HDB Flats as an Investment Medium

HDB flat prices have skyrocketed over the past few years. Owners expectedly smirk as their net worth climbs into stratosphere. Some figure that their retirement could possibly bank on the rising property market as they can downsize their house later and profit the balance. The younger generation, however, is not so fortunate. How are our little knights and princesses going to live happily ever after if they can’t afford their own castle?

The Singapore government has predictably taken notice of this issue and expectedly implemented cooling off measures for the property market. One of the strategies is to increase the supply of new flats into the marketplace. Witness the numerous Build-to-Order flats released over the past year or so. This should ideally curb the rampant upward swings of the housing prices in the short to mid-term. However, the question remains, is the HDB flat a good investment medium given the circumstances? Will the prices collapse given the higher supply of flats and rein in the foreign worker count after the election? Will the falling birth rates and an increasingly single population cause a fall in the demand of flats and thus resulting in a reduction in flats’ prices? Would-be flat owners are unsurprisingly concerned.

First, we look at the situation from the angle of the yields of flats as if they are rented. Even if you were to live in your flat, this is your imputed rent as should you not have purchased a flat, you would have to rent it somewhere else. We look at 3, 4 and 5 room flats in Jurong West, Ang Mo Kio, Seng Kang and Toa Payoh.

Flat Price Rent Yield
Jurong West 4-room $400,500 $2,200 6.6%
Jurong West 5-room $475,000 $2,400 6.1%
Seng Kang 4-room $450,000 $2,300 6.1%
Seng Kang 5-room $511,000 $2,400 5.6%
Ang Mo Kio 3-room $341,500 $1,900 6.7%
Ang Mo Kio 4-room $468,000 $2,450 6.3%
Toa Payoh 3-room $348,000 $2,000 6.9%
Toa Payoh 4-room $481,500 $2,500 6.2%

As you can see, while the prices of HDB flats are high, the rentals are equally eye-popping. Thus, the yields of flats range from 5.6% to 6.9%. Under the current economic circumstances, this is a respectable gross yield if you consider the alternatives. Saving deposits earn next to nothing. Money markets earn 0.5%. STI ETF earns 3.3%. 20-year SGS bonds earn 2.4%. You get the idea (even the ill-fated mini-bonds have only 4% returns). Note that HDB and STI ETF yields are in real terms, i.e. their values should rise with inflation while that of debt instruments such as saving deposits, money markets and SGS bonds are nominal yields. Given the high yields of HDB flats, a crash of 50% or more in the prices of HDBs is unfathomable if we assume rentals were to remain constant. If that unfortunate crash were to happen, gross yields will get to double-digit level and loads of people will take money out of the banks and investment vehicles and snap up HDB flats!

A lot of people are uneasy that HDBs have 99-year tenure. The land that your flat sits on does indeed have 99-year tenure. However, you own the structure sitting on top of it. What happens after the 99-year tenure is unknown yet as there’s no flat that’s that old. However, you should be able to renew the tenure of the land and not have to rebuild the structure again. You should suffer slight depreciation charges against your flat over time as some areas of the building might need to be upgraded.

Even if the Singapore government were to decide to confiscate the flat after the 99-year tenure, HDBs are still of good value as you would have “earned” back the principal in less than 20 years via the rentals. While your rental should rise with inflation, your mortgage installments are however fixed at a constant rate. This is assuming that interest rates remain at its current low level and the high rentals will not fall. However, the circumstances might change and topple the ideals.

House ownership brings with it a new sense of pride and belonging. If your time horizon is long term and you expect the rental not to fall and you can afford the down payment, HDBs are a good investment as the installments over a 30-year period is even lower than the rental, i.e. aside from the down payment; you pay nothing and own the flat outright after the 30-year installment period. For couples finding a place to live, the government has sizeable subsides to encourage home ownership. This is a once in a lifetime opportunity not to be squandered away.

Considering that the government population policy is to allow foreign migrant workers to replace the falling birth rates and then some more to boost economic growth, we should see the demand of flats to increase with time, this coupled with the fact that we are land-scarce put an upward pressure on housing price/rental over the long term. Over the shorter term, things are less certain as prices also ebbs-and-flows with the economy which has unforeseeable cycles. All-in-all, buying a flat now would’ve locked in the current price/rental over the future. For those buying to live in it, you can consider the purchase price as pre-paid rent for the next 99 years. Whether the purchase makes sense or not 30 years from now is an unknown, it really depends on your foresight and luck.

3 thoughts on “HDB Flats as an Investment Medium”

  1. Insightful article on the property investment market in Singapore. I think that while considering whether the return on the HDB flats will be substantial or not, we have to also bear in mind that with the current prices of property , it’s a pretty heavy inital investment as well. I think it would be helpful if you did a follow up article on various property loans offered by singapore banking services like DBS etc.


  2. Most HDB owners thought that rising housing prices will benefit them but they are mistaken. If they sell high, they need to buy high as well. So after net-net, most made peanut profits. Fundamentally HDB flats are meant for Singaporeans to live in, and not meant for investment purposes. Singaporeans need to recognise this, in light of various government measures. And I believe this is the message that the government has been driving across in recent years. So if Singaporeans still persist in renting our their HDB flats, thinking that this is a good form of investment returns, then one day they will surely be burnt by new government policies.

    SG Wealth Builder (www.sgwealthbuilder.com)

    1. I agree that if you want to maintain the status quo of the flat size, then buying and selling would be senseless. It’s only when you want to downgrade from perhaps a 5-room flat to, let’s say, a 2-room BTO would you make some serious profits.

      Congrats on having a nice finance blog.

Leave a Reply