HDB flats were regarded as a form of long term asset by Singaporeans who will buy and hold on to their HDB for a very long period of time. Let us find out why is this so and if HDB flats are still a relevant long term asset given the rapid changes of our economy and demographics of Singaporeans.

1. HOW DID HDB FLATS BECOME AN ACCIDENTAL LONG TERM ASSET?

The objective of building HDB flats was to provide Singaporeans with affordable housing that can be funded with their Central Provident Fund (CPF).

How did this simple objective change from its original purpose into becoming a long term asset for us?

how old boat quay looks like

This is how our old Boat Quay/ Singapore River looked like.

FROM THIRD WORLD TO DEVELOPED NATION

Some of us may have the privilege to witness how Singapore grew from a third world country that no one ever heard of into a developed country that regularly appears in the news and rankings for good reasons.

One of the most telling effects of a growing nation is the enormous economic expansion which also leads to a substantial increase in asset prices during this period.

If we have a time machine to go back to 1980s when Singapore was still developing and close our eyes and buy any HDB flat, we would have reaped huge profits today.

THE BIG LEAP IN RESALE PRICES

Speak to any Singaporean who had owned an HDB flat in the 80s or 90s and have held onto it into the new millennium may testify that they have witnessed a huge jump in their HDB resale prices. Chances are some of them may have already unlocked this profits.

Naturally, when most of your neighbours are enjoying such profits, this will give an impression that owning an HDB is akin to striking national lottery.

But will this trend continue?

It is very common for developing country to keep churning out double-digit expansion in economic activities whereas for the developed country the expansion is usually in the single digits. This will somehow affect how fast our asset value increases in the future.

2. THE CPF ACCRUED INTEREST IMPACT

Most Singaporeans utilises their CPF to finance part or whole of their HDB flat purchase. This is an excellent tool as it helps gives more liquidity in their household cash flow.

However many HDB flat owners do not know that CPF used for the financing of the HDB flat must be refunded back into their CPF account INCLUDING accrued interests accumulated over the years.

What is CPF accrued interest in 2 minutes.

STORY OF AMY AND CHARLES (AN ILLUSTRATION OF CPF ACCRUED INTEREST)

We will use a simple example of Amy and Charles who had recently bought a 4 Room HDB flat for $400,000 and had fully paid it with their CPF.

CPF Ordinary Account interest rate is at 2.5% per annum. The moment we withdraw the money out from CPF, it starts accumulating interests on a monthly basis.

CALCULATIONS

Year 1 accrued interest: $400,000 x 2.5% = $10,000

Year 2 accured interest: ($400,000 + $10,000) x 2.5% = $10,250

Year 3 accrued interest: ($400,000 + $10,000 + $10,250) x 2.5% = $10,506

if Amy and Charles sells their HDB flat on the 10th year, his interests accumulated for the 10 years is approximately $112,034.

The will need to return the sum of $400,000 PLUS the accrued interest of $112,034 which is $512,034.

3. UNDERSTANDING THE DEMANDS OF HDB BUYERS

HDB buyers today are more sophisticated and have more considerations when drawing up their criteria. Apart from the usual convenience at your doorsteps requirements, HDB buyers are keeping an eye on future value as well as ease of selling in the future.

As HDB flats get older, HDB buyers are also shying away from them even though these flats are cheaper. 

transaction volume of HDB by age

Transaction volume of HDB grouped by age.

A typical cycle of an HDB flat will see a peak of sales volume on the 5th to 7th-year mark. Gradually volume will start to decline gradually thereafter.

WHY HDB FLATS RESALE PRICES ARE DECLINING?

Generally, an HDB flat resale price will deteriorate with age. There are other policy changes that will affect the HDB resale price trend.

how a HDB flat might depreciate over time

How a HDB flat may depreciate over time. (Source: Straits Times)

Restrictions to the usage of CPF as well as bank loans further reduces the potential pool of HDB buyers who wants to purchase an older HDB flat.

This reduction in demand will further fuel the decline of the resale price and volume. You may contact me to better understand further what other factors are causing this.

ARE HDB FLATS STILL A RELEVANT LONG TERM ASSET TODAY?

HDB flats have served its primary objective very well, that is to offer Singaporeans an affordable roof over their heads.

However, from the statistics and policies perspective, HDB flats cannot serve as a long term asset because its resale prices and volumes start to decline with age. Coupled together with the increasing amount the CPF accrued interest that we need to refund upon selling, cash proceeds will gradually decline as time progresses.

For families who are constantly looking at building wealth gradually and safely, the correct use of HDB and CPF can work to your advantage. Our Property Wealth Planning strategies have many different scenarios to help families acquire long term assets and to accumulate wealth through property investments.