Problems with buying BTO flats

March 7, 2014
Singapore Democrats

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Dear Sir,

I will like to bring the following issue to your attention.

The HDB’s Build-To-Order (BTO) scheme is a failure. It has caused many problems, especially for the lower income group.

One problem with BTO flats is that the buyer commits the price of his BTO flat today, but he only gets to sell his current HDB flat years later. That means, HDB already locks in their profits from the buyer, but the buyer has to face the risk that the price of his current flat may fluctuate when his BTO flat is ready much later.

This scheme is only workable in the good time, when an upgrader bought a BTO flat at $xxx,xxx, and he gets to sell his current flat at a much higher valuation years later. What if,

Year 1:
Buyer buys BTO flat at $300,000
Buyer’s current flat valued at $320,000

BTO flat ready 3 years later:
BTO flat bought at $300,000 (price already locked in)
Buyer’s current flat value has dropped to $270,000

As all the financial calculations are done at the time the buyer books his BTO flat, everything seems smooth and perfect. But by the time his BTO flat is ready, what if the valuation of his current flat has since dropped tremendously, even selling off his current flat cannot cover the amount of his new BTO flat? That’s the problem many Singaporeans are facing now.

Adding to the woes, the Mortgage Servicing Ratio (MSR) was implemented. The MSR cut 35% off from the maximum loan allowed, so the situation becomes even worse!

Because of all these wrong policies, many HDB upgraders are caught in a deadlock. They can neither sell their current flat or buy their BTO flat, as they do not have the cash to cover the differences when the valuation of their current flat has dropped.