Updated: Oct 20
For most Singaporeans, our property is probably the largest asset we will ever own in our entire lifetime and inextricably tied to retirement.
HDB flats in particular have long been seen as retirement assets, as their values skyrocketed over the past few decades mainly due to Singapore making its rapid transition to first world status.
Fast forward to 2020, the HDB wealth story has taken a turn. Is holding on to your HDB a good long term investment plan which can see you through your golden years?
After the property heyday of 2013, HDB flats began to trend downward in value
As we can see on SRX, resale flats were once the gold standard in appreciating assets – indeed, flat prices have climbed almost nonstop since the earliest days of pubic housing.
Had you bought a flat in 2006 and sold it at the property peak of 2013, for instance, you would have enjoyed appreciation of about 80 per cent – a significant gain over just a seven-year period.
However, notice the price movement after 2013. Resale flat prices begin to drop after 2013, and have more or less declined for the past seven years.
From the same graph, you can see that if you bought a resale flat in 2013 and sold it today, you could be looking at around a 20 per cent loss. This is in stark contrast to the way the private property market has moved:
Resale Private homes have continued to see appreciation, and have risen past the last property peak of 2013.
This is in spite of a slew of cooling measures, such as the Additional Buyers Stamp Duty (ABSD). As such, we can see the issue of depreciation is quite specific to HDB flats as they are supposed to be kept affordable. The fundamental advantages of Singapore’s real estate market remain strong and trend upwards, with regard to private homes.
What happened to the HDB wealth story?
Simply put, it became the HDB housing story. Unlike the past, when and HDB flat
was seen as a sure-fire ticket to wealth, the emphasis today is on providing a roof
over your head.
Read my earlier article on Can You Still Make A Profit From Selling Your HDB Flat?
Changes to government policy have reflected this: The biggest such policy change occurred in March 2014, when rules regarding Cash Over Valuation (COV) were altered.
Previous to this, it was expected that HDB flats would sell above their actual value. For example, if the HDB valuation on a flat was $350,000, the eventual price could have been about $360,000 (the excess $10,000, which had to be paid in cash, was the COV). By mid-2011, COV was rampant, with median COV reaching as high as $38,000 for most flats.
After March 2014 however, HDB would only release the actual valuation after the buyer and seller had agreed on the price. That is, you won’t know if you’re paying above the actual value, until you conclude on the price. HDB also stopped publishing COV numbers.
I also feel this is a major source of stress for buyers, as you could end up paying the difference in cash if you agree to a price that’s too high. The COV is not covered by your home loan! As a result, buyers became more cautious, and today most resale flats at transacted without any COV.
The second change was the growing awareness of lease decay
HDB flats come with 99-year leases. In the past, Singaporeans used to suspect that – at the end of that lease – the government would have a generous solution. One example was the Selective En-Bloc Redevelopment Scheme (SERS), which offered a new flat with a fresh lease, as well as generous cash compensation.
However, it’s now clear that fewer than five per cent of HDB estates qualify for SERS.
Most will instead come under the less generous Voluntary Early Redevelopment Scheme (VERS) – this allows the flat owners to collectively resell their flats to the government at fair market value (not likely to be high, given that leasehold property values tend to fall sharply after they cross the half-way mark in their lease).
As the years move on, lease decay can only take a greater toll. Older flats, which were once more desirable for their mature location, will instead be the first to bear the brunt of this – this includes the flats in Marine Parade or Queenstown, many of which were built in the 1960’s or ‘70s. We may not have felt the sting of this in the 1980s or 1990s, when flats were relatively new; but we definitely will as more flats cross the 50-year mark.
Singaporeans seeking to build wealth through property are more inclined to upgrade
As we’ve shown in the graph above, condo prices have managed to climb while HDB flat prices have mainly dwindled. This makes them more attractive as a long-term investment: As early as January of this year, HDB upgraders already made up a sizeable portion of new private home buyers.
The trend is likely to continue, given that about 50,000 flats are expected to reach their Minimum Occupation Period (MOP) between 2020 to 2021 alone. (Ironically, the bigger supply of resale flats on the market – put there by upgraders – could create even more downward pressure on resale flat values; the end of the MOP raises the supply of resale flats in the rental market, thus impacting rental yield).
The private homes market also has two significant advantages going for it. First, home loans in Singapore are cheap. Consider the Singapore Interbank Offered Rate (SIBOR), to which many home loans are pegged.
This is currently at around 0.25 per cent, down from 0.38 per cent 10 years prior. The typical home loan from a bank is now at a rock-bottom rate of 1.3 per cent per annum (by contrast, HDB loans are at 2.6 per cent). This is likely to persist while the United Stated Federal Reserve maintains its low interest rates, to cope with Covid-19.
The lower rates make properties more affordable, increase rental yields (by lowering monthly repayments), and improving overall gains.
For example: Say you were to take a loan for $900,000 to buy a condo, at a rate of 1.8 per cent (common in 2017), for 30 years. This was previously $3,237 per month, coming to total interest payments of $265,423 at the end of the loan*.
At the current rate of 1.2 per cent, the same loan would mean paying just $2,978 per month, with total interest payments of $172,144*.
*Note that home loan interest rates fluctuate, and this is an assumption based on current figures.
Most Singaporeans overestimate how much it costs to switch to a private property
HDB Upgraders do not need to have millions of dollars on hand to buy a condo. Using a bank loan, they can obtain financing of up to 75 per cent of the unit’s price. Only the first five per cent of a private property has to be paid in cash. The next 20 per cent can be paid through CPF, and the rest can come from the loan.
So for a $1.2 million condo, a buyer only needs $60,000 in cash, and $240,000 in CPF. Assuming a couple are buying, that’s $30,000 each, and $120,000 in each person’s CPF (with a 50-50 split).
For many HDB upgraders, it’s possible to cover this amount after selling their HDB property (e.g. say, a 4-room flat with sale proceeds of $300,000).
If you need help working out these numbers, contact me and I can guide you through it. During the discussion, I will be able to share with you more on the following:
How HDB Owners can upgrade to condominiums with no additional cash outlay
How to create passive income and achieve financial freedom through property wealth planning.
How to double your wealth safely for retirement
Switching to a private property is not just about seeking luxury, it’s about long term planning
Having facilities like pools, gyms, clubhouses, etc. are nice; but this isn’t the main reason many HDB homeowners are upgrading. In many cases, switching to a private property is a smart move to ensure your property remains an appreciating asset: one that can provide for your retirement when you right-size (or which provides a strong legacy for future generations, especially with regard to freehold units).
So if you’re thinking of the long term for your property, do contact me with any questions. I can help you work out the process and timeline for a smooth upgrade; and we’ll work out the right private property for your financial goals.
About The Author
My passion for Real Estate sparked at a very young age. At 14, I would tail along with my parents as they went for home viewings, and get involved with the necessary matters whenever they shifted homes.
Later on, I was appointed as their power attorney who solely oversaw the sale and purchase of my family’s properties. From my personal experience in engaging agents, I deeply understand how important integrity is in this business.
As properties are big-ticket items, their dealings should not be taken lightly. To offer the best advice, I always strive to put myself in the shoes of my clients such that I can help them make informed decisions which support their goals.
My mission is to add value and make a positive impact on the lives of my clients through sound investments and intelligent strategising. Let's connect at 97642556 to discuss on your goals.