Does progressive payment for new projects fuel high new condo prices?

[SINGAPORE] Singapore residents love new condo homes. Some recent major condo launches have achieved sales rates exceeding 80 per cent or even 90 per cent during their launch weekends.

Meanwhile, various new condo launches have set benchmark prices in their locations. A new condo unit might fetch a premium of 40 per cent or more on a per square foot (psf) basis over a resale unit nearby.

Various factors help explain the price gap between new and resale units. For example, new condos may have more efficient layouts as well as better finishings and facilities. Some buyers might be enamoured by having a brand-new home.

Importantly, a new 99-year leasehold condo comes with a longer land lease outstanding than a resale condo with an initial 99-year lease.

Still, could the practice of selling uncompleted new units off plan well ahead of their completion be a key contributor to the huge psf price gap between new and resale condo homes?

Selling uncompleted homes

In Singapore, a condo project might launch sales within 18 months of a developer acquiring a site.

Buyers of uncompleted new condo units typically pay for their purchases using the progressive payment scheme (PPS). A buyer pays a cumulative 20 per cent of the purchase price upon signing the sale and purchase agreement. Other payments follow based on a project achieving specified construction milestones. 

When a project achieves completion as marked by obtaining temporary occupation permit (TOP), at which point a buyer can collect the keys to his new home, the buyer pays 25 per cent of the purchase price. The last 15 per cent of the purchase price is payable when a certificate of statutory completion is obtained, which may follow TOP.

Sure, developers here generally have a good track record of delivering completed homes of a satisfactory quality to buyers who bought them off plan.

Nevertheless, letting developers sell uncompleted homes might encourage more aggressive behaviour by developers and buyers.

Developers may submit more bullish bids for housing sites because they can lock in sales and significantly de-risk a project should they achieve strong sales of uncompleted units when a project is launched. 

The payment proceeds from buyers of uncompleted homes can help fund a project’s construction thus lowering a developer’s financing costs and improving a project’s internal rate of return.

In turn, high housing land bids can contribute to high new condo prices as land cost is generally the largest component of a new home’s cost. 

More critically, buyers might act aggressively when buying uncompleted condo homes using the PPS.

A buyer of a new uncompleted unit may not need to bother about servicing housing loan repayments until some time after he has bought the unit. 

Possibly, a buyer is counting on earnings rising in the period between buying an uncompleted home and the unit’s completion. Might a high-flying professional be expecting his pay to climb by more than 25 per cent over a three-year period because of promotions or securing a new job?

Also, a buyer of a new uncompleted condo unit who is upgrading from an existing home might factor in selling his current home three years later for a significantly higher price to help fund his purchase. Maybe the said party expects the price of his existing home to rise by mid-double digits over three years.

Might an assumption of rising earnings go awry should a person lose a job amid a job market that is now subject to much disruption? Could assuming a higher selling price for an existing home in future prove to be wrong because of economic weakness?

High new condo prices

The Business Times ran a recent article which asked whether, with rising land bids for housing sites, the new normal for new condo prices would be S$3,000 psf.

If a new 1,000 square feet condo unit costs S$3,000 psf, the price works out to S$3 million.  

A S$3 million home will be about 10.1 times the annual income of the 80th percentile of resident households and 12.9 times the 70th percentile’s annual income.

In 2025, the monthly household market income among resident households of the 70th percentile and 80th percentile were S$19,394 and S$24,673 respectively, or S$232,728 and S$296,076 per annum respectively. 

Also, consider a household who sells their Housing & Development Board (HDB) flat to upgrade to a new S$3 million condo home.  

If the household funds their new purchase using equity:debt of 25:75, the said household needs to find S$750,000 in equity – which could come largely from net proceeds of the sale of the HDB flat after paying down any outstanding loan.

The monthly loan repayment on a 25-year loan for S$2.25 million amounts to S$9,537 assuming annual interest rate of 2 per cent.

Should a buyer be unable to secure a loan for 75 per cent of the condo home’s purchase price, he would need to raise more equity.

Recently, policies were rolled out to cool the executive condominium (EC) market. Among other measures, for EC sites with tender closing dates on or after May 8, the minimum occupation period for EC owners is extended from five years to 10 years and developers are not allowed to offer the deferred payment scheme (DPS) for uncompleted ECs.

As it stands, DPS, under which buyers pay 20 per cent of the purchase price upfront, with the remaining 80 per cent deferred until the project obtains TOP, is not permitted for condo projects.

Is there risk of policy intervention to cool new condo prices? For one, allowing new condos to be sold only upon obtaining TOP may help to lower prices as well as risks to buyers and the financial system.

Moreover, the playing field between vendors of resale and new homes gets levelled if new homes are sold in a broadly similar manner to resale units – where full payment is made and the said property is handed over roughly around three months after the issue of the option to purchase.

Sure, moderating new condo prices, so locals can better achieve new condo ownership dreams, need not rank high on a policy agenda. Nonetheless, new condo prices can impact prices elsewhere in the housing market.

As new condo prices risk getting too high, it may be worth considering the impact on prices of selling new uncompleted homes using the PPS and whether to keep this practice.