Lottery effect of prime location housing may be tamed, but not for existing prime flats

Grace Leong

Senior Business Correspondent

While the new public housing model may help tame the "lottery effect", it could also boost demand for existing flats such as those at The Pinnacle @ Duxton.PHOTO: ST FILE

Oct 27, 2021, 9:04 pm SGT

SINGAPORE - A new public housing model to keep flats in prime locations affordable may well succeed in taming the "lottery effect" or excessive windfall gains when such flats are resold.

This is because conditions such as additional subsidy clawbacks and a longer minimum occupation period (MOP) may make them less attractive.

On the other hand, this could boost demand and the values of younger existing flats in mature estates such as Queenstown and Tiong Bahru, as well as those at The Pinnacle @ Duxton and Dawson, as these will become "limited edition" flats that are not subject to the new restrictions, said Mr Ismail Gafoor, chief executive of PropNex Realty.

Buyers of flats under the new prime location public housing (PLH) model can generally expect their properties to gradually rise in value.

To ensure affordability, Build-to-Order (BTO) flats in prime locations, which have high market values, are likely to enjoy greater government subsidies in addition to existing subsidies already provided for all BTO flat buyers.

That could accentuate the "lottery effect" when these flats are subsequently sold in the resale market, as it would mean higher capital gains for the sellers.

However, for PLH flats, the rate of appreciation may be slower compared with flats in prime areas that are not subject to the new restrictions, Dr Lee Nai Jia, deputy director of the Institute of Real Estate and Urban Studies, said.

Conditions capping excessive gains include restricting the resale of PLH flats to Singaporeans only after an MOP of 10 years, up from the current five, as well as the introduction of an income ceiling of $14,000 per month for subsequent buyers, as this may limit the pool of those who can afford these flats.

For those taking an HDB loan, the maximum loan available is around $800,000 to $900,000, based on the mortgage service ratio, which is set at 30 per cent, and the $14,000 income ceiling, Ms Christine Sun, senior vice-president of research and analytics at OrangeTee & Tie, said.

"The loan quantum may limit the amount that buyers are willing to pay, especially if they do not want to top up too much cash," she said.

Even if rental rates in prime locations tend to be higher, restrictions on renting out the entire flat, even after the MOP is over, may deter those who want more flexibility in leasing their property.

While normal BTO flat buyers can sell their flats after 10 years, PLH flat buyers must wait at least 15 years (estimated construction period of five years plus 10-year MOP) before they can sell and upgrade to private property.

"These buyers are likely to miss the opportune time to upgrade or sell as they are locked in for a longer period," Dr Lee said.

On top of that, the restrictions will be in place for at least half of the 99-year lease of each PLH flat before the Government reviews them.

These conditions may render the flats less attractive on the resale market in future, Mr Gafoor said.

Meanwhile, as the PLH model will be applied to only a fraction of the entire BTO supply, with the first batch of PLH flats entering the resale market only after 2035, this may have marginal impact on the private residential market, Mr Nicholas Mak, ERA's head of research and consultancy, said.

The first PLH project in Rochor, to be launched next month, will have a mix of just 960 three-room and four-room flats, excluding another 40 two-room rental flats.

That is just 5.6 per cent of the 17,000 BTO flats to be launched this year. "Hence the impact on the private residential property market will be limited," Mr Mak said.

In addition, buyers who can afford private homes in the prime, suburbs and city fringe areas may not be attracted to the PLH segment.

"Those buying private homes for their own stay are likely to place a high value on privacy, facilities and design. Those buying for investment purposes are unlikely to switch to public housing under the prime model because they want flexibility in leasing or selling, and are seeking capital appreciation within four to five years," Dr Lee said.

Analysts have mixed views on whether the integration of public rental flats in PLH projects, which is aimed at ensuring inclusiveness for lower-income families, will help rein in price growth.

Dr Lee believes that buyers who can afford to pay high prices for public housing in prime areas are likely to prefer those without rental units.

But other observers say the number of rental flats is just a fraction of the entire PLH project and will therefore not likely have much of an impact on resale prices, which are still very much driven by location, market demand and supply.