In Singapore, the most unromantic way to propose marriage is this – “Let’s apply for BTO flat!” But it fits – you buy a flat when you are ready to settle down. It also helps that you need 2 names in order to submit that application to HDB.
Due to this very narrative – we have been conditioned that a HDB flat will be our very first home. As a property agent, I believe a HDB flat remains the preferred choice for many first-time property buyers for countless reasons – proximity to parents and amenities but above all, affordability.
The HDB flat, be it Built-to-Order (BTO) or a resale flat, is usually much more affordable as compared to private properties. As a first-time buyer, you also have the opportunity to utilise the various housing grants the government provides.
What’s more, you may not even need to commit much cash if you have enough funds in your CPF Ordinary Account (OA). This leaves you with more money to renovate your dream home. Unlike bank loans (requires borrower to commit more cash/ CPF – 25%) that fluctuates from time to time, the HDB loan, fixed at 2.6% currently, offers more stability.
Everything seems perfect. But life is not always so rosy. As you grow older – you will need to start planning for your future retirement.
Do not be lulled and ignore the impact of the declining lease of your HDB flat.
As the lease of your flat run its course, their usefulness as a retirement asset diminishes.
Here are 5 things you must know about HDB depreciation.
#1: Is Your HDB Appreciating or Depreciating?
When you collected your keys from the HDB office, the officer-in-charge would share how all your CPF monies in your Ordinary Account (OA) at that time would be be wiped out to pay for your new HDB flat if you’re taking a HDB concessionary loan.
The remaining amount will then be taken care by your HDB housing loan. Many of you will also continue to service this very loan with your monthly CPF contribution.
Now this is all fine. If your HDB flat appreciates substantially – great! You make a gain when you sell. This is usually the case for BTOs, especially those in matured estates where owners have a small windfall when they sell in 5 to 10 years.
But if you have purchased an older resale flat or bought a new flat at a later stage (Sale of Balance Flat/ Re-Offer of Balance Flat), you would have paid a much higher price.
So what happens if your HDB flat starts to depreciate, especially flats, more than 30 years? Well, you may then face a negative sale when you eventually decide to sell. This means you do not profit from the sale of one of your biggest assets.
So how much will be your loss? It will depend on the selling price and how much you paid initially for your flat.
The thing is with HDB depreciation – the one that will bear the brunt of the losses will be your CPF OA and ultimately your future retirement.
The impact is invisible – you wouldn’t know it – until the day comes when you decide to extract the value of your HDB flat by selling it.
It becomes sad to realize that your flat is unable to provide the retirement coverage you need – when you ACTUALLY need it.
Example: HDB 4-Room flats along Bishan Street 22 (completed in 1992)
- In June 2009, a 112sqm, 9th floor unit at Blk 262 went for $455,000.
- A 5th floor 114sqm unit at Blk 248 transacted at $534,000 in May 2011.
- In June 2012, a 21st floor 106sqm unit at Blk 252 was sold for $620,000.
- In 2019, a mid floor (7-9th floor) 112sqm unit at Blk 262 was sold for $606,000.
- A 3rd floor 116sqm unit at Blk 248 fetch $560,000 and
- A high floor (19-21st floor) 106sqm unit at Blk 252 went at $688,000 in August.
Example: HDB 4-Room at Blk 296 Yishun Street 20 (completed in 2000)
- In June 2012, a 6th floor unit (91sqm) was sold for $435,000.
- In Jan 2013 a high floor (10-12th floor) unit (90sqm) transacted for a high of $483,000 in. Another similar unit on the 6th floor went for $449,000 on April 2013.
- In 2019, two 5th floor units were sold for $370,000 and $360,000 respectively, while a 3rd floor unit was sold for a low of $320,000.
All data are taken from SRX Property
While this particular block of flat in Yishun is newer than the flats in Bishan, the value of units here is already depreciating much faster than those in Bishan – which still managed to appreciate a little.
So if you haven’t been monitoring how your flat has been doing, perhaps it’s time to!
#2: Is Your HDB Appreciating Faster Than 5.1% Per Year?
When you bought your flat, you essentially borrowed from your CPF OA account. There is a cost to using your CPF monies.
The cost is the 2.5% interest rate. Basically, you gave up the opportunity to earn a guaranteed 2.5% returns from the CPF Board when you chose to park your money in your property – whether is it private property or HDB.
Now if your HDB were to appreciate by 2.5% per year – you would have essentially broke even.
If your HDB price remained stagnant, you would have made lost 2.5% per year.
If your HDB price depreciated by 2.5% per year, you would have lost 5%! You are bearing the loss of 2.5% from your flat PLUS the 2.5% opportunity cost of using your CPF monies.
This is one of the reasons why some homeowners may not get any cash proceeds from the sale of their flat even though flat prices did go up!
When you sell your flat, you will have to return what you took from your CPF, plus accrued interest, as well as any outstanding HDB/ bank loans. As a gauge, your flat would need to enjoy an annual capital appreciation of more than 5.1% (2.5% – HDB interests rate plus 2.6% – CPF interest rate) for any cash profit.
If not, any profit obtained from the sale will be locked back into your CPF when you sell. Homeowners who have paid full cash or selected areas with high growth would be able to mitigate this.
Again, this impact would be invisible – you wouldn’t know it until you start to do your research on the HDB transaction data around your area.
#3: Is Your Monies Working Harder For You?
By itself – money is neutral and has no energy. But I am sure you would have seen the phrase “make your money work harder for you!”.
How can money work? It doesn’t have hands, arms or legs.
But money when placed in the correct investment vehicle – it can grow faster.
This is where you have to ask yourself – is your CPF monies in the best investment vehicle?
If it is in your HDB flat – is it the best investment vehicle?
Or it is time to consider moving to a better investment vehicle?
Your HDB is your invisible investment vehicle. Were you aware?
Those who have missed the boat can rely on alternative methods like the HDB Lease Buyback Scheme to unlock the value of an older flat (when they are 65 or above) or may only be able to afford another subsidised new BTO flat.
But given a choice, I believe most of us would prefer to get the most out of our assets. And actively move to another property with better capital growth.
#4: Singapore’s Economy Is Now Mature
In the past, we would often hear about how our grandparents or parents made more than 100%-200% returns on their HDB flat. Naturally, they feel that the HDB flat is their best investment because they have benefited greatly from it.
This is partly because Singapore’s economy had roaring growth during that period.
However for the recent past few years, it would be challenging to to make even 10-20% gains from the sale of your HDB flat.
This is because of the maturity of the Singapore economy – it is currently only Singapore economy has matured – it is currently only growing at 2-3% per year.
As such, the appreciation of a HDB flat will be more modest, with the exception of specific areas.
#5: Your HDB Peak Price Is Usually Upon the 5-Year MOP
While your HDB slowly appreciates in price – a BTO HDB flat will likely reach its peak price upon hitting the 5-year Minimum Occupation Period (MOP).
This is because at the 5-year mark the BTO flat will:
- be eligible to be sold on the HDB resale market
- be the “youngest” amongst other HDB resale units in the market
- have the longest lease and become highly attractive to buyers who wish to move in immediately
If you were to remain in your flat and stay on for another 3-5 years, prices may become stagnant or eventually depreciate, depending how long you stay on.
Again, if you’re in highly sought after estates like Clementi, Ang Mo Kio, Kallang, Pinnacle @ Duxton and the likes, you could be more insulated from price depreciation.
But for most of the newer estates in Sengkang and Punggol etc., you will be competing with many other sellers and also the new flats that HDB is continuously building to cater to demand.
For older flats, it is likely they have passed their peak prices and will not perform as well as a younger flat in a similar estate.
I hope you understand that my intention is not to scare you. As a real estate agent, I have seen how homeowners have been affected by a lack of planning or sheer complacency that they will make a neat profit whenever they choose to sell.
My goal is to help you become aware of the various issues.
You may be happy living in your current flat but with the cost of living increasing, there are many considerations – your retirement, providing for your family or your children’s education and potential medical expenses.
It may be prudent to pay more attention to one of your biggest asset, your HDB flat and make more informed choices.
It is really not all doom and gloom. Owning a property in the right location and entering the market at the right price is crucial. The HDB flat may be your first home, but it most definitely doesn’t need to be your last, with proper planning.
If you are looking to explore your options and planning to secure better gains for your future retirement, I invite you to contact me for a non-obligatory consultation.