Homeownership: Buying A BTO Flat Is The Optimal Choice

May 6, 2022

Blocks of HDB flats in Bishan. Credit: The Straits Times

Securing a build-to-order (BTO) HDB flat is not easy. For 4-room units in non-mature estates, the application rate can exceed 3 times, and the rate is much higher in mature estates.

Some people may choose to buy an HDB resale flat, an executive condominium unit or a private home instead. Buying a resale HDB or private home allows one to move in fairly quickly, versus waiting several years to secure and move into a BTO flat.

Should a first time home buyer, who cannot get housing grants, buy a private home?  If one aspires to private homeownership and home prices rise over time, perhaps it does not pay to be tardy in buying a private home.

A seasoned investor told me that one should try to buy the most expensive home that one can afford. Based on this thought, I wondered if a couple, who are buying their first home, should opt to buy a private home instead of a BTO unit.

Buying BTO Versus Private

I ran a simulation comparing the purchase of a BTO unit with a private condominium unit for a couple with S$360,000 in cash.

Under the buy-BTO scenario, the couple buys a 4-room flat in a non-mature estate for S$360,000, without taking out a loan.

I assume the price of a comparable older resale flat is around 30 per cent higher than that of the BTO unit, and thus apply a 40 per cent premium to the price of the BTO unit, which gives it a theoretical market value of S$504,000 today.  

Over 10 years, I apply annual growth in value of 2.7 per cent, which is the simple average of the 10-year and 20-year compound annual growth rate (CAGR) of the HDB resale price index for the period to 2021.  At the end of 10 years, the BTO unit is worth S$658,000.

If the unit is sold, profit on purchase cost is S$298,000 and net cash generated is S$658,000.

Under the buy-condominium scenario, I assume the couple buys a S$1.2 million resale home in the suburbs of around 900 square feet, that is close to the size of an HDB 4-room flat, with the help of a loan of S$840,000, which is 70 per cent of the home’s value.

I apply annual growth of 2.7 per cent, which is the simple average of the 10-year and 20-year CAGR of the Urban Redevelopment Authority’s (URA) private home price index for the period to 2021.  The condominium unit is worth S$1.57 million after 10 years.  Excluding transaction costs, profit on purchase price is S$370,000 if the unit is sold. 

I assume the home loan is taken for 25 years at an interest rate of 1.7 per cent per annum.  If the unit is sold after 10 years, the net cash generated, post deducting the outstanding principal of S$546,000, is S$1.02 million.

From the above, the profit and net cash generated is greater for the couple if they take on a loan and buy a private home versus buying a BTO flat.

However, further analysis shows that buying a BTO flat is optimal. In my simulation, the couple needs to fork out around S$41,300 in loan repayment annually when buying the condominium unit, which works out to S$413,000 over 10 years. By adding this amount to the cash generated from the sale of the BTO unit, the net cash is S$1.07 million under the buy-BTO scenario.

If the sum of S$41,300 per annum is invested to generate an annual return of 4 per cent, one gets S$496,000 after 10 years, which makes the buy-BTO scenario even more attractive.  

With the buy-BTO scenario, the key is to save and invest the funds that would be used to service mortgage payments under the buy-condominium scenario.  

Buying An Expensive Home

Still, buying as expensive a home as one can afford is worth considering. In the buy-condominium scenario, the gain is S$250,000 when the home is sold after 10 years, post deducting initial equity, principal repayment and loan repayments from the sale price.  

The gain represents a return on equity of 69 per cent or a simple average of 6.9 per cent per annum, which exceeds the 2.7 per cent annual growth in value of the home. In sum, the use of leverage boosts the return on equity.

Paying more to buy a home which is nearer to an MRT station or a popular primary school, or has a better facing or configuration, can make it easier to sell the said home subsequently. Also, one may pay more to buy a home that is built by a reputable developer for the better design or building quality, which can help the unit age better.

Spending more on a home for owner-occupation may give greater consumption value and investment return. But the woes plaguing property groups that take on excessive leverage should remind home buyers to be prudent.  

Taking a multi-year home loan is a major commitment. Problems can arise when one cannot service monthly repayments. Also, interest rates are rising amid high inflation, which makes home loans more expensive.

Invariably, buying a BTO flat gives one a margin of safety as these flats are subsidised.  In an active HDB resale market where prices are driven largely by market forces, one may be able to sell the BTO flat easily and profitably. HDB resale prices rose for the eighth consecutive quarter in Q1 2022, up 2.4 per cent from Q4 2021.

The minimum occupancy period (MOP) before one can sell a BTO flat is five years. For owners of Prime Location Public Housing flats, the MOP is ten years.

The optimal first step in the homeownership journey for eligible Singaporeans will likely be to buy a BTO unit. In May, HDB will offer about 5,300 BTO flats in areas such as Bukit Merah, Jurong West, Ghim Moh, Toa Payoh and Yishun.  

For first-time BTO applicants, do your homework and hope luck shines.

Credit: Business Times

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