unit, the family has to have plenty of liquidity so as to fulfill the MSR.

Whatever it is, the applicants will be busy calculating how much cash they can afford to put for the downpayment so that they can catch the potential upside from the rejuvenation of Jurong Lake district.

Further Tightening of the HDB Market - MSR and Loan Tenure

Apparently someone up there thinks that the screws are not tight enough and they have to tighten it more to screw HDB owners up.

After achieving some initial success with the Mortgage Service Ratio (MSR) and shorter loan tenure which resulted in HDB resale transactions and cash-over-valuation (COV) falling, the Ministry for National Development (MND) decided to cut the MSR (35% to 30%) and loan tenure (30 years to 25 years).

What will happen next? Your guess is as good as mine.

Resale transactions and COV will continue to ease thereby making it more affordable for first time home buyers. The latest median transacted COV is $20,000.

With a shorter loan tenure and MSR, buyers have to fork out more cash if they buy a more expensive or big HDB flat. There will be lower demand for 5-room and bigger flats.

Sellers will curse their luck. As it is, I have seen advertisements for the same HDB flats for more than a month without success. The seller was only asking $20,000 COV. Two weeks ago, the advertisement changed to View To Offer (VTO) with no mention of COV. It is going to get more chilly for HDB resale flat sellers. There are going to be more transactions where COV is zero or even negative depending on how desperate the seller is.

Those borderline HDB upgraders who committed to a private condominium or executive condominium in 2010 will be the first to get hit HARD, real hard! When I say borderline, I mean those who need to sell off the HDB flat as they do not want to rent out their HDB flat and have no ability to service two loans. Their condominium or EC is going to obtain its TOP in 2014.

But as it is, our Government always try to balance out the market. To maintain a steady rental market for those wanting to hold on to their HDB flats, the Government has directed that the new Permanent Residents (PR) ie. those who get PR status for less than three years rent them. If I am a PR, I will be mad.

Already with the Additional Buyer's Stamp Duty (ABSD), a PR have to pay additional 5% for their first property purchase. Many are putting off the purchase of a property. Now they have to wait even longer. Who knows if the ABSD rate might go up?

Despite the Government trying to keep the HDB rental market steady, we doubt it will help much. First, approvals for PR status have been falling year after year since the Government tightened the criteria. We don't see it easing soon. Second the number of HDB upgraders who are holding on to their flats and renting them out is increasing. The 2Q 2013 subletting cases rose 6% from 1Q 2013. While HDB flat rentals have been holding steady, it is near the tipping point.

The mass market condominium will experience a knee jerk reaction but the fall in transactions will not be glaring. MND chose a nice month to announce new measures. It is the Lunar Seventh Month afterall and transaction volumes are expected to be low anyway.

Hopefully investors will be more sane after absorbing the new cooling measures and not pay ridiculous prices for a mass market condominium unit.