10 years minimum occupancy, clawback of resale proceeds – but PLH flats can still be good buys

ONE wonders if prime location public housing (PLH) flats are proving not all that popular with eligible Housing and Development Board (HDB) build-to-order (BTO) flat buyers. In the last BTO exercise, the application rate among first-time non-elderly applicants for four-room flats was 3.7 times for the PLH flats in Bukit Merah, versus 17.2 times and 8.7 times for non-PLH flats at Sun Plaza Spring in Tampines and Central Weave @ AMK in Ang Mo Kio respectively.

I was excited when details of the PLH model were unveiled just over a year ago, as the PLH model aims to ensure that new public housing built in prime, central locations like the city centre will remain affordable, accessible and inclusive for Singaporeans.

More onerous conditions apply to buyers of PLH flats. PLH flat owners will need to occupy their flats for at least 10 years – the minimum occupancy period (MOP) – before they can sell their flats in the open market or invest in a private home. The MOP is five years under the BTO model. While PLH flat owners can rent out their spare rooms, renting out the whole flat is not allowed, even after the MOP, whereas renting out the whole flat is allowed after the MOP under the BTO model.

As new PLH flats are priced with more subsidies, buyers of PLH flats from HDB will pay HDB a percentage of the higher of the resale price or valuation upon the sale of their flats. The amount is fixed at 6 per cent for the PLH flats at Havelock Hillside and Alexandra Vale in Bukit Merah. 

Additionally, resale PLH flats are ringfenced for buyers who meet the prevailing eligibility conditions for buying flats directly from HDB. Groups who can buy three-room and larger HDB resale units but not resale PLH flats include households comprising only permanent residents, singles aged 35 and older, and couples whose monthly income exceeds the income ceiling of S$14,000. 

Simulation

Arguably, one may fare roughly as well financially from buying either a new PLH or a new non-PLH unit.

I simulate the potential returns after the holding period of 10 years from buying a four-room new non-PLH unit versus a new PLH unit. I exclude housing grants and assume resale prices grow by 3 per cent annually.

With the non-PLH unit, I use S$410,000 as the purchase price and S$608,000 as the starting market price. The midpoints of the price ranges of the four-room BTO flats at Sun Plaza Spring and comparable resale flats nearby are S$410,000 and S$608,000 respectively.  

With the PLH unit, I use S$626,000 as the purchase price and S$846,000 as the starting market price. The midpoints of the price ranges of the four-room PLH flats at Alexandra Vale and comparable resale flats nearby are S$626,000 and S$890,000 respectively. To get the above starting market price, I apply a discount of 5 per cent to S$890,000 to reflect the effects of a narrower pool of eligible buyers of resale PLH units. I knock 6 per cent off the resale price after 10 years, being the subsidy recovery.  

The result is the absolute price gain after 10 years – for the PLH unit is S$443,000 versus S$407,000 for the non-PLH unit. However, one’s percentage gain from the non-PLH unit is higher versus the PLH unit. Certainly, the simulation can be fine-tuned in many ways, such as to show return on equity or to account for timing differences in completion of the new homes.

Moreover, the results depend on various factors. The price appreciation over 10 years could differ among locations. Also, how large is the effect of the narrower pool of eligible buyers of resale PLH units?

Demand for resale PLH units

The prospects for PLH units in the resale market may be fine. Firstly, a household earning S$168,000 (12 times of S$14,000) a year that is comfortable buying a home costing six times of annual income, may be fine paying S$1 million for a home. As is, the HDB’s income ceiling does not take into account bonuses earned by salaried employees.

Also, any rise in the income ceiling to be eligible to buy flats from HDB directly, would mean increased buying power for resale PLH flats. The income ceiling was raised thrice in the last decade – in 2011, 2015 and 2019. 

Secondly, even with applying an income ceiling to buyers of resale PLH flats, there can still be resale PLH flat buyers who have strong purchasing power. For example, some young couples, who meet the income ceiling criteria, could receive parental help, to buy resale PLH flats. Some sellers of BTO units may also be happy to recycle proceeds into buying well-located PLH units.

Additionally, some people who move from private homes to public homes may choose a centrally located PLH unit. Such persons may be flushed with liquidity from the sale of their private homes. Buyers of PLH flats must not own a private home or have disposed of any in the last 30 months.

Thirdly, at the 10-year mark when a PLH flat bought from HDB can be resold, valuation will not be hit by concerns over potential land lease decay. The price difference for land with 94 years land lease outstanding, which is applicable to a BTO unit that hits its MOP, and land with 89 years land lease outstanding is around 1.2 per cent, based on a table showing leasehold values as a percentage of freehold value used by the Singapore Land Authority.

While the restriction on renting out the whole of a PLH flat reduces the ability to earn rental income, one may in any case be only able to rent out spare rooms, if one needs a place to stay. And rooms at PLH flats may be popular with tenants due to their central locations.

Transaction and relocation costs of moving homes are not immaterial. Should one snare a PLH flat, staying in the unit for at least 10 years is not onerous as one has a home in a choice location. Perhaps, if PLH units are not heavily oversubscribed, there is even more reason to apply for a PLH flat.

In the upcoming BTO exercise in November, applicants may wish to seriously weigh the merits of applying for any PLH flats that may be on offer.