Should we purchase a HDB flat with the intent to upgrade to a private property?

There was an article yesterday in the Straits Times that talked about the growing price gap between 5-Room HDB flats and private property. (See article here) Currently, that gap stands at between $540 to $750 per square foot – meaning if a 5-room HDB dweller wanted to purchase a private condominium of the same floor area, they would have to fork out an additional $600 - $800K (basis 1,100 sq feet). That difference alone would have put monthly repayments on a 25year lease at more than $3,500! And if the buyer hasn’t yet repaid HDB for his lease, then that difference would be topped up, putting the repayment in excess of $4,500 per month for the next 25 months! This is no small amount and perhaps it is time that we took a more strategic look at property purchases and ask ourselves if we were going about it the right way…

Understanding the Landscape

If one’s intent was to purchase a private condominium, then one should simply purchase it at the point of determination. To use a HDB flat to springboard onto private property may be foolhardy because price appreciation of HDB property is much less than that of private property. What this means is that as each year passes, and one has not jumped onto the private property bandwagon, it would be increasingly more expensive (and difficult) to do so.

The next point to note is that salary increments lag property price appreciation by 37%. According to SingStats, the residential property price index increased 190%. This means that residential property costs almost twice what it used to ten years ago. In contrast, the median nominal income level in Singapore rose 53% from ten years ago. Factoring inflation of 4.6% (2012 figures as quoted by the 2014 Index of Economic Freedom), median real income experienced a 56% depreciation. Meaning to say that the increase in income has effectively been outweighed by cost increases over the past 10 years.

What all these mean, ultimately, is that if you couldn’t afford private property at the point of purchase, you would not be able to do so at any other point thereafter, unless of course you had a windfall. Windfalls cannot be predicted and hence, cannot factor into our considerations.

At this juncture, some of you may ask, “But what if we got promoted and made much more than we do now? Wouldn’t that allow us to purchase private property?” Well, yes; and this is an example of a windfall. To illustrate my point, look back at the last 20 years of your life and document the number of times you had a precipitous jump in your salary. Chances are, what you see then would be what you would see happening in the next 20 years!

What is one to do?

It all boils down to your intent. What do you want to achieve over the next 25 to 30 years of your life? Do you want to accumulate as much wealth so as to retire comfortably? If that was your intent, then the best way to do that is to purchase as high a private property as possible now, don’t get married, live a frugal life (eating plain rice with baked beans) for the next 25 years, pay down your mortgage so that you can cash out at millions of dollars when you retire.

But what if that was not your idea of living? What if you wanted a modicum of luxury while you are living now? After all, who’s to know that they day you fully redeem your mortgage, you won’t collapse from working too hard to pay it up, never to see it at all?

But if your intent is that life should be lived in the present, then the property you purchase should be one of facilitating the living. It has to be a means to an end, and not the end in itself. With that in mind, you may realize that the mortgage you secured today is much lower than any mortgage you will secure in days to come. You will then also realize that unless circumstances change considerably, you would be living in this same property over the next 25 years.

Time to see things differently

So perhaps it is time for us to rethink the way we see our life. The days of making a killing through property may be over. With more than 65% of Singaporeans living below a household income of $10,000 (Source: SingStat), a reasonable income level to afford the mortgages of these levels, one needs to see just how much we should be living for the property. Perhaps it is time for us to look at living in the present, than trying to chase a dream that is quickly getting out of reach for many people.

Your intent is really what matters.

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