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Is Buying A HDB Really A Good Investment Option?

Is Investing In HDB Flats A Good Option?

Although many Singaporeans aspire to own a private property, would investing in HDB flats be a good option? It can certainly be for first-time buyers such as young couples looking for their first matrimonial home. First of all, HDB flats are highly subsidized and home ownership is a key national policy to encourage Singaporeans to have a stake in the nation.
This post will cover the following:

 

As a first-time buyer, you have a choice of applying for a new Built-To-Order (BTO) flat if you are prepared to wait a minimum 2.5 years. If not, you can consider a resale flat. [NOTE: Singapore Permanent Residents (SPR) are not eligible to purchase new HDB flats if their family unit does not include a Singapore Citizen]. Hence, if they are thinking of investing in HDB flats, they are only eligible to HDB resale flats. They will also not be entitled to any government housing grants. More information can be found here.

For new BTO flats, besides being heavily subsidized, first-time buyers will also receive up to $80,000 Enhanced Housing Grant (EHG) if your household income does not exceed $9,000. How much you will receive will depend on the level of your monthly household income as indicated in the table below.

 

Enhanced Housing Grant (EHG)

For those unwilling to wait for a BTO flat, investing in a resale HDB flat can be a good alternative. Although they are more expensive than new BTO flats, first-timers can receive up to $160,000 housing grants to offset the higher prices. These housing grants consist of $50,000 Family Grant, $80,000 Enhanced Housing Grant (EHG), and $30,000 Proximity Grant (refer to the illustration below.). These grants will help to narrow the price difference between a new BTO and resale flat. In addition, if you are fortunate enough to find a wellmaintained resale flat, you can save more on renovation compared to a new BTO flat.

 

HDB Housing Grants

Such housing grants are helpful for people unwilling to wait for new BTO flats, those in need of housing urgently and those who wish to live near their parents. In other words, investing in resale flats provides the flexibility of choosing which part of Singapore to live in. Whereas for BTO flats, most are in non-matured estates. Although some BTO flats are offered in matured estates, they face very high demand and are subject to balloting. An example was the February 2019 Whampoa/Kallang BTO launch where 10 couples vied for one unit.

If you are a first-timer applicant and is unable to choose your choice BTO unit, rejecting two chances to select a flat will cause your firsttimer priorities to be removed for one year in future HDB Sales Exercise. The indefinite wait to secure your choice unit can be very frustrating. Are you prepared to bid your time?

 

 

Is Investing In A Resale HDB Flat A Better Option?

Investing in a resale HDB flat can be a better option if you are unwilling to wait to secure your “choice” BTO flat. One of the main
reasons is, property prices tend to rise over time. The longer you wait, the more you are likely to pay in the future (refer to HDB resale price index below). There are exceptions of course, such the impact of global crisis and change in government policies. Another
important factor is lease decay, which we will elaborate more later in this article.

 

 

HDB Resale Price Index And Property Cycles

If you aspire to own a private property in the future, why not grab the generous government housing grants and complete your loan repayment as soon as possible? After pocketing the grants, you can decide whether to sell off your HDB flat or rent it out to finance a private property. Do note that there is a Minimum Occupancy Period (MOP) of 5 years before you can rent out or sell off, regardless of whether it is a BTO or resale flat. In addition, you are also not allowed to buy a private property locally or abroad during this period. So, this may be a good time for you to slowly accumulate your savings for future property investment while establishing your career.

Investing in a resale flat also has the added advantage of choosing one in an area with good capital appreciation potential. For
example, a flat that is near an MRT station, shopping mall or a good school. Of course, such a unit will cost slightly more. But you can command a higher rent, or if you decide to upgrade to a private property in the future, you should be able to sell it off easier and at a better price too. important factor is lease decay, which we will elaborate more later in this article.

One advice for anyone who aspire to invest in a private property in the future but wish to retain their HDB flat for investment is to start
with a smaller 3 or 4-room HDB flat (more on this below). According to the 3rd Quarter 2019 HDB median resale prices (see below), a
3-Room unit starts from around $250,000.

Median Prices of HDB Resale Flats

If both you and your spouse are first-time buyers, you can receive government housing grants of up to $160,000. This will lower your financial outlay substantially. The rationale of buying a smaller flat, instead of a 5-room, is to pay off your mortgage in the shortest time possible, if you are thinking of getting a second property (private) for investment after fulfilling your 5-year Minimum Occupation Period (MOP). The last thing you want is to prolong your loan repayment period because this will adversely impact the amount of loan you are eligible for when buying your next property (more about loan financing below). Assuming you held on to your HDB flat and buy a private property, do take note that this will be considered your second property. Hence, Additional Buyer’s Stamp Duty (ABSD) applies.

Of course, if you wish to sell off your HDB flat after the 5-year Minimum Occupation Period (MOP) to invest in a private property, then you don’t have to incur ABSD. There are many permutations at play and below is just one example about some aspects of property financing. If you require any assistance to help with your financial assessment, please Contact Us.

Example: Financial Calculation For The Purchase of A HDB Resale Flat

Let’s assume that you are buying a 3-Room HDB resale flat for $300,000 and has a monthly household income of $5,000. If you are a first-time buyer, you will be entitled to the following housing grants:

 

  • 50,000 Family Housing Grant
  • $45,000 Enhanced Housing Grant (EHG)
  • $30,000 Proximity Grant (living with parents) or $20,000 (living within 4km of parents)

Let’s also assume that you will be living within 4km of your parents’ home. Hence, the total housing grants you will receive is $115,000. Therefore, buying a HDB flat should be a priority to kick start your property investment by taking advantage of the government’s rather generous housing grants.

Based on the above scenario, this is what we have now:

  • Purchase Price of a 3-Room HDB Resale Flat: $300,000
  • Total Housing Grants received: $115,000
  • Purchase Price of a 3-Room HDB Resale Flat after grants: $185,000

To work out the financial commitment and minimum loan repayment period for the purchase of the HDB resale flat, let us assume the
following:

  • Buyer’s Age: Below 35 years
  • Monthly Household Income: $5,000
  • Employee CPF Contribution: $1,000 (20% x $5,000)
  • Employee Take Home Pay: $4,000 ($5,000 – $1,000)
  • Negligible CPF savings available

From the above information, we can work out the shortest housing loan repayment period and monthly installment based on the
following:

  • HDB Concessionary Loan Rate: 2.60%
  • Mortgage Servicing Ratio (MSR): $1,500 (30% of $5,000) – see below for explanation
  • Total Employee + Employer CPF Contributions in Ordinary Account: $1,150 (23% of $5,000)
  • Total Monthly Loan Repayment: $2,650 ($1,500 MSR + $1,150 CPF)
  • Shortest Loan Period: 6.3 years

The shortest loan repayment period of 6.3 years is derived by taking into account the maximum allowable under the Mortgage Servicing Ratio (MSR) plus your monthly CPF Ordinary Account (OA) contributions. The MSR is currently set at 30% of your monthly household income, meaning a maximum of 30% of your household income can only be used to repay your housing loan. This works out to be
$1,500 (30% x $5,000).

As for your monthly CPF contributions (Employee + Employer) in your OA, it is currently at 23% if you are below 35 years of age (see table below). Hence, the total CPF OA contributions that can be used for your housing loan is $1,150.

Therefore, you will have a maximum of $2,650 ($1,500 + $1,150) for your monthly loan installment, which will enable you to pay off your housing loan in 6.3 years (or about 6 years and 4 months). Of course, you can pre-pay your loan early if you receive an unexpected windfall during the course of your loan repayment period (Note: For HDB loan, there is no pre-payment penalty. But for a bank loan, you can expect to pay a penalty of about 1.5% of the undisbursed loan amount).

The above is just one example of the affordability in buying your first HDB resale flat. Of course, this is just one of many permutations depending on the property price, your level of income, personal savings and available CPF funds, as well as parental financial support (if any).

Another factor you need to consider is whether the balance of your $2,500 monthly disposable income (after deducting your monthly CPF contributions and loan installment) is sufficient for your living and lifestyle expenses. These will include recurring cost such as property tax, conservancy charges, utilities and perhaps, your holiday expenses.

DISCLAIMER: The above is just a simple illustration. Besides the housing loan, there are many other cost considerations. These include stamp duties, conveyancing fees, property agent commission and renovation cost. Hence, it is advisable to consult a licensed property agent to to help you assess your affordability and provide the necessary information for your property investment.

 

Options After Repaying Housing Loan

After you have repaid your housing loan, you may consider the following property investment options:

  • Sell your HDB flat and upgrade to a private property or executive condominium (EC)
  • Buy a new launch or resale private property
  • Rent out your HDB flat to finance your new private property (more on this below)

An experienced property consultant will be able to advise you on these options and more, which include the following:

  • Properties with good capital appreciation potential
  • Property rental yields
  • Property hotspots and upcoming developments
  • Exit strategy to maximise your investment returns

For an in-depth analysis of property investment in Singapore, please check out the 5 key factors in Singapore property investment.

 

Finance New Property with HDB Rental Income

If you have completed your 5-year MOP and intend to invest in a private property, you need to work out your finances carefully.

If you buy a private property while still servicing your HDB loan, you can only get a Loan-To-Value (LTV) of 45% instead of 75% for a
loan tenure up to 30-years or age 65, whichever comes first (see illustration below).

In other words, banks will only grant you 45% of the purchase price or value of your property, whichever is lower. For the remaining 55%, 25% must be in cash downpayment and 30% in a combination of cash and CPF Ordinary Account (OA) monies.

Since you are still servicing your HDB flat, the purchase of the private property will be considered your second property. Hence,
Additional Buyer’s Stamp Duties (ABSD) applies. For most, this will greatly impact their affordability. Hence, you should strive to pay off your existing HDB loan in the shortest time possible so that you can secure a higher loan amount to finance your private property. A shorter loan tenure will also help to reduce your interest expense.

If you are able to pay off your first housing loan, then you can get up to 75% bank financing instead of 45%. This will help you to avoid the huge capital/cash outlay for your second property.

The following example shows what your capital/cash outlay is if you buy a private property for $1 million dollars (second property)
BEFORE paying off your first housing loan:

– Property Price: $1 million dollars
– BSD: $24,600
– ABSD: $120,000 (see calculation below)
– Total Cost: $1,144,600
– Bank Loan: $450,00 (LTV of 45% x 1 million dollars)
– Cash Downpayment (Minimum): $250,000 (25% of 1 million dollars)
– Balance: $444,600 (Combination of CPF OA monies and cash.
– Total Cash + CPF OA Monies: $694,600

The following example shows what your capital/cash outlay is if you buy a private property for $1 million dollars (second property)
AFTER paying off your first housing loan:

– BSD: $24,600
– ABSD: $120,000 (see calculation below)
-Total Cost: $1,144,600
– Bank Loan: $750,00 (LTV of 75% x 1 million dollars)
– Cash Downpayment (Minimum): $50,000 (5% of 1 million dollars)
– Balance: $344,600 (Combination of CPF OA monies and cash)
– Total Cash + CPF OA Monies: $394,600

As can be seen, the overall upfront cost for investing in a second property costing 1 million dollars while still servicing your first housing loan is $694,600. This compares to the upfront cost of $394,600 if your first loan has been fully paid – a difference of $300,000.

Moreover, you will be servicing two housing loans at the same time, which could stress your financial position.

 

Additional Buyer’s Stamp Duty (ABSD) Buyer’s Stamp Duty (BSD)

If you are investing in a second property, Additional Buyer’s Stamp Duties (ABSD) of 12% will be imposed. This works out to be
$120,000. On top of this, there is also the Buyer’s Stamp Duty (BSD). For a 1 million dollars property, the BSD works out to be $24,600.
Hence, the ABSD plus BSD amounts to $144,600 ($120,000 + $24,600). The ABSD and BSD are calculated based on the rates
indicated in the tables below:

Additional Buyer’s Stamp Duty (ABSD)

Buyer’s Stamp Duty (BSD) Rates

These stamp duties must be paid within 14 days of Option to Purchase (OTP) or Sale and Purchase Agreement being signed. They must be paid in full and not in installments. You can also pay using your CPF, but you must fork out the cash first and then seek reimbursement from CPF later.

After taking into your account the BSD and ABSD, this will push up your total property investment cost to $1,144,600, out of which your bank loan only covers you for $450,000 if you are taking a second mortgage. The balance of $694,600 must be in cash and CPF OA monies.

For more information about stamp duties, please refer to “How To Calculate Singapore Property Stamp Duties BSD, ABSD And SSD?”.

 

Restriction on Use of CPF Funds

On 9 May 2019, the Ministry of National Development (MND) and the Ministry of Manpower (MOM) jointly announced a change in rules on CPF usage and housing loan.

Under the new rules, how much CPF monies can be used for property purchase will depend on the extent its remaining lease can cover the youngest buyer to the age of 95. It was also announced that CPF savings and HDB loans will not be granted to fund the purchase of HDB flats, Executive Condominiums (EC) and private residential properties with remaining leases of 20 years or less.

If the remaining lease of property at the point of purchase is at least 20 years and can cover youngest buyer until at least the age of 95, CPF usage will be allowed to pay for the property up to the Valuation Limit (VL). If not, they will be pro-rated. You can find out more on this in “Change In CPF Usage And Housing Loan Rules”.

In addition, for investment in a second property, there are further restrictions on the use of your CPF funds. You are required to set aside the minimum Basic Retirement Sum (BRS) before you can use any excess monies in your CPF Ordinary Account (OA). The amount to be set aside for the BRS is shown below:

Total Debt Servicing Ratio (TDSR)

Another restriction you may face is the Total Debt Servicing Ratio (TDSR). It has been put in place by the Monetary Authority of
Singapore (MAS) to prevent over-leveraging of your finances. All financial institutions (FIs) such as banks will need to apply TDSR
when disbursing housing loans. TDSR sets the limit of your income that can go into servicing all outstanding loans, which currently
stands at 60%.

How does TDSR works?

TDSR takes into account all your loan obligations (eg. housing loans, study loans, credit card debts, car loans, personal loans, etc). What this means is that your total loan repayments cannot exceed 60% of your income, limiting the amount of debt you can take on. The policy is to ensure financial prudence.

To illustrate, if your monthly income is $1,000, your TDSR (60%) will be $600. This mean your total loan repayments (housing, car, credit card, etc) cannot exceed $600 per month.

For those whose income are commission based, such as salesperson, insurance agent, etc, the income will be subjected to a 30% haircut. For example, if your monthly income is $1,000, only $700 will be considered for the calculation of TDSR.

With all the restrictions in place, it is not easy to afford a second property, especially for young couples still building up their careers. The amount of cash and CPF required to buy your second property is quite significant, making it pretty unaffordable for most.

So, what are your option if you wish to invest in private residential properties? What are the strategies to grow your property investment? Let us share with you our knowledge and experience, as well as to help evaluate your financial position to determine the best course of action. Feel free to contact us for an obligation-free consultation.

Meanwhile, for those who can afford to invest in a second property and use their HDB flats to generate rental income, below are some useful information to take note of.

Investing In HDB Flats – Rental Yields

If you decide to retain your HDB flat, rent it out and use the proceeds to finance your private property, let’s examine how this can be best achieved.

The following table provides a sample of median gross rental yields for 3, 4 and 5-room flats at the four corners of Singapore.

Median Gross Rental Yields of HDB Flats

As can be seen, the smaller the flat, the higher the gross rental yield. Please take note that your net rental yield will be slightly lower after taking into consideration expenses such property taxes, maintenance cost, conservancy charges, household repairs, etc.

Nevertheless, they are still attractive compared to private residential properties, which command rental yields of only 2-3%. This is another reason that makes HDB flats a good investment.

Hence, for those who are looking to rent out their HDB flats to finance their second property, but face financial constraints, buying a smaller HDB flat may be the best option. Besides getting a higher rental yield, more funds can also be set aside to invest in your second property.

Moreover, as shown in our example above, paying off your first mortgage will help you get a higher amount of bank financing, which will lower your capital/cash outlay in the process. This will go towards some way to cushion the ABSD being incurred. To help you with property financing or investment matters, please feel free to Contact Us for an obligation-free consultation.

Depreciating Values of Ageing HDB Flats

Recently, there have been concerns about the steep depreciation in the values of ageing HDB flats once their leases cross the 40-year mark. But the issue has somewhat been allayed by Prime Minister Lee Hsien Loong’s 2018 National Rally Speech. PM Lee said when HDB flats reach 70-years old, owners can vote to let the government buy back their flats early. He calls this the Voluntary Early Redevelopment Scheme (VERS). This is quite similar to the Selective En-bloc Redevelopment Scheme (SERS).

PM Lee also said the Housing Board will carry out a second Home Improvement Scheme (HIP), which is heavily subsidized, when flats reach 60 to 70 years old. The first HIP takes place around the 30-year mark. These schemes will help to alleviate property decay, rejuvenate the community and uphold property values.

Also, since 9 May 2019, the government has announced changes in the use of CPF funds that could lift demand for older HDB flats. For HDB flats with a remaining lease of at least 20 years and can cover the youngest buyer till age 95, CPF funds can be used to pay for the property up to the Valuation Limit (VL).

Nevertheless, the fear of capital depreciation cannot be totally ignored. This is especially so when the Ministry of National Development
(MND) has not released any details on VERS yet. In addition when HDB flats gets older (or leases get shorter), the rate of depreciation
will quicken due to wear and tear.

The Bala Curve

Without getting into the technical details, the Bala Curve seeks to compare values across different tenure and land valuation. It also computes the differential premium for change of use or increase in
intensity, and land premium for upgrading of lease tenure. In short, it seeks to determine the value of properties according to the length of its (remaining) leases. The Bala Curve is also known as the SLA Leasehold Table, meaning the government uses it to assess land values.

There are a few key characteristics about the Bala Curve to take note of, which will help us make important decisions about our property investment. Looking at the curve, there are three key intervals: 60- year, 30-year and 15-year mark. These intervals are important because of their different rate of decline in values.

For example, between 99-year and 60-year, the fall in the value of your property is 0.1-0.4 basis point (bp) for each year of lease. Between 60-year and 30-year, the decline in value is 0.5-1.0 bp; from 30-year to 15, the decline accelerated to 1.0-1.8 bp; and once it hit the 15-year mark, the decline accelerated even further to 1.8-3.8 bp. Simply put, the older the property gets, the more rapid the decline in its value.

Hence, in order to encash your property’s capital appreciation, or to limit the depreciation of your property investment, you should do it before the 60-year lease  mark. As the Bala Curve is used by the government to assess land value, should we be concerned about
lease decay?

Investing In HDB Flats – Still Viable?

However, don’t get us wrong. Investing in HDB flats can still be a viable option. But to mitigate such risks, every property investment
needs an Exit Strategy to maximise and preserve its value. To illustrate, take a look at the chart below.

PM Lee also said the Housing Board will carry out a second Home Improvement Scheme (HIP), which is heavily subsidized, when flats reach 60 to 70 years old. The first HIP takes place around the 30-year mark. These schemes will help to alleviate property decay, rejuvenate the community and uphold property values.

Also, since 9 May 2019, the government has announced changes in the use of CPF funds that could lift demand for older HDB flats. For HDB flats with a remaining lease of at least 20 years and can cover the youngest buyer till age 95, CPF funds can be used to pay for the property up to the Valuation Limit (VL).

Nevertheless, the fear of capital depreciation cannot be totally ignored. This is especially so when the Ministry of National Development
(MND) has not released any details on VERS yet. In addition when HDB flats gets older (or leases get shorter), the rate of depreciation
will quicken due to wear and tear.

Widening Price Gap Between Private Properties Vs HDB Flats

As can be seen, property prices for both private properties and HDB flats fell on the back of a slew of property cooling measures in 2013 after rising sharply for about 8 years. These include the tightening of bank loans, limitation on the use of CPF funds and imposition of ABSD, among many others. However, when the property market began to recover from 2017, home prices between private properties and HDB flats diverge.

The big question is WHY?

There are two major reasons. The first is due to concerns over the depreciating values of HDB flats as their leases get shorter, which we have highlighted above. MND Minister Lawrence Wong has also said that most HDB flat leases will be run down and the land will return to the government eventually. In other words, don’t put too much hope on VERS.

Secondly, the HDB has been ramping up the supply of BTO flats, especially from 2010 onward (see table below).

So, it not hard to imagine what will happen when these HDB flats reach their Minimum Occupation Period (MOP). Given the deluge of supply, it will put a cap on the prices of HDB flats. Basically, this is in line with the government’s effort “to provide quality and affordable public housing for generations of Singaporeans”, adding “we are proud to continue doing so”. We are not saying the prices of HDB flats will not rise. But, it is difficult to see them outperforming private properties.

In addition, the Mortgage Servicing Ratio (MSR) at 30% will limit the amount of our household income that can be used to finance the purchase of HDB flats. Whereas for private properties, it is not subjected to MSR, but the Total Debt Servicing Ratio (TDSR) that allows
a higher financing limit of 70%.

Should you require more information on property investment, please feel free to email, phone or WhatsApp us. If you are looking for investment in private properties, below are some new launches with different attributes and characteristics. For foreigners, please take note of the restrictions highlighted in the article “Singapore Property Rules for Foreigners”. Foreigners are also not allowed to buy new
ECs.

  • Provence Residence, an executive condo near Canberra MRT station and Canberra Plaza
  • Parc Greenwich, an executive condo at Fernvale Lane, next to the Seletar Springs Estate
  • Bartley Vue, a 115-unit condo development 400m from the Bartley MRT station
  • The Watergardens At Canberra, a low-rise condo development near the Canberra MRT station
  • Canninghill Piers, an integrated development at Clarke Quay beside the Singapore River
  • The Reef At King’s Dock, an exclusive waterfront development at Harbourfront opposite Sentosa island
  • Midtown Modern, an integrated development to be built atop the Bugis MRT station
  • One Bernam condo, a mixed-use development at Tanjong Pagar within the Central Business District
  • The Atelier, a freehold condo development at Newton in Singapore’s prime District 9
  • Kopar At Newton, an exclusive condo development opposite the Newton Food Centre
  • Ki Residences At Brookvale, a 999-year development in the idyllic Sunset Way estate
  • Parc Central Residences, the first executive condominium to be launched in Tampines in eight years
  • One-North Eden, a mixed-use development in one-north, Singapore’s high-tech, research and innovation hub
  • Pasir Ris 8, an integrated development beside the Pasir Ris MRT station, bus interchange and White Sands shopping mall

You may also wish to check out the following properties where developers are giving discount or have lowered their prices: Developer’s
Sale, Discount And Offer.

Meanwhile, check out the following articles on Singapore property investment: