Demand may be strong, but don’t overbuild 5-room BTO flats

THE latest Build-To-Order (BTO) exercise in October by the Housing and Development Board (HDB) drew one of the lowest application rates in recent years.

When applications closed at 11.59 pm on Oct 10, 10,935 applicants were vying for 6,800 flats. This translates to 1.6 applicants for each available unit. 

However, while demand for flats in general was weak, demand for five-room units was strong. Should HDB respond by substantially increasing the number of five-room BTO units?

The application rate for the latest BTO exercise was affected by stricter rules governing the non-selection of units.

Since August, first-time homebuyers who decline to book a flat when invited are relegated to second-timer status for a year. If they then still do not choose a flat, they will be blocked from HDB sales exercises for a year. Second-timers have lower priority and fewer opportunities to book a flat, as at least 85 per cent of BTO flats are reserved for first-timers.

Preference for larger flats

In October’s BTO exercise, the application rate among first-timer families for Plantation Edge I and II in Tengah in the west was 0.9 times, 1.1 times and 1.8 times for three-room, four-room and five-room flats, respectively. 

The five-room flats, with an estimated floor area of 1,216 square feet (sq ft), were priced at S$460,000 to S$568,000 excluding grants. The price range excluding grants for three-room flats (estimated floor area of 743 sq ft) and four-room flats (estimated floor area of 1,001 sq ft) were S$232,000 to S$279,000 and S$353,000 to S$418,000,respectively.      

For Rail Green I and II @ CCK in Choa Chu Kang, the application rate for larger and pricier five-room and 3Gen flats among first-timer and second-timer families was also much higher than for three-room and four-room units.

A total of 857 five-room and 3Gen flats were offered in October’s BTO exericse, making up close to 13 per cent of units launched. Five-room and 3Gen flats were not offered in the mature estates. Could more five-room flats have been launched in this exercise?

Pros and cons of building more larger flats

Singapore suffers from a low birth rate. Total fertility rate per female in 2022 was 1.04. Perhaps making it easier for local couples to secure five-room BTO flats, particularly in mature estates, may help to bump up the birth rate.

Possibly a flat of around 1,200 sq ft is enough to house a couple and three kids, or an extended family with three generations living under one roof.

Moreover, many households may need more space given the widespread adoption of hybrid working where people split their time between working from the office and home.

However, any decision to offer many more five-room BTO units should not be made hastily.

Generally, households in Singapore are getting smaller. The average household size among resident households was 3.09 in 2022 versus 3.24 in 2018 and 3.47 in 2013.

In 2022, the share of resident households with one or two persons was 39 per cent, while that of households with five persons or more was 17 per cent. In contrast, the share of households with two persons or fewer was 31 per cent, and that of five persons or more was 24 per cent in 2013.

Crucially, building subsidised BTO flats is costly. More resources such as funds and building materials are used when building larger units. 

On an overall basis, HDB incurred a net deficit of S$5.38 billion before government grants in the financial year 2022.

The HDB spent S$4.68 billion on the Home Ownership Programme to develop BTO flats and provide housing subsidies and grants in the latest financial year, up 22 per cent year on year. HDB incurs large losses yearly as the amount collected from the sale of flats is lower than the total development cost of BTO flats and housing grants disbursed.

Sure, there are households comprising two persons or fewer who live in condominiums or landed homes with larger floor areas than HDB five-room flats. There are also couples without children and joint singles who buy spacious HDB five-room or executive flats in the resale market.

However, should couples without children or with no intention of having children apply for subsidised five-room BTO units?

Perhaps a two-person household wants a five-room BTO home for the luxury of space or to maximise profit from selling the unit after the minimum occupation period.

Compare the mid-point of the price range of BTO units at Plantation Edge I and II with that of the transacted comparable resale flats. The resale three-room, four-room and five-room units cost S$180,500, S$214,500 and S$217,000 more respectively versus their BTO counterparts.

Moreover, an owner of a five-room unit has more flexibility to earn income from renting out one or two rooms while occupying the unit.     

Many people will naturally seek to get as good a BTO home as possible and maximise profit from buying a BTO unit.

However, resources are scarce. Hence, five-room BTO flats should arguably be reserved mainly for larger families, such as couples with two kids or more.

Carrots and sticks

HDB might want to consider imposing a property tax surcharge on two-person households who buy BTO five-room flats. Also, a clawback of resale proceeds could apply to such households when they sell their five-room BTO home.

The property tax surcharge paid can be refunded together with interest for a young childless couple who buy a BTO five-room flat when they start to have kids.

Singapore enjoys a high level of homeownership. Locals can buy high-quality HDB BTO homes at affordable prices. Still, some people will feel aggrieved at not being able to snag a five-room BTO flat.

Ultimately, given the many needs on the fiscal purse and land scarcity, building many more HDB five-room units need not be a priority.