Over the weekend, there was an unexpected burst of excitement among property agents, developers and investors over Executive Condominiums (ECs).

On Thursday, Minister of National Development Khaw Boon Wan had mused aloud, at an Our Singapore Conversation (OSC) dialogue on housing, that “something is wrong somewhere” with the EC scheme as it stands today. He hinted that the scheme should be tweaked.

Many questions have since been raised by the media, property agents and investors as to where the EC scheme might be headed, but there are not enough details to provide clarity.

What has happened, however, is that while it is the authorities’ intention to stabilise residential property prices, the Minister’s comments have sparked interest in ECs among investors who had not previously considered ECs but are qualified to apply.

Their logic goes like this: In case the EC scheme is shelved, I might lose the opportunity to make a capital gain on a subsidised public housing product that automatically becomes private property 10 years after completion.

Advertisements have sprung up encouraging prospective clients to give ECs serious consideration; I would not be surprised if the interest level and the pace of sales has increased over the past four days.

Perhaps it would be more prudent for policymakers to consider the views and suggestions raised during the OSC in totality, and signal any changes to policy only after careful consideration. This would avoid guesswork and speculative behaviour that could destabilise the market.

ECS AND INEQUITY

I had questioned the raison d’etre of the EC scheme in an earlier commentary for TODAY (“Are ECs still relevant?”, Jan 18). The sandwiched class of the mid-1990s when ECs were introduced is very different from the sandwiched class of today.

The market size of HDB flats and private residential apartments has grown significantly, from about 806,000 units in 1995 to 1.2 million last year. Wages have increased and homebuyers’ choices have widened.

If a family considers themselves sandwiched because their household income is above the S$10,000-a-month ceiling that qualifies them for Build-to-Order (BTO) flats, then it is because they are not willing to consider resale HDB flats or older private properties.

With ECs, we appear to be keen to satisfy the aspirations of a small group of relatively high-income families, who earn up to S$144,000 annually, and who want new homes that are subsidised by taxpayers. In terms of priority for public housing, where does the EC scheme rank, given that we have yet to meet the needs of some families that are economically or otherwise challenged?

Mr Khaw also referred to “a sense of inequity” in that under current property market conditions, there is a “substantial gap” in the subsidies that EC buyers receive from the Government compared to the subsidies for those who buy HDB flats.

I do not see how this is so. ECs sit on government land that is sold to private developers. The Government makes a profit on the land sales, albeit a smaller profit than if the land were sold for developing private condominiums.

So in a way, there is some “subsidy” here in terms of profit opportunities foregone.

ECs are then sold to buyers and developers derive their profits here. EC buyers who qualify for grants receive the grants as a subsidy by taxpayers.

For example, in Punggol Central, the land for private condominium Parc Centros was tendered on Dec 15, 2011 for S$354.37 psf per plot ratio; the land for Waterbay, an EC, was tendered three months later on March 29, 2012 for S$319.69 psf ppp. The foregone profits to government coffers — the subsidies for EC buyers — is about S$14 million.

By comparison, HDB BTOs are built on state land and priced at the cost of land plus construction with a small profit to the HDB. The foregone profit opportunities are far greater than for ECs. And, aside from the grants that eligible BTO buyers enjoy, the selling price does not include an additional layer of profit for private developers.

Therefore, at the point of purchase, BTOs are more heavily “subsidised” than ECs.

PROFITS UPON RESALE

Ten years after the Temporary Occupation Permit is granted, ECs become private condominiums without the owners having to pay additional costs, unlike when HUDC estates are privatised. Some may be envious that EC buyers get higher profits when they sell.

But do not forget that EC buyers fork out a bigger quantum to fund their purchases, and very likely they shoulder a higher burden in terms of mortgage payments.

In the event of a severe market downturn, a S$300,000 BTO flat might suffer a loss of S$50,000 (or 17 per cent loss); but a S$800,000 EC unit could decline by S$200,000 in value (25 per cent loss).

This is a simple equation of risks versus rewards. And we have not even accounted for the costs of EC ownership in terms of interest expenses, maintenance fees, and so on.

Having said this, I am unable to come up with strong reasons for why ECs are relevant in today’s context. Especially not when the scheme caters to families earning six-figure annual household incomes.

I say, let us send this cow to the slaughterhouse.

ABOUT THE AUTHOR:

Ku Swee Yong is CEO of real estate agency International Property Advisor and the author of two bestsellers: Building Your Real Estate Riches and Real Estate Riches.