Have ECs lost their objective?

Should executive condominium buyers get government housing grants, when they are assured of a windfall on selling their units? Wrong question. The real question is: Are ECs serving their purpose to bridge the gap between private and public housing? The answer: No.

Published on May 23, 201， Straits Times

-- ST ILLUSTRATION: MANNY FRANCISCO

By Rachel Chang

 

THE scene: An executive condominium (EC) is designed at double the size of an average Housing Board (HDB) flat and priced at more than $1 million.

The result: Public outrage. Why are government subsidies going to buyers who can afford such units? Why is HDB not reining in such excesses by developers? Some suggest: Take away those subsidies. Scrap the EC scheme.

Sounds familiar?

In fact, the scenario painted above happened in 1997.

Those unconvinced that history repeats itself need only look at the short story of the perennially controversial EC scheme.

ECs are a form of hybrid housing to cater to the "sandwiched" class who earn too much to qualify for subsidised public housing but find private property prices too high in a buoyant market.

The developments are designed and marketed by private developers and have condo-style fixtures, but come with ownership restrictions imposed by HDB, such as a five-year minimum occupation period that subsidised flats are also subject to.

After five years, they can be sold to Singaporeans and PRs. After another five years, they become fully privatised and can be sold on the open market to foreigners too.

The EC scheme was launched in 1996, amid soaring private property prices. One year later, a $1.09 million EC unit sized at 2,700 sq ft ignited an intense debate on the drawbacks of the scheme.

Fifteen years later, the same scene played out, double in scale. Last December, a $2.05 million EC unit in Tampines, sized at 4,349 sq ft, revived calls to junk ECs once and for all.

Back in 1997, a property market crash truncated the conversation about the raison d'etre for ECs. Then came the triple whammy of the Asian financial crisis in the late 1990s, terrorist attacks on Sept 11, 2001, and Sars in 2003. The property market remained in the doldrums for a decade, and the Government stopped selling land to EC developers for a lack of takers.

It was only in 2010, in the midst of the property market's current bull run, that it resumed. So did the conversation on whether ECs should be a permanent part of Singapore's housing landscape.

The EC windfall?

EARLIER this month, National Development Minister Khaw Boon Wan told participants at an Our Singapore Conversation dialogue that there is an "inequity" at the heart of the EC scheme.

This is because first-time buyers of ECs still receive HDB grants of $10,000 to $30,000, depending on income. These are given to all first-time HDB flat applicants, including EC owners who stand to make huge profits when they sell off their fully privatised units 10 years later.

Some have said those grants should be taken away from EC buyers. But that skirts the fundamental question of whether ECs serve a purpose and should exist as a housing type.

Removing the grants would also be misdirected. After all, the assumption that EC buyers are guaranteed a windfall from their units after privatisation is a false one.

This assumption springs from the belief that the property market moves only in one direction - up - a stubborn illusion of property speculators everywhere.

In fact, EC buyers are subject to the risks of a falling market like any other private property buyer. In addition, they fork out more for their units than the average HDB buyer, and pay more in interest due to bigger mortgages. In other words, they incur a far higher financial risk than the average HDB flat buyer.

The last property cycle is instructive. Data from the Singapore Real Estate Exchange (SRX) shows that prices for ECs launched in 1997 at a median price per sq ft (psf) of $439, plunged 26.7 per cent during the property slump to a median psf of $322 by 2006.

In contrast, the HDB resale price index dipped but 15 per cent in the same period.

When the first batch of 1997 ECs became fully privatised a decade later in 2007 - a time when their "windfalls" should have materialised - median psf was at $392, lower than the launch price of $439. Rather than make a profit, EC owners would have been hit by a 10.7 per cent loss if they had sold their units.

The corollary of a bigger reward is always a bigger risk. The current five-years-and-counting bull run, which has pushed median psf for ECs to $752, does not change this fact, but merely obscures it. The "EC windfall" is thus purely dependent on which way the market wind blows when one has to sell a unit.

In any case, HDB grants are a financial boost to help nudge young couples into home ownership. The EC buyer may make huge gains 10 years down the road - but still deserve help today with their down payment for an apartment today like the couple applying for a four-room flat.

Mind the gap

THE deeper issue to be considered is whether ECs are fulfilling their intended function in the property market.

ECs were meant to bridge the gap between HDB flats and private properties - a housing product specifically for those who earn too much to qualify for a new flat, but who would struggle to buy a private property on their income. Applicants for subsidised HDB flats have a monthly income cap of $10,000. For ECs, the income ceiling is $12,000 a month.

Yet SRX's data shows that ECs are slowly relinquishing this role, because developers are pricing them closer to private properties.

In 1997, new ECs were priced at a 36 per cent discount to new private properties in the same neighbourhoods.

The market dipped overall in 2005, but the EC-private gap narrowed to 25 per cent. Now, it stands at 21 per cent.

The closing gap may be due to the fact that in 1997, the first ECs were launched by government-linked developers like Pidemco, which were presumably less wedded to profit-making than the private developers that build ECs now.

It may be that bidding competition among developers is pushing the costs of EC land up, and hence unit prices.

Whatever the cause, the fact is that EC prices have been pulling closer to private property prices.

To add insult to injury, the fact is that private developers' profit is being made on the back of the opportunity cost of selling land cheap to EC developers.

The price developers pay for EC land is lower than for private property land, given the restrictions on ECs' sale in their first decade.

An example that International Property Advisors chief executive Ku Swee Yong cites is in Punggol Central in 2011: The land for private condominium Parc Centros was tendered for $354 psf per plot ratio; the land for Waterbay, an EC nearby, was tendered three months later for $319 psf per plot ratio. Of course no two plots of land are identical, but these two are in a similar location, both near Punggol MRT station, and are for 99-year leasehold residential developments.

The estimated forgone profits to state coffers was about $14 million. Given this state of affairs, when EC prices have crept so close to private property prices, and where EC developers' profits are being made on the back of an implicit subsidy on state land, it seems the only reason to keep ECs going is not economic but political - as a pressure valve to ease resentment over high property prices.

Private property prices have risen so fast that the gap between median HDB resale flat prices and resale private property prices has widened. In 2005, the median price psf for resale HDB flats was $226, and that for resale private property, $469. Now, it is $414 and $1,069 respectively.

The gap has grown from 108 per cent to 158 per cent.

That has yanked private properties even further out of the reach of middle-income families. A vocal sandwiched class finding private condos beyond their reach, but whose aspirations spurn HDB resale flats, may find in the EC scheme their only hope to achieve their condo dream.

No surprise then if any government prefers to keep the scheme on its books as an option for this class, despite its drawbacks.

It falls to Singaporeans to ask if mollycoddling the sandwiched group is a worthy goal.

It is not as though the issue is whether this group has a roof over its head. Housing aspirations, after all, are different from housing needs; a resale flat or small walk-up apartment sans facilities may not be as glamorous a buy as a spanking new EC with roof terrace and spa pool, but it is a home all the same.

In 1997, then Prime Minister Goh Chok Tong defended ECs by arguing that Singaporeans in the sandwiched group are valued and talented ones, who may migrate elsewhere to fulfil their aspirations for private property if they are denied locally.

In this 2013 sequel, no government leader has made this argument yet. But 15 years later, it is surely time to answer the question of whether the state should satisfy the aspirations of young couples who can afford a resale flat in the HDB heartlands, but prefer an executive condo.