3 Reasons Why Your HDB Flat is Worth $0

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I hear you yelling already.

You don’t want to believe me, and that’s ok.

But you better believe this guy.

“Is it fair? I think it’s fair” – Prime Minister Lee Hsien Loong

Ok?

Done?

Can we all stop yelling now?

Get it into your head.

Just like your car that has to be scrapped after ten years.

Just like your bread that expires in a week.

Your house comes with an expiry date. Sooner or later, you will lose.

Don’t ever forget it.

Your “Investment” in your HDB Flat gets worse each year as the 99-year leasehold shortens. Each year you’re staying in a HDB Flat is a year where your money is slowly evaporating.

To make things worse, these are things to note for when your flat has a leasehold of fewer than 60 years:

  • It gets harder to sell. CPF usage is restricted further and bank loans are tightened for purchasers. Even if your HDB did appreciate in price (temporarily), you’d still have to find a buyer who’d be willing to jump through all the hoops with to buy your flat.
  • With an ample upcoming supply of new BTOs in the market, buyers have more options to get in at a lower entry price if they qualify.
  • Singaporean PRs who are looking to for a home requires a minimum of 3 years to be able to qualify for a HDB so part of the demand is also subdued.
  • Cash Over Valuation (COV) has fallen after the government had launched its new scheme, meaning you get less money than you wanted.
    Also, According to the HDB resale price index, we have seen a decline in HDB resale prices since 2014. Take a look and mind the curve from 2014 onwards.

It’s a horrible idea to treat your HDB flat as an investment.

And it’s only going to get worse each year. 

The devaluation of your flat will continue until it’s worth less than a roll of toilet paper in the loo. 

But why?

Why is this happening?

It’s really simple to understand why this is happening when you know what an investment is supposed to be and what it is supposed to do.

These are the benefits of an investment and what we want them to do for us:

  • Generate Positive Cashflow (pays us money)
  • Generate Capital Appreciation (grows in value)
  • Provides us leverage for some additional value (Monetary or otherwise)

See the pattern? It’s all about putting money into your pocket or making more money from nothing. That’s key. Always remember what we want our investments to do:

We want our investments to pay us money or grow in value

Got it?

Good.

Here’s why your flat is NOT going to be an investment. We’re going to start at the beginning. Right after you’ve purchased the flat.

#1 – Your Cash Flow Vs. Minimum Occupation Period

Right. So you just bought your flat. Congratulations. You’re now bound by the Minimum Occupation Period. Its a mouthful of words, but what it really means is that for the first 5 years after purchasing your flat, you can’t rent it out or sell it.

That means no generation of cash flow.

It’s a government policy meant to ensure that buyers are truly purchasing it for homestay purposes.

From an investment perspective, this means for the first 5 years of your investment, you’re actually paying the mortgage and utilities on the flat instead of renting it out to another person. If your flat miraculously went up in price thanks to maybe, the construction of a nearby MRT station, it also means you can’t capitalize and just sell it.

In other words?

This flat you just bought thinking its an investment doesn’t pay you and in fact sucks more money from your bank account with every passing month.

#2 – Your Capital Gains Vs. Government Policies

I know I just told you about the 5 years thing and you’re probably wondering, hey, but that means after the 5 years, I get to sell it and still make a profit right?

The answer is “maybe”. Between buying your next home and the Resale Levy, not to mention the 5 years of missed rental income and mortgage payments to the bank, it’ll take a monumental shift in your house’s value to effect a profitable sale.

In case you need a reminder, head to the Housing Development Board’s website, you will see their official “About Us” statement. Note the last line. It’s the most important one.

For over 50 years, we have provided quality and affordable public housing for generations of Singaporeans, and we are proud to continue doing so. – source

Their goal is to provide quality affordable housing.

To have the houses that they build appreciate upwards out of the range of affordability for new families looking for homes contradicts their interests.

The government is also ready, willing, and able to intervene with new regulations and laws when the property market starts to get too hot.

Here’s a press release they made this year, July, where they raised Additional Buyer’s Stamp Duty and tightened Loan to Value limits.

Loan to valuation limit went down from 20% to 15% and the downpayment for the second property has gone up to a flat 25%.

This means paying a lot more for your second property (additional stamp duties) while having to fork out yet more money for the down payment (because your loan amount is now more limited). That means for just a $400,000 unit, that’s a $100,000 that’s coming out of your own pocket.

But wait, doesn’t that affect only the people buying their second property? What does this have to do with me?

It has everything to do with you. Because these are what people in the business call “cooling measures”. Measures meant to lower the prices of properties across the board for everyone.

So your flat which you’re hoping has gained enough capital appreciation to sell?

Yeah. Not likely.

Worse.

The 2018 cooling measures implemented were only the latest in a slew of cooling measures introduced by the Government over the past nine years, with the latest one before this being the introduction of the Total Debt Servicing Ratio (where the total amount of debt an individual is servicing cannot surpass 60% of their monthly income. This includes all debts such as credit cards, student loans and car loans.)

Taken together, the measures ensured lesser property speculation and curbed spiking property prices.

Lesson?

It’s best not to hope that your HDB Flat will appreciate in value well enough to cover everything you’ve spent. Not only are you facing tougher competition from the market, you still have to deal with the fact that your property is depreciating and buyer disadvantages for anyone who even wants to buy it over from you.

#3 – Capital Gains Vs. Leasehold (yet another Government Policy)

I get it.

You’ve heard from the Prime Minister.

You’ve read the policies that the government has implemented.

Somehow, in your head, you believe it’s going to be okay.

The government’s going to do something.

It’s going to step in and tell you everything’s alright, give you a nice big chunk of cash and let you buy a second house.

You want hard evidence. Show me the proof, you say.

Here’s proof.

Geylang Lorong 3,  where the government is slated to take back 191 homes in 2020. 

No compensation.

No apologies.

Nothing. 

Their lease is going to be up in 2020 and the government is simply going to swallow the properties and redevelop them into something new.

One homeowner even bought an 854 sq ft flat at $88,000 just in December 2015.  

That flat’s value will be worth zero dollars when it’s due to be returned to the government in 2020. The owners will even have to spend some cash to clear out all their furniture, not to mention the trouble of finding a new place to live in.

But wait, didn’t the government offer us an alternative via the Selective En Bloc Redevelopment Scheme?

I’d like to zoom in on this one sentence in the linked article:

SERS LIMITED TO ABOUT 5 PERCENT OF FLATS

Yep. 95% of homeowners will have to return their flat to the government.

Be smart.

Don’t be one of the 95%. It’s fine if you want your home to be a home. Just don’t make the mistake of thinking its an investment.

It’s not.

Don’t bet against the government.

Just don’t.

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Irving Soh

Behavioural Psychology fanatic. I like good food, movies, intelligent conversations and logical reasoning. I also dabble with options, factor-based investing, and data analytics.
  • This is obviously an emotional topic to discuss but there’s a reason why properties are called 99-years leasehold, 999-years leasehold and freehold properties. What’s the purpose of a 99-years leasehold if it has no expiration? It also explains why freehold properties costs a lot more to begin with. 99 years lasts between 2-3 generations when it’s newly leased. Naturally, if we buy an old property, we need to contend with the remaining life span of the leasehold property and not cry foul when it has no value just because the property reaches its end of lifespan . Life’s cold hard truths…sigh!

  • Bought 5 room HDB in 1995 lease start 1997 for $250,000, 2014 valuation $640,000. Rented out since 2007, present rental $2,800. Don’t know how to count.

    • Hi Mr Teo,

      Yes, generally, if you have invested in a piece of property from the early 1990s, you will have been able to enjoy a significant increase in property valuation in the current day terms and made a significant profit. However, that is no longer the case today for new homeowners.

  • My neighbor’s HDB probably is a very good investment. Bought it after a long property downturn (ok it was dumb luck). His 4-rm flat likely cost no more than $170K. He didn’t bother with regulations like MOP — he has rented it out since Day 1 & has never lived in it till today. He didn’t bother with nice renovations or good furniture. His initial total reno cost including kitchen appliances & tv — less than $12K. Over the years he usually replaced spoilt things with 2nd hand stuff if he could get them.

  • It’s precisely why it’s called a lease that it’s worth zero at the end of the term. But it does raise another question of why in the first place the HDB resale market was allowed to spiral out of control with insane prices. I don’t see how govt policies will mitigate those that paid so much, only to be dealt such a hand.

    It probably remains to be seen how the govt will be able to strike a balance between sticking to its ‘affordable homes’ mission and managing the expectations of the people.

  • It feels horrid reading your article. For someone clearly smart and writes well, you have deliberately contorted the value of decent HDB housing. A HDB flat was never created to be held as an investment vehicle. There are many avenues for investment, and you may know what these are. Please share these with your readers. The HDB flat affords everyone a decent place to call home. My family and I have benefitted from it and we appreciate the comfort it has provided us. Thank you.

    • Hi Michael,

      Thank you for your comment. However, I do not believe I had deliberately contorted the value of decent HDB housing at all. The flat returns to the state at $0 value at the end of the lease barring the State choosing to Redevelop it via the SERS scheme. While it is worth some value now, it will not ever be of great value in the long run. The article’s idea is to deliver and reinforce that your HDB flat should not be an investment. It is a dangerous trend among people nowadays to simply regard it as a “sure fire” way of making money only to be vastly disappointed in the later years. My opinion is that while your HDB flat is decent in and of itself as a home (necessary asset, such as food and clothes), it is not, and should not ever be regarded as an investment.

  • *from 80% to 75% LTV.

    But thank you for doing your part in getting this conversation going. For one, I encourage everyone to start with finding out the age of your flat and begin the conversation from there, with what the age means. All this talk is useless if owners are clueless about the age of their flats haha.

    • Hi Alvin, technically, all leasehold properties not currently under ‘Freehold’ suffer that fate. However, where private properties are concerned, there are options, the most obvious here being en bloc. En Bloc Redevelopers typically pay a premium to “Top Up” the lease back to 99 years, an option unavailable to HDB flats.

        • Hi Gab! Thanks for pointing it out. Regardless of private or condo, as long as your property is a leasehold, eventually, its value declines to zero. This applies more for HDB versus private properties (since condos can top up their lease and other private properties can go up to 999 years or are outright freehold). Thus I’ve chosen to use HDB (as it’s entirely leasehold w the exception of ECs which transition out) as an example. The Lorong 3 examples serve as a more potent example. HDBs are definitely not safe. But don’t expect your private property to be safe as well if nothing stops the lease. In fact, your danger is amplified throughout the years since you’re paying a premium to own private land.

  • Is the HDB flat for investment or for living? we need to get our priority right. If you are looking for investment HDB is not your cake to eat it. The given example of Geylang Lor 3 is inaccurate. The lease for those houses are 60 years. So if you are an wise investor, why are you buying a short lease term property? Just like HK, the China gov does not have to compensate the British after the lease is over in 1997. That is simply the agreement. So please dun cry foul.

    • Hi Arthur!

      The HDB serves as a home and will probably always serve as a home for people. That is my personal opinion. The dangerous notion/perception among most people nowadays is that buying a HDB flat equates to an investment in their future. they account for this as part of their retirement or plan for it to be passed on unaware of the declining value and the danger of treating it as an appreciating asset when in actuality, it depreciates significantly.

      While the Lorong 3 Geylang example was not a HDB property (and thus inaccurate to an extent), the similarity between them and HDB – via being leasehold – is an undeniable fact.

      Both are leasehold properties.

      Both are slated to be returned to the government.

      That is the reason I chose to use them to illustrate the point of depreciating value.
      The point of the article was to ensure that people’s notions of their HDB flats being assets or investments are dispelled and not continued.

  • For those buying the HDB flat for the first time, it’s a lifetime Asset taken the fact you can live in for 99 years at a affordable buying price.
    How many people can afford to buy a Private condo in the first place?
    I would said property prices will continue to raise whether it is a 99 leasehold HDB or Private One.
    So do we have a choice, please advise?

    • You alternative is to rent, while your hard earn cash is earning a better return than a HDB. You thus need to calculate the internal rate of return of HDB since we are now certain it becomes ZERO at end of lease. IRR should be about 3.3% to 3.6%. So buying a HDB and living in it, your opportunity cost is about 3.45%. However, your opportunity cost can be a lot higher since you have to look at other asset class over the long term e.g. private property or REITS or Global diversified chares, since risk reduces substantially over the long term as such it becomes less risky than even cash if kept for 20-30 years and yet gives you a typical annualised return of 8% (capital and rental yield). Bottom line is rent cheaply or BUY a very cheap HDB in some far flung corner of Singapore or if above 55 buy a flexi flat so that the opportunity cost of 8% will not hurt you that badly since you will be dollar cost averaging purchase a mix of REITs such as CLR etf and a global diversified etf such as IWDA with the aim of never selling laugh yourself to the bank 20 years from now and not be foolish to buy an expensive HDB flat. It is expensive because of guaranteed depreciation such as a car.

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