The tried and tested method of upgrading from an HDB to a private condominium has been going around for years. Many property agents have been advocating this form of upgrading as a way of accumulating wealth for the average wage earner. Most people are content with staying in a private condominium.
However, what if you are aiming for a different form of housing?
We believe that a large group of Singaporeans are still not serviced well, and these groups are the middle-high income wage earners that are exploring options to move into landed housing.
Landed housing is usually reserved for old-money families and business owners, so it is pretty unusual for wage earners to do it. This isn’t impossible if these investors are willing to put the time, effort and persistence into it.
This article provides a hypothetical situation in which the homeowner is interested in moving to a landed property from their initial purchase of an Executive Condominium (EC). We will set the approximate duration to attain landed housing in 10 years.
There are some limitations to this case study, which we will address at the end of the article.
Transaction Prices of Property Types
The numbers shown in the sales transaction trend above compares the different property types in Singapore and their average capital appreciation rate over 15 years. This rate is then divided over 15 years to present a per annum rate.
Our Ground Rules
We opt for leasehold private condominiums in this transition stage as it provides a significant pricing advantage as compared to freehold properties. Prices for landed properties, however, are an average between these tenures, as we want to present a realistic option for both sides.
We have decided to opt for average prices of 3 Bedrooms and larger, as the property is used for own occupation of your family. Going with an average price of 2 Bedrooms or smaller may be more affordable initially, but it might be unrealistic in terms of functional space if you have a big family.
HDB flats are not used in our example as I believe there are many articles that present the different scenarios of upgrading to a private property. In addition, HDB flats appreciate slowly - 5.85% p.a., and we will rather you aim for an EC to be your first property if you can afford it financially so as to ride on its good compounding effect.
Landed property prices are included to provide you an illustration between the difference in price between the housing types. Due to computation error, we are unable to provide an accurate p.a. from this chart. We will be using the SRX Property Index (SPI) Chart, which will be shown later.
Executive Condominiums
Valuation price of EC: $1,044,283
Capital Appreciation from $1,044,283 to $1,560,858 (2020-2025) (5th Year, fulfilment of MOP) (8.37% p.a)
Buyer Stamp Duty: $26,371.32 (Pay upfront with cash first, CPF to be used to be deducted later)
Maintenance Fees: Average $250/month | Total Cost for 5 years: $15,000
Cash portion: Bank loan: 5% Cash: $52,214 | 20% CPF funds: $208,857
Since you are splitting cost between your partner and you, the monthly installment will cost $1350. Based on the Mortgage Servicing Ratio, you will need to each earn a minimum income on $4500/month.
Our Advice (CPF Funding)
If a large portion of the price is being paid for through your CPF funds, this amount will have to be paid into your CPF Ordinary Account (OA). Usually, this does not matter as you will be using these funds for your next purchase. However, since you are intending to upgrade to a private condominium, a significant cash outlay is needed for the down payment.
Private Condominiums
If you are content with your EC and will like to wait out to purchase a landed property directly, we do not recommend this procedure as there will be a significant cash outlay. You will not be able to utilize your home as an investment vehicle efficiently.
ECs are generally in a separate price bracket from private condominiums, and not upgrading will require you to work much harder than your asset.
Amount your EC costs in 2025: $1,560,858
Valuation price of private condominium (2020): $1,629,471
Valuation price of average condo by 2025 based on 7.55% p.a: $2,344,762
Capital Appreciation from $2,344,762 to $3,374,044 (2025-2030) (Holding Period of 5 Years) (7.55% p.a)
Buyer Stamp Duty: $78,390 (Pay with cash first, can use CPF)
Maintenance Fees: Average $400/month | Total Cost for 5 years: $24,000
Cash portion: Bank loan: 5% Cash: $117,238 | 20% CPF funds: $468,952
Since you are splitting cost between your partner and you, the monthly installment will cost $3035. Based on the Total Debt Servicing Ratio (TDSR), you will need to each earn a minimum income on $5058/month.
Our Advice (TDSR Limits)
Due to the TDSR limitations, you will most likely be unable to take other kinds of loans if you barely past $5000/month. Plan ahead wisely. Remember that the same rules for CPF usage still applies here.
Landed Homes
You did it! After sticking to your game plan for 10 years, you finally achieved your goals! We understand that it is no easy feat, so have a breather before making your purchase.
Purchasing a landed property is a challenge, but maintaining the property and its other miscellaneous fees are other duties which you will need to work out, but that is a topic for another day. Let us move on with the fun bits first!
Earlier I mentioned using the SPI chart instead of the 99.co Sales Transaction Trend. When we compare the same duration from Jun 2005 to Jun 2020 = It is about 8.64% p.a.
Current decent terrace properties are going for ~$2,000,000 (2020). There are definitely more affordable options in the market, but those require heavy renovation works for restoring the property. These costs can easily run up to more than $150,000. Going through this route is an option, but do take into account your TDSR for renovation loans.
Amount your private condominium costs in 2030: $3,374,044
Valuation price of terrace house (2020): $2,000,000
Valuation price of terrace house by 2030 based on 8.64% p.a: $4,580,655
Buyer Stamp Duty: $167,826 (Pay with cash first, can use CPF)
Maintenance Fees: Dependent on your property and you
Cash portion: Bank loan: 5% Cash: $229,033 | 20% CPF funds: $916,131
Since you are splitting cost between your partner and you, the monthly installment will cost $5,929. Based on the Total Debt Servicing Ratio (TDSR), you will need to each earn a minimum income on $9,882/month.
Our Advice (Part Share)
At this point in time, we believe that both partners are drawing a sizeable income, our general recommendation is that since this will be your only property owned by joint ownership, it will be used for own occupation and not as a rental property.
We recommend that you start building up your property portfolio by looking at private condominiums that are good purchases. Do a part share – One partner buys over the share of the other partner. This is to defray ABSD costs, by allowing the other partner to purchase a new property without an additional count of property. Get a refinancing done on the existing landed property. The partner with the higher-earning power should hold the title for the landed property, while the other will hold the title for the new property in mind.
Limitations to Case Study
Timeline Projection
We chose our overall timeline to be 10 years, due to the increasing prices of properties. The compounding value of properties can be very aggressive, and the longer you put off upgrading, the more costly it will be. The first five years is compulsory due to the MOP set for ECs. Whereas for the next five years, 3 years are towards the holding period due to the Seller Stamp Duties (SSD). The next two years should be contributed towards
The ideal age will be someone in their mid to late 20s. As we are opting for a stretch tenure of 30 years.
Starting early allows you to stretch the loan tenure without affecting your Loan-to-Valuation (LTV). Should the combined years of your Income Weighted Average Age (IWAA) and loan tenure (30 years) falls above 65 years, the banks will reduce your LTV from 75% to 55%. The later you start the journey, the more upfront cash you will have to pay.
With a lower monthly installment, the family will be able to contribute more towards their savings for emergencies, and contribution towards their cash down payments for their next property.
This projection excludes other variables such as your other monthly expenses. So remember to account for that too!
Past Data Might Not Guarantee Future Performance
The p.a compounding rate is not completely accurate, but it best represents the volatility of the market, due to the global financial crisis (2008-2009) and the implementation of the cooling measures post-2009.
Pre 2005 was not included as Singapore’s strong economic growth in the 70s-80s and the housing boom in the 90s represent a different scenario from today’s challenges and might overly skew the p.a compounding rate to be far more positive.
COVID-19 provides a different set of challenges, but we believe that Singapore’s real estate market will remain resilient.
Prices in The Open Market
We based our compounding rates based on prices in the open market to correctly portray general market sentiments. If you decide to purchase fire sales, distressed sales, or auction properties, you will definitely be able to get a better price and ultimately, expedite your journey to obtaining a landed property with better cash flow.
Loan-To-Valuation Dependent
Before starting out on this journey, we generally recommend you to have enough cash reserves when you purchase your EC.
Negative Sale
Under certain circumstances, you might have purchased a unit that will result in a negative sale. Be sure to do your homework carefully so that you are able to purchase a good investment. We have numerous articles on our website which goes about selecting the right unit, so do check these out.
Other Useful Articles
Extrinsic Factors - (Economy Growth)
Housing prices will be affected by other economic drivers, as wages will be affected and driving the consumers purchasing power for homes. This causes the housing market to typically trail behind. We don’t expect a massive correction in prices due to the cooling measures which are set in place.
Housing Policies
At the current rate that the Singapore housing market is moving, we don’t foresee any new cooling measures being implemented. Rather, there might potentially be removal or relaxation of some cooling measures in order for transaction momentum to resume post-COVID-19. There is however pent-up demand for real estate, so we do not expect a great degree of change.
Refund CPF/EC Grants After Sale
After the sale of the property, proceeds will generally be refunded back to your CPF account first. This includes CPF funds used for payment of your property including its accrued interest and EC grants which were given to the purchase of your EC.
Hold Properties for Rental?
If you are interested in holding properties for rental, it can get really expensive, because you are moving between different property types. In addition, the loan that you are able to get will be reduced significantly, if you are still servicing your first housing loan. The LTV for your second housing loan will be 45%, which means that you will require a significant cash outlay.
Renting out your previous home might help with your monthly loan repayments to the bank, but it might interfere with your long-term goals, should you be required to dip into your cash reserves should the property be vacant for any period of time or times of financial uncertainties.
Disclaimer
This analysis was a very rough projection, and we strongly advise you to consult a banker and real estate agent to ensure its feasibility.
Let us do a projection timeline for you! Contact us at +65 96329840 or send your queries to estatemagnates@gmail.com! Our consultations do not have a charge, so let us assist you!
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