Singapore’s HDB is the Best Risk-Free Investment?

We’ve seen headlines of Singapore HDB flats crossing the million-dollar mark. Is this the best investment vehicle for us all?

Context of Housing Affordability in Singapore

Traditionally, affordability of house prices is always a function of the general (or in this case, median) income of the populace. From there, we can roughly estimate the pressure of the monthly mortgage, as a percentage of household expenses. In fact, there is a ratio used termed as “Price to Income Ratio” = Housing Price / Annual Income.

From a 2023 ULI Asia Pacific Report, Singapore’s HDB is one of the most affordable ones, coming in at a 4.7 (suggesting that it will roughly take 4.7 years of a household income to pay off a “median-class” HDB Property. If we were to work it backwards, the median Singapore household income in 2022 was $10,099 inclusive of CPF. If we multiply it by 12, and by 4.7, we get a figure slightly below $570,000. I believe this is right around the ballpark for a 4-room HDB in the outskirts of Singapore (less the popular ones like Punggol/Tampines).

Comparatively, I think the Singapore public housing market is kept at a reasonable level, in general.

However, I think the source of the commotion is when people start comparing the different options in the market and realized that certain projects/buildings start to become out of reach – specifically those that made headlines. You have Prime Location BTO 4-room flats going at more than $700K, resale flats going for over a million dollars, people started to question the validity and objective of public housing in Singapore.

In this piece I’m not going to argue for or against HDB’s current policy posture, but more so, documenting my thoughts as a potential future homeowner.

Thinking about Singapore HDB as a form of an investment

Frankly speaking, when discussing about this housing topic with my group of friends (mostly fresh graduates) – there is this common consensus, HDB BTO – confirm plus chop make money, and it will be your first pot of gold that helps you “asset progress” to build out your property portfolio.

To contextualize, a few friends have applied, balloted, and secured spots in some prime location BTO projects, and they’re easily committing to a 600-700K HDB mortgage fresh out of university. The main driver for such a decision?

“It’s going to be 1.2-1.4M in 15 years’ time”.

Of course, I’m not part of the decision-making process, but it has dawned upon me that “future appreciation” was one of the most, if not the most important decision for them to buy the property. I’m not too sure if this was by design – but it does ring a few alarm bells in me.

For one, there is nothing in the investment world that is “confirm plus chop make money”, even debt issued by governments can go default. If that’s the dream/promise that you’re sold, please be careful.

Two, 15 years (assuming you committed to a PLH BTO) is a long time, and many things can happen in between. When making such life-changing decisions, I sometimes wonder if we are even capable of making an informed decision.

Life is a tradeoff, by leveraging up so early would mean that you’re “guaranteeing” a steady stream of “income” for the loan/mortgage. What if you hate your job and need to make a career switch? What if you need to move (for whatever reason)? What if the market doesn’t perform as expected? Are the sacrifices worth it?

When a fresh graduate couple is making such a decision – I would reckon that they’re in their early 20s. Can we even comprehend how long is 15 years (Considering that you were half unconscious when you’re a kid)?

What’s next?

Assuming that you did enjoy the appreciation from your HDB BTO and doubled/tripled your capital after 15 years. What’s next? Continue up the asset progression ladder by upgrading into a bigger one/more prime one, or start competing in the private category?

Let’s not forget that if the property market is generally strong, your entry into the next property would also be on the high side. If you sell high, and buy high – where is the advantage? Barring any special circumstances of finding “under-valued” or “mispriced” opportunities, you need a stronger income to service your next bigger loan quantum. So… the key focus here is not really trying to double/triple your capital from the first property.

It’s to have a strong income, so that you can take out a bigger loan the next time round.

Why do I say so?

Assuming you do double the first time round, and netting off the interest and loan, you get to amass decent capital and want to go to the private equivalent. You sold a prime 4-room HDB @ 1.5M (cash proceeds of 600k + 300K contributions), a 3-bedroom condo in that market would probably be near 3M.

25% of 3M is 750K. That’ll not be an issue. The issue would be whether the household income is sufficient to service a mortgage of 2.25M. Income is the problem.

The capital from your first property is basically like a “forced savings plan”, so that you don’t get “priced-out”, but it does not automatically give you the golden ticket to a bigger/better property.  

In fact, I would argue that a bear market for properties would be the best gift you can get as a younger folk – because your entry would have a better buffer (assuming that you keep your job, and your income stays strong).

Everything going up is only good for those that already have high stakes in the game. For those that are just starting out. Don’t be too excited about things going up, it’s not our turn anyway.

Let’s not forget that housing is a necessity, and discretion is not necessarily available most of the time. In Chinese, we have this term – 可遇不可求. You can hope for it, but you can’t sought after it.

Love,

CK