We have witnessed how BTO sellers in prime location has made a tidy sum of profit from selling their flat after their minimum occupation period (MOP). Some of these sales have also been making the news in our local newspaper. With the recently announced Prime location housing, the HDB policies of buying BTO in prime location is set to change. Policies of owning such BTO flats has become very restrictive.
Going forward, what does it means to purchase a BTO flat under the new Prime Location Housing (PLH) policies? Does it make sense to buy such a property for investment? Here are my views on the new PLH.
Under the new policy, owners of PLH flat will have to fulfill a minimum occupation period of 10 years. Owners will have to stay in the flat for 10 years before they can sell it. Assuming the estimated time taken for the construction of these flats takes 4 years, buyers could wait up to 14 years before they can sell the property.
14 years is a long time. If I buy this house at the age of 30, by the time I can sell, I am already age 44. If I am age 35 when I buy this house, then I will be age 49 by the time I can sell it. After 14 years waiting period, getting the next property loan could sometimes be a challenge because of the shorter loan tenure. At age 30, I can get a loan from the bank for a 30-years tenure. However, if I am age 44, the loan tenure will be shortened to 21 years. The shorter loan tenure could result in lower amount of loan granted by the bank or higher instalment payment on the property loan. In addition, at an older age, it will also mean that my next property investment will have a shorter investment time horizon.
Barred from renting out whole unit
PLH flat owner will not be able to rent out their flat (the whole unit) even after the MOP period. This is applicable to both first time buyers and subsequent resale buyers. Thus, if you are intending to buy the flat to rent out in the future, this option will not be possible for you.
Resale flat buyers looking to purchase PLH flats after these flat has completed their MOP period must also meet the “BTO” eligibility requirements. One of the eligibility requirements for BTO flat is a set income ceiling. This income ceiling may affect the potential price upside of the PLH flat.
Based on the current policy of income ceiling of 14k (4-room flat or bigger), when we calculate the corresponding loan for this $14k income, the maximum loan that can be granted is about $839k. Assuming the resale buyer puts down a 25% down payment and taking a 75% loan, the maximum property value that this resale buyer can afford is around $1.119M (This is assuming that the buyer is not taking any grant or topping up additional cash or CPF to pay towards the property). I will expect the resale price of the PLH flat to be around this affordable buyer’s range. Of course, if there are housing grants given to these resale buyers or any income ceiling adjustment in the future, this maximum range can increase.
The “BTO” requirements will also means that PR family will not be able to buy such properties. This has an effect of reducing the potential pool of buyers in the resale market to buy these flats.
Private property down-graders
With the new policy, resale buyers for PLH flats must not be holding on to a private property in the last 30 months before they can buy a PLH flat.
This makes private property or en-bloc property sellers who are intending to buy a HDB flat in the prime location ineligible to buy these flats immediately. This will further reduce the pool of buyers.
There will be a subsidy claw-back from selling PLH flat. Sellers will have to pay a percentage of the resale price of the flat to HDB. With the claw back, this can potentially affect the profits that the owners can make.
Additional points of consideration
It is truly clear that the purpose of the future BTO flats build in prime areas are for buyers who are buying for own stay. Speculative buyers who are intending to buy such flats for investment will be disappointed.
However, the new policies will benefit buyers who are genuinely keen to stay in such a flat for an extended period, especially those who are not intending to sell it. With the new policies, it can sieve out “speculative” buyers from the balloting process of such flats. Genuine buyers will stand a better chance of owning a flat there.
Finally, do consider again on the holding period for the PLH flat. The holding period is really a long period of time and you do not have an option to sell or buy another property until the MOP is met. Personal circumstances can change during this period. Some of the possible circumstances that can change are:
- What if you have a change of mind during the MOP period and decided to upgrade your house?
- What if you need to work overseas?
- What if you have an uneasy relationship with the neighbor and needed to move out?
- What if you decide to put your children in a school that is much further away?
- What if you needed to have a bigger house due to family expansion?
- Etc etc…
Therefore, do think clearly and carefully before making any property purchase decision. Do explore all your housing options before committing into the purchase. If you are still uncertain about what your housing options are, feel free to contact me using the form below.