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Recently, a HDB penthouse maisonette was reportedly sold for a record breaking $900,000 – a new price record. Naturally, it became the talking point among many homebuyers and property investors. This also prompted some of our local and PR clients to ask us if they should invest in HDB flats instead of private properties. While I wrote a blog a few months ago to compare the profitability of HDB flats against private properties, this transaction has prompted me and my team to revisit the issue.
Firstly, a key factor in investing in any form of property is its upside potential, which is dependent on the purchase and selling price. In this case, the unit was purchased in the year 2000 for $750,000. It was subsequently sold in 2010 for $900,000; which works out to be a profit of $150,000. This in turn works out to be an annualized capital appreciation of about 2%, which is less than Singapore’s long term inflation rate of about 3% per annum. In other words, for the unit to be an effective hedge against inflation it should have been sold for at least $990,000. However, banks will likely be very reluctant to support such high valuation for a HDB flat.
Secondly, assuming the unit took a 90% HDB loan with an average annual fixed interest rate of 2.5%, the net present value (NPV) and the internal rate of return (IRR) both works out to be negative. Without going into the tedious calculation, this tells us that even though the unit was sold for a profit of $150,000, it would have been more profitable for the owner to invest his money elsewhere (e.g. unit trusts, electronic traded funds, etc.).
While I would admit that this blog presents an over simplified analysis, the key takeaway I wish to share is that HDB flats may not be the best form of property investment. Public housing should be treated primarily as a cost-effective channel for home ownership attainment and savvy investors may want to look at private properties for investment opportunities. One thing is for sure, the government will definitely step in again to minimise the possibility of making a quick buck if HDB prices continue to rise unabated. Thus, investors thinking of profiting from the property boom via HDB flats should really think twice before playing this game.
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Reader Comments (3 comments)
I agree with Getty Goh that HDB should be treated primarily as a cost-effective channel for home ownership attainment. Some comparsion: a)HDB also has rules in buying and selling for homeowner. (eg: HDB owner cant sell their flat for the 1st 3 yrs after purchase date). b)But private homeowner have the freedom to sell and unlock the profit anytime after they purchase. (only restriction now: Seller need to pay stamping fees if sell within a year.) Therefore I suggest investors to look into private property if they wish to accumlate wealth through properties as they will have more control over selling / Renting and buying power with less restriction as compared.
The HDB Penthouse Maisonette that was was sold for $900K is a one off case transaction. It happens to have attracted a buyer who is cash rich and desires such a design. I personally feel that the pte property prices fluatuates in greater amt while HDB properties; in gd or bad times the fluatuation is minimum. Nothing to worry about!
Should we factor in the drop in value (all else remain equal) due to the reducing balance lease period of a HDB. 10-year reduction would have a significant impact. Thanks.