BTO versus Resale Flat: Which is better for asset progression?

For those who aspire to be property investors, the first step is often the purchase of their own flat, which is the first “rung” on the ladder of asset progression. The flat has to hold its value or appreciate well enough to let them upgrade to a private property. For this reason, the first major consideration is whether it’s better to apply for a BTO flat, or just buy a resale flat, when starting out.

There is actually no single answer to this, as it varies between buyers. You’ll need to weigh up the pros and cons of both options, to understand which fits your plan or timeline better. Here’s what to consider, if you buy with an eye towards upgrading:

Resale flat advantages for upgraders

Most – but not all – first timers today tend to prefer resale flats. It’s common advice to buy a resale flat in a good location, and then sell it as soon as it reaches the Minimum Occupation Period (MOP). These are the main factors to consider:

  • Can buy in a mature location
  • Potentially shorter time to upgrade
  • Save on the cost of temporary accommodation
  • Wider range of grants

Resale flat disadvantages for upgraders:

  • Cash Over Valuation, and potentially higher cost
  • Lease decay and depreciation
  • Renovation costs

1. Can buy in a mature location

BTO flats are rarely launched in mature locations, and are almost always over-subscribed when they are. Resale flats may be the only way to get into a built-up town, and it could be well worth it.

A flat in a mature location, such as Bishan, Queenstown, Toa Payoh, etc. will generally hold its value better. It can also appreciate faster over a five-year period, compared to a flat in non-mature areas like Sengkang, Punggol, Pasir Ris, etc.

As an example, consider the average prices of 4-room flats in Bishan, compared to Sengkang, over the past five years:

4-room flat prices in Bishan have appreciated from $481 to $577 psf over the past five years. In Sengkang, they have appreciated from $406 to $442 psf. Overall, the gains in Bishan are over twice that of Sengkang,

This can make a significant impact on the success of your upgrading plans, especially if you’re intending to do so right after the MOP.

2. Potentially shorter time to upgrade

The MOP is calculated from the point of key collection, not sale. So if you buy a flat that takes five years to build, you would wait an entire decade (five years construction + five years MOP) before you can sell it.

We need to bear in mind that, over this decade, private property prices are continuing to rise. Without fail, every new launch condo is priced higher than the existing developments around it. Historically, it has been difficult for HDB units to keep pace with their private counterparts, in terms of appreciation:

We can see that 10 years ago, condo prices averaged just $1,371 psf. Today, the average is $1,599 psf. For HDB flats, they averaged $397 psf in the last decade. Today, they’ve appreciated to about $427 psf; not a big increase over a 10-year period.

Notice that the average price gap between a condo and an HDB flat has increased over the decade. Hence the longer you wait, the more difficulty you may experience in bridging this gap.

3. Save on the cost of temporary accommodation

Besides counting on the appreciation of your flat, you will have to save up for your eventual upgrade. In your budget estimates, you should factor in the cost of temporary accommodation. A BTO flat requires about three to five years to build – where will you stay in the meantime?

If you need to rent a flat, this can eat into your potential savings. For example, if your rent is $2,000 a month for the whole flat, you would have paid $120,000 in non-recoverable costs by the time you’re ready to move in.

With a resale flat, this is not an issue – it is already built, so you can move in soon after the transaction is complete.

(But if you’re willing to live with parents, etc. in the meantime, this is not an issue.)

4. Wider range of grants

There is a Proximity Housing Grant (PHG) and Family Grant for resale flats, on top of the existing Enhanced Housing Grant (EHG). These are not available for BTO flats. Of course, the amount of the grant, and whether or not you qualify, depends on a range of criteria (visit the HDB website for details).

If you do qualify for more grants for a resale versus BTO flat, it may be the better financial decision. The more you can save, the better your chances of upgrading.

On the downside, you need to consider:

1. Cash Over Valuation, and potentially higher costs

When buying a resale flat, the seller may want more than the actual valuation (e.g. asking for $350,000 for  a flat valued at $340,000). This excess amount is the Cash Over Valuation (COV).

Note that the valuation is only revealed after you’ve agreed on the price, secured the Option, etc.

The COV is not covered by the home loan, regardless of whether you use the bank or HDB. As such, there’s a risk that your initial cash outlay is higher than expected. This doesn’t happen with BTO flats, where HDB’s selling price and the valuation are considered to  be the same.

Regardless of whether there’s COV, a resale flat is also going to be more expensive than its BTO counterpart, in the same location. This is due to two factors:

The first is simply market appreciation of the flat, such as if the desired area has become more mature / built-up. The second reason is competition: when you try to buy a resale flat, you are competing with the pool of buyers who cannot get BTO units. This includes higher-income buyers who have bust the HDB income ceiling, Permanent Resident families who cannot buy BTO flats, anyone who urgently needs a home and can’t wait for construction time, etc.

The higher initial cost could potentially offset any gains upon resale.

2. Lease decay and depreciation

HDB flats are on 99-year leases. As a flat approaches the end of its loan tenure, its value will begin to drop:

(Note that the real results can be quite different from the data, as the transaction volumes of very old flats are low; they can be quite volatile).

Simply put, it’s not a good idea to pay high prices for a very old flat (e.g. 40 years or more), as there’s a chance that depreciation will result in minimal to no gain. The saleability of the unit is also affected; older flats may take a longer time to sell at a good price.

3. Renovation costs

It isn’t always true, but in general an older flat will cost more to renovate. You may need to break up the existing interior, and install new flooring, cabinetry, etc. This is different from a BTO flat, which tends to have the basics built-in, and can even just be furnished with minimal renovations.

In addition, older flats may require more in the form of maintenance and repairs. I can usually help my clients to estimate the probable costs, as I have been in construction before; do contact me if you want me to look over a property.

BTO flat advantages for upgraders:

Apart from the factors mentioned above, such as potentially lower renovation costs, no COV, and so forth, the other details to note are:

  • You could get lucky and land a BTO flat in a mature location
  • Almost always sees gains when sold right after MOP
  • Can benefit from the transformation of non-mature to developed estates

1. You could get lucky and land a BTO flat in a mature location

HDB flat rebound

Sometimes, it’s just a matter of luck; such as if you landed a flat in Bishan or Toa Payoh (Bidadari) in the November 2020 launch exercise. This is almost always a clear win, as you’re getting a much cheaper flat, in a location where most people need to buy resale.

If it happens, congratulations! But if it doesn’t, you may need to look at resale options after all.

2. Almost always sees gains when sold right after MOP

BTO flats tend to be consistent in this regard. They are bought for cheaper than resale units – and when sold after five-years, they almost always see gains. Part of the reason is that, being so new, there is no lease decay issue (while still allowing the buyers to move in right away).

This is not always the case with resale flats that are bought at a premium (e.g. high COV), or which are very old.

3. Can benefit from the transformation of non-mature to developed estates

An example of this would be the changes in the Jurong Lake District, which turned the primarily industrial area into a retail powerhouse and a “second CBD”.

The Clementi area, once considered a quiet and sleepy town, has seen strong gains from the development of nearby Buona Vista and the Holland Village identity node. Likewise, flats near the Kallang area saw a boost in values, with the opening of the Singapore Sports Hub, and the connected Kallang Wave Mall.

The only real way to “predict” these changes, however, is to familiarise yourself with the URA master plan. Try to envision what the area will be like, by the time you sell your flat. As it may be anywhere from eight to 10 years by the time you sell your BTO flat, chances are some of the planned developments would already be in place. Such transformations can result in higher than expected gains.

Ultimately, your decision should be shaped by the specific unit, rather than general principles

There are always exceptions to the rule, when it comes to property. There are old resale flats that manage record gains, just as there are sometimes – albeit rarely – BTO units that don’t see gains right after MOP.

What I’ve mentioned above are general principles; ultimately, you’ll need to assess each flat on its own merits. I suggest speaking to a property professional, as even a 15 or 20 minute conversation can pay off for years to come. Do drop me a message for further help; and you can also follow me on Ron Chong Property.sg for the latest news and updates.

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