Now, the bad news: BTO prices outpace resale market

Rivervale Arc

Super appreciating assets

Before we start, have you read the good news yet? If not, you might want to check it out first. Here I am going to raise some serious questions on pricing in the current July BTO exercise. For this, I must thank a reader for bringing it to my attention.

One very interesting aspect about this BTO exercise is that it includes flats from three previous BTO projects that were launched between 2010 and 2012. These flats on sale currently are 2-room flats that are now open to singles; whether they are leftover flats or had been excluded from the previous sales, we don’t know. More importantly, it allows us to compare the pricing between then and now.

To do so, we only need to look at the pricing ranges for these flats when they were first launched versus what they are now. I used the midpoint of the pricing ranges as the gauge. In this BTO, the two Sengkang projects have more than 50 units each while the one in Yishun has over a hundred. A high number of units gives us some confidence that prices are less likely to be overly skewed one way or another within the range, somewhat like what the Central Limit Theorem tells us. Then we compare this rise in mid-prices against the increase in the HDB Resale Price Index over the same period of time. The table below shows the results:

Comparing BTO 2-room prices then vs now

Comparing BTO 2-room prices then vs now

We see that the flats at Fernvale Lea has become more expensive by 9.2% in the 18 months between Jan 2012 and now, while the Resale Price Index increased by a lower 8.5%  in the same period. Similarly, prices at Rivervale Arc has increased by 37.8% versus 28.1% on the Index. These numbers are higher because Rivervale Arc’s original BTO dated further back in 2010. Lastly, the price rise for Orchid Spring @ Yishun is just ahead of the resale price trend (20.5% versus 20.1%).

Something doesn’t look right here — what happened to Minister Khaw Boon Wan’s claim that he has de-linked BTO prices from resale prices? Not only do they not look de-linked at all, the BTO prices have in fact outpaced resale prices!

I should also point out a few things. These 2-room flats are effectively Sale of Balance Flats (SBF) even though they are packaged as BTO. Rivervale Arc is already completed, while Fernvale Lea and Orchid Spring @ Yishun will be done by 3Q 2015 and 4Q 2014 respectively. In comparison, the earliest completion for all the other flats in this BTO exercise is 4Q 2016.

That partly explains why the demand has been so overwhelming, and does it explain the prices? Perhaps they are priced like SBF, which are closer to market prices? Not so, because also included in this balloting exercise are similar 47sqm 2-room flats at Fernvale Riverwalk and VineGrove @ Yishun. These are true blue BTO projects to be completed only in 2016-2017, but their pricing is no cheaper than the other three in the table above. And even if we ignore Fernvale Riverwalk and VineGrove @ Yishun and assume the three pseudo-BTO projects are really priced as SBF, it still doesn’t explain how prices could grow faster than the open market.

A keen observer may argue that the HDB Resale Price Index tracks resale prices of 3- to 5-room flats and executive flats, but not 2-room flats. Technically, the Index may have risen more quickly if 2-rooms are included, because cheaper flats experience bigger percentage gains during a bull market. Granting such, the effect is unlikely to be very significant and it still does not explain this increase in BTO prices that is higher than the Index’s rise when the minister said he has de-linked them. In fact, given the scarcity of resale transactions of 2-room flats, one wonders what the HDB used to determine that the same flats costing $68-96k three years ago is worth $107-119k now.

Does the HDB price these flats based on the knowledge that demand will spike once singles are allowed in? Or did it under-price them in the previous BTOs due to the poor demand? Whichever the case, there must be greater clarity on how the pricing is derived.

Data Sources: