One of the big-ticket items we may buy in our 20s and 30s would be our first house. Given that it is no small amount, the decision you make must be well thought out.
If you are not too concern about the price, you could just choose whichever option you like most. However, I believe, most Singaporeans would like to pocket a profit when they sell their properties further down the road.
Here, we’ll explore whether a Build to Order (BTO) flat or an Executive Condominium (EC) would be a better ‘investment’ option as your first house. (p.s. if you are looking for a second properties, you can also join the upcoming webinar by Jeffrey Ong, he’s sharing how you can grow your property portfolio.)
We will investigate the general trend of a 4-room housing option – specifically a 4-room BTO vs a 3-room EC (A 3-room EC is equivalent to a 4-room HDB flat in terms of the number of rooms).
However, bear in mind that prices can vary depending on various factors like locations and government policies and are highly subjective depending on one’s circumstances. Nonetheless, I hope this article can give you a general guideline when you are looking for your first property.
*Resale property is another great option for first-time buyers who do not want to wait or want more options to choose from. However, we have excluded it here as the potential profit you would get from it would likely be realised by the previous owner already. (Tip: First-timer families buying resale flats can take advantage of the Family Grant (Up to $50,000) and the Proximity Housing Grant (Up to $30,000) which might reduce the cost further and thus ‘profit’-ing from it.)
What are Build-to-Order (BTO) and Executive Condominium (EC)?
Build-to-Order HDB (BTO)
BTOs are to be constructed HDB flats that will only be built if 65-70% of the apartments in the flat have been booked. Many (although not all) can be found at non-mature estates.
The prices for these flats are set by HDB and sold at a subsidized price. As the name suggests, these flats are built only after you have purchased the flat and the general timeline from balloting to getting the keys is around 4 to 5 years.
Executive Condominiums (ECs)
ECs are a hybrid between public and private housing.
While these units are built by private developers, they are governed under HDB rules for the first 10 years and cannot be sold to foreigners. However, after 10 years, this rule is removed and the units can be sold to anyone which typically lead to a jump in property prices.
ECs are favoured by many as they are typically cheaper than a private condo by about 20%, while retaining access to facilities like swimming pools, gyms, and private car park.
You may want to note that as compared to BTOs, ECs tend to be located in “ulu” or less populated areas. I am not talking about non-mature estate areas, but rather areas that are further from the city, town centres and even MRT stations.
Well, this makes sense as those who can afford ECs are less likely to be dependent on public transportation. These lands are also much cheaper which allows ECs to remain cheaper than private condos.
Some reasons for choosing an EC over a HDB might be because you have already exceeded the income ceiling of HDB ($14,000 for HDB and $16,000 for EC), or you are looking for higher capital appreciation.
BTO vs EC: Cost
Let us start with the most important criteria, the cost of the properties.
As this is your first property, you may have just started working and have limited capital to play around with. Hence, cost is likely to be the most important criteria to determine which property you would go for.
On average, 4-room BTO would cost between $250,000 to $380,000 for non-mature estates and $311,000 to $620,000 for mature estates.
If you are a first-time applicant, you will be eligible for the Enhanced CPF Housing Grant (EHG) of up to $80,000, depending on your household income.
An average 3-room EC on the other hand would cost between $770,000 to $1,000,000.
Likewise, first-time applicants are eligible for CPF housing grant but only up to $30,000 depending on your average gross monthly household income.
In our example, we will assume no grant is obtained.
Downpayment
If you’re getting a BTO, you will only be required to fork out 10% of the total as a down payment, if you are taking up a HDB loan. You may also choose to take a bank loan if the interest rates are lower. However, you’ll need to fork up 25% downpayment, if you choose to take the bank loan route.
Assuming you are going for the HDB loan, for a 4-room BTO valued at $315,000, you will need to have at least $31,500 lying around either in your CPF or your bank. In addition, you will have to pay a buyer’s stamp duty when you sign the agreement for lease, which is roughly $4,500 for the BTO in this example.
To bring the cost down further, couples applying for the first time can also apply under the Fiancé/Fiancée scheme to stagger the down payment which would reduce the initial down payment to 5%. This works out to about $15,750.
4-room HDB down payment: $15,750 + $4,500 = $20,250
For ECs, a 25% down payment is required, of which 5% must be in cash.
As such, for an EC valued at $885,000, you need to have at least $221,250, of which $44,250 must be in cash. In addition, you will have to pay a buyer’s stamp duty when you sign the agreement for lease which is roughly $21,150 for the EC in our example.
EC buyers are also not eligible for HDB loans. Your only option is to apply for a bank loan, which is subjected to both the Mortgage Servicing Ratio (MSR) and Total Debt Serving Ratio (TDSR).
- Mortgage Servicing Ratio (MSR): the total housing loans cannot exceed 30% of a borrower’s gross monthly income
- Total Debt Serving Ratio (TDSR): your gross monthly income that goes towards repaying your monthly debt obligation should not exceed 60%. These loans include any types of loan you might have, from car loan to your credit card loans.
3-room EC down payment: $221,250 + $21,150 = $242,400
For this calculation, we did not account for any legal fees which have to be paid during the signing of the agreement for lease.
Mortgage
After downpayment, you are left with $283,500 for the 4-room HDB and $663,750 for the 3-room EC. Assuming you’re on the HDB loan of 2.60% p.a interest rate for the BTO and a bank loan with 2.00% p.a fixed interest rate* with a tenure of 25 years for the EC, here is what you are expected to pay monthly.
For your BTO flat, your monthly payment would be $1286.15 (payable by CPF Ordinary Account), with a total of $102,345.92 paid in interest.
For your EC, your monthly payment would be $2,813.33 (payable by CPF Ordinary Account), with a total of $180,249.95 paid in interest.
*In the current low interest environment, you can expect to get 1.0% to 1.5% p.a interest loan.
For folks who plan sell their first house in the future for some profits, the following section might be interesting.
BTO vs EC: “Investment” returns
Capital gains
Do BTOs appreciate in value?
4-room HDB flats (orange line in graph above) have appreciated by around 78% from an average price of $238,000 to $425,000 over 15 years.
Annualizing it, the capital appreciation works out to 3.94%, which is commendable. But do note that most of the price increase took place in the early years when the property market was booming.
If we bought the BTO from 2010 at a property price of $380,000, the annualized return would have dropped to 1.13% (non-leverage).
So how did EC fare?
Here’s the sale transaction trend over the last 10 years.
We can see that over the past 10 years, ECs appreciated by 32.5% from $786,000 to around $1 million. This represents a 2.8% annualized return (non-leverage) which is 2 times better than HDBs over the same time period.
Why do ECs tend to appreciate more?
As mentioned, after 10 years, EC will be considered a private condo and can be sold to foreigners. With a larger market, capital appreciation is bound to happen due to the greater demand. After privatisation, it is common to notice a reduction in price gap between an EC and its surrounding private properties.
Here are two examples comparing prices of an EC and a neighbouring private condominium.
- Rafflesia vs Bishan Loft
As you can see, Rafflesia (99-year, TOP 2003, Private condominium) traded at a premium over Bishan Loft (99-year, TOP 2003, EC) at the beginning.
However, after the 10-year mark, the difference starts to drop as Bishan Loft’s prices increased significantly.
- EastPoint Green vs Simei Green
Likewise, for EastPoint Green (99-year, TOP 1999, Private Condominium) and Simei Green (99-year, TOP 1999, EC).
If you’ve read till here, you’re probably thinking that an EC is more appealing than a BTO right? But before you go off and commit to an EC, let’s take a closer look at the smaller (but imporant) details:
Miscellaneous fees
Like a private condo, ECs requires a monthly maintenance fee to upkeep the facilities. This typically ranges between $300-$330 for a 3-bedroom EC, and between $350-$385 for a 4-bedroom EC.
HDBs have something similar called the Service and Conservancy Charges (S&CC). Depending on the Group representation constituency (GRC) you live in, different town councils charge a different rate based on your flat type. On average, the S&CC rate for a 4-room flat is around $63.
You may also want to note that the monthly maintenance fee also includes parking charges. If you own a car, HDB season parking would cost about $110*.
*You could be paying between $80 to $190 depending on the type of car park and your vehicle. Based on my research, most drivers would pay about $110 assuming you drive a sedan and park in a multi-story car park.
Property taxes
Next up, there is also a difference in property tax between a BTO and EC.
In Singapore, the property tax rate is based on the Annual Value (AV) of your house which is the estimated gross annual rent of the property, if it were to be rented out.
A 4-room HDB flat has a median AV of $9,600 and the annual tax is around $64. On the other hand, an EC with a median AV of $22,000, comes with an annual tax of $560.
Overall cost
Let’s tally up the cost:
4–room HDB yearly cost (w/o car) : $63 x 12 + $64 = $820
4–room HDB yearly cost (with car): ($63 + $110) x 12 + $64 = $2140
3-room EC yearly cost: $315 x 12 + $560 = $4340
BTO vs EC: Profit Estimation
Based on our examples above:
Total gain for 4-room HDB in 10 years (w/o car): ($315,000 x 1.0113^10) – ($820 x 10) – $315,000 = $29,260
Annualized gain (w/o car): 0.89% (non-leverage)
Total gain for 4-room HDB in 10 years: ($315,000 x 1.0113^10) – ($2140 x 10) – $315,000 = $16,060
Annualized gain: 0.50% (non-leverage)
Total gain for 3-room EC in 10 years: ($885,000 x 1.028^10) – ($4340 x 10) – $885,000 = $238,072
Annualized gain: 2.41% (non-leverage)
And there you go, EC does seem to be a better investment as compared to HDB BTO at the point of writing.
As mentioned, this is just a guideline, and the numbers can vary according to your circumstances. These other factors can also affect your returns:
- new cooling measures,
- amount of CPF grants you can receive,
- cost of your renovation,
- interest from your loan (I have excluded in the final calculation as it is highly subjective and would be affected by the leverage you have), and
- opportunity cost if had the money be used to invest in the stock market instead.
Conclusion
If you have the privilege to get an EC and it happens to be available, an EC does seem like a more appealing choice based on the example above.
However, if EC is out of your budget, getting a BTO is not too shabby either. Given that it is heavily subsidised, it is very likely you will could a profit 5 years after its MOP too.
A few years down the road with more capital available, you could even consider upgrading or buying a 2nd property as an investment!
This article merely scratched the surface of the property market. As you see, property is a complicated asset and changes in policies, or a decision can easily shift the whole equation. If you are planning to profit from your properties (or even venturing overseas) it may even be harder without sufficient knowledge. If you are interested do join the upcoming webinar by Jeffrey Ong to learn more about property investing.
