Curbing The HDB BTO Lottery Effect

The majority of us may be familiar with the supposed Singaporean ‘rite of passage’: get married, buy your first BTO, get the grants, sell it later for a good profit and upgrade to a condo. Whether or not we subscribe to the idea, there’s no denying that this progression has help many people move forward with their property dreams in years past.

However, the quantum of profit earned when selling one’s BTO flat has also been known to vary extremely widely. For example, if you were lucky and secured a 40th floor flat with unblocked views in a BTO project next to an MRT station, you could be looking at a juicy profit, perhaps as much as $500k (or more!) above your purchase price. In contrast, the others who secured an average type BTO flat might see only a modest $200k gain on resale.

This is referred to as the “Lottery Effect” – the luck of the draw in bidding for a BTO flat and the financial gains that come with it. Doesn't quite agree with Singapore’s meritocratic approach to life huh?

Why Is It A Problem Today?

HDB BTO flat prices have risen steadily through the years, to account for rising land value across the island. Perhaps in the past, the price disparity between the buying cost of a “preferred” BTO project (i.e. one that’s highly coveted because of location, etc.) and a less coveted one may not have been that large, so you could argue that most people could still afford the “preferred” one if they were lucky to get a queue number for it.

The “windfall” profit at stake was great, but not crazy big (remember, million-dollar HDB flats weren’t yet the trend merely a few years ago!).

Buyers of BTO flats in non-mature estates generally see much smaller gains than those in mature estates. In extremely popular locations (e.g. Queenstown), the gains seen, especially since 2021, have been even greater.

However, that price disparity has grown quite large today, such that if you were a couple in your mid-20s you’d likely need help from your parents to afford the downpayment for the “preferred” flat – an advantage that not everyone has.

Note the large difference in prices between a BTO flat launched in a preferred location (Central Weave, Ang Mo Kio - right in the town centre and beside the MRT) versus one that's to be built in a less popular area. Many will argue that Central Weave could only be afforded by those with additional financial support.

Therein lies the problem.

If this were to continue, there is a possibility that these preferred BTO projects could end up being applied for exclusively by the more well afforded…whom in turn will further benefit from the supposed windfall profit in upon future resale.

Not good for “equality” at all.

The Government's Solution

On 27 October 2021, HDB unveiled a new Prime Location Public Housing (PLH) model which it planned to classify future BTO projects in highly coveted locations under. Tighter resale conditions and a 10-year MOP are some of the features of this model.

The first BTO project launched under the new Prime Location Public Housing model was River Peaks at Rochor on 17th November 2021.

More recently at this year’s National Day Rally, PM Lee announced an additional category of flats known as Plus flats and the abolishment of the old "mature & non-mature town" reference. Plus flats carry similar resale conditions as PLH flats.

With this reclassification of future BTO projects, the government hopes this will eliminate the lottery effect and ensure a good and fair socioeconomic distribution of people across public housing.

New HDB BTO flat classifications which will apply to launches from H2 2024 [Info Source: HDB]

What the government is effectively doing is to reduce the future supply of buyers for these PLH/Plus (for convenience let’s refer to them collectively as “premium” flats from here).

Simple economics tells us that yes, this should negate the ‘lottery’ effect – less demand = harder for sellers to achieve a higher price and benefit from the 'windfall' gains in future. On paper it truly does sound fairer for all. We can’t keep letting a lucky few folks win a premium flat, enjoy the benefits of living in it AND pocket a windfall profit by selling it.

Restrictions - Too Harsh?

However, are the restrictions on ownership of these flats a bit of an overkill? Specifically, the 10-year MOP seems a little excessive.

Sure, the main idea of bagging a premium BTO is to enjoy living in it, not to flip it for a profit a mere 5 years later.

However, 10 years is a long time and a lot of things can change for many people, even if at the start they claim they’re confident “yes I want to live here till the day I die”. These could be a serious turn-away for many future resale buyers. For sure, would-be buyers will be keeping their ears open to hear how HDB will deal with cases of appeals to break the MOP.

Perhaps the MOP could be something shorter, yet longer than the existing 5 years for standard flats - 7 years maybe? This slightly lengthier requirement should suffice to serve its purpose.

MOP aside, the collective effect of the restrictions seem to go beyond merely curbing the lottery effect. It feels as if these flats will end up being a completely different category of public housing.

'Standard' Flats in the Vicinity and Existing Flats in Prime Areas Could Be The Real Winners

We can’t forget that built right beside some future PLH or Plus flats will be…standard flats. These flats already exist and new ones will continue being built. Even if they aren’t the ones right beside the town centre or MRT station, they may just be one block further away and so there may not be much differentiating them from their presumably more popular counterparts.

At the same time, there are the existing 'premium' projects such as SkyParc@Dawson, SkyOasis@Dawson, etc. which although clearly have extremely premium attributes - high floor units, unblocked views of the whole island, great location - will not have the new model restrictions tied to them.

This is interesting – will these flats then become the new MVPs* in the HDB market since they may end up being more highly sought after with their freedom from the draconian restrictions attached? Some of the Dawson flats have already begun transacting above $1 million.

What's the point of the new model if the lottery effect will still be enjoyed by these existing flats?

(*"most valuable players")

The Takeaway

While the latest policy shifts that see the introduction of Plus flats (and the previously implemented Prime PLH flats) are largely a good step forward in ensuring public housing policy remains fair for all, there are areas which may need further thought.

The government does need to study the roll-out of the model more carefully as whether or not the policy will be effective will only be seen a good 15-20 years later after the first PLH BTO project is built and its first owners have served their 10 year MOP.

If the policy does not work, we would have spent nearly two decades going down the wrong road. In addition, the effect this has on the popularity and pricing of Standard flats will also have to be watched, because a new category of flats could well emerge and be the ones taking the windfall profits – the ones built right next to the Plus flats.

Lastly, we can't help but ponder whether the model should have been applied to existing flats - at least on their next resale - to accelerate the effectiveness of the intent behind the policy move.