Should a first timer buy a BTO or resale flat in 2024?
The First Home Dilemma: BTO Flat or Resale HDB Flat?
Housing an estimated 78% of Singapore's residents, HDB flats are an undeniably integral component in the nation's urban fabric. Given this fact, it follows that most Singaporeans would turn to the HDB flat market for their first home purchase.
Therein lies a common dilemma: Should a first-timer choose to buy a Build-to-Order (BTO) flat, or would a resale flat be the better choice?
But for many, the decision often boils down to affordability and urgency, along with their success in BTO balloting exercises.
However, come 2H 2024, changes to the BTO framework as well as the accompanying extended Minimum Occupation Period (MOP) for Prime and Plus flats, are poised to add more layers of complexity to the decision-making process for first-timers.
Even more notably, these factors could also make it more challenging for first-time owners of Prime and Plus BTO flats to make the jump to a private property.
But to understand why, a lookback at recent market events and cooling measures is essential.
Why was a new BTO framework announced?
Amidst an influx of MOP flats and pandemic-fuelled demand, Singapore's resale HDB market saw significant increases in both prices as well as transaction numbers between 2021 to 2023.
In 2021, the number of HDB resale transactions hit a record peak with some 28,700 units changing hands – the highest in the last decade.
Subsequently, this prompted the introduction of a series of cooling measures over the past three years, with the goal of stabilising the HDB resale market.
Since these changes, the volume of resale HDB transactions has moderated downwards, with an estimated 26,000 transactions in 2022, and approximately 25,000 transactions in 2023. A more modest growth rate of 4.8% was also registered for resale HDB flat prices in 2023, which is less than half of the 10.4% increase reported in 2022.
Yet despite these outcomes, two signs pointed towards the need for further intervention; even as the volume of resale HDB flat transactions dwindled, the HDB resale index continued to surge by 27.6% from 4Q 2020 to 2Q 2023 – and so did the number of million-dollar HDB flat transactions.
In 2021, there were a total of 259 resale HDB flats sold at the million-dollar mark. This figure grew to 369 units in 2022, before reaching the current peak of 470 in 2023. And as of January 2024, another 74 resale HDB flats were transacted in the seven-figure range.
Against the backdrop of these developments, the Singapore Government unveiled its new BTO framework in August 2023.
Taking effect in 2H 2024, this incoming BTO classification system will see the introduction of the Standard, Plus, and Prime categories.
While Standard flats will retain current BTO sales conditions such as the current 5-year MOP, Plus and Prime flats that are located at more attractive locations will instead be accompanied by stricter regulations; these include a 10-year MOP as well as more stringent rental and resale conditions, comprising a clawback of a percentage of future selling price or valuation, whichever is higher, and a $14,000 income ceiling for resale HDB buyers.
The 'lottery effect', million-dollar HDB flats, and the revised BTO framework's moderating effects
Purchasing an HDB flat in a mature estate and selling it after the standard 5-year MOP can prove to be highly lucrative for first-timers.
For example, when the 4-room BTO flats at Ghim Moh Edge were launched in 2012, their prices ranged from $450,000 to $594,000. Fast forward to 2022, after achieving MOP status, a total of 117 of these units were sold for significant profits, with transaction prices of between $703,000 to $1,100,000.
This is akin to winning the lottery, hence the term "lottery effect", which is often used to describe the significant gains that some BTO buyers get to enjoy upon selling their flat on the resale market.
The "lottery effect" is most pronounced amongst HDB flats that are 15 years of age and below (i.e. resale flats that have achieved MOP in the last 10 years), having made up the bulk of million-dollar HDB flat transactions from 2021 to 2023.
Among the 259 million-dollar HDB flats sold in 2021, 196 (75.7%) were aged 15 years or younger. This observation persisted in 2022 and 2023, with 197 out of 369 (53.4%) and 246 out of 470 (52.3%) million-dollar units, respectively falling into the aforementioned category of relatively young HDB flats.
That said, the "lottery effect" may become a thing of the past – particularly for Plus and Prime Location Public Housing (PLH) flats following the introduction of the new BTO framework.
This likelihood can be ascribed to various resale restrictions accompanying future batches of HDB flats. For instance, the 10-year MOP and $14,000 income ceiling for resale flat buyers are expected to aid in curbing short-term speculation, while also keeping future resale prices capped at healthy levels.
Similarly, the mandated subsidy recovery in the form of a percentage clawback of PLH flat's resale price or valuation, depending on whichever is higher, will also aid in mitigating profits gained from the "lottery effect".
Solving the first-timer dilemma of purchasing a BTO flat or resale HDB flat
Considering the above, first-timers with aspirations of upgrading to a private property may find existing resale HDB flats in mature estates a more appealing option than a Prime or Plus BTO flat.
In addition to facing less-stringent resale conditions that enable a quicker exit, existing resale HDB flats are also free from rental restrictions upon reaching MOP; this provides their owners with the opportunity to generate passive income from rent, even after purchasing a private property.
Yet another sign pointing in favour of existing resale HDB flats is also the shift in the number of buyers paying Cash-Over-Valuation (COV) for their home purchases.
Often, it can be a struggle for first-timers to secure the required liquidity for COV payments, but with the decline in the number resale buyers paying COV from 30% in 4Q 2022 to 15% in 4Q 2023, it is more likely that they will be better positioned to consider a resale flat purchase.
Moreover, given ERA's forecast of 26,000 – 27,000 resale HDB flat transactions and a projected resale price growth of 3-5% in 2024, it is unlikely for Prime and Plus BTO flats – which face stricter resale conditions and a subsidy clawback – to yield the same levels of unprecedented price growth seen from 2021 to 2023.
The hypothetical financial calculations below can help first timers compare cost and opportunities between BTO flats and resale flats. The resale buyer cap on Prime and Plus flats could add to future price growth resistance.
Be that as it may, profitability should not be the sole barometer on which the suitability of a home should be measured.
In the long run, the revised BTO framework will reshape the HDB landscape for the better by moderating price growth and making affordable homeownership possible for generations of Singaporeans to come.
Prime, Plus, and Standard BTO flats play a significant role in this future by fostering a more diverse and sustainable housing landscape, while also possibly continuing to provide a pathway for aspiring private homeowners to upgrade – even if they appreciate more gradually.
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Purchasing a property is not easy, as there are many crucial choices to make as a property upgrader. At the end of the day, everyone wants financial freedom, and not to be burdened by monetary issues especially at every stage of one's life. Attaining financial freedom is definitely possible, with meticulous planning and commitment. There are so much to benefit from when you make the right choices, and do let me be your guide to explore your options and see how you can make your hard-earned money work for you.
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