HUGE DISCLAIMER: This article is sponsored by DBS Property Marketplace. In case you drop off halfway (pls don’t), you can check out their MyHome Planner where you can get detailed home repayment calculations without doing the math yourself.
With Build-to-Order flats delayed for a couple of years, no thanks to COVID-19, more Singaporeans are desperately turning to resale HDBs.
As a result, HDB resale prices are currently seeing a spike. Flats transacting over a million dollars have been making the news.
If you’re in the market, you might think that you’ve got no choice but to suck it up and buy that $700,000 youngish (5-10 year old) flat you’ve been eyeing.
Well, hold that thought.
In this article, we want to make sure you know what your options are, as well as how much you might want to spend on your home.
Here’s what I’d do if I were on the market for a home right now.
Plan A: Rent while waiting for the BTO
Subsidised BTOs will often be the most affordable option hands down, as compared to getting a flat on the open market.
But here’s the thing, affordability is only ONE of the factors when it comes to buying a home.
- Size (HDB flats built before 1997 tend to be larger)
- Location etc.
The biggest worry about pursuing the BTO route right now is definitely time – homeowners are looking at a possible 5-7-year-wait.
While the most financially savvy thing to do is to move in with the in-laws (or simply live apart), this could put a major strain on any relationship.
In scenarios like these, you might want to consider renting as a stop-gap measure as opposed to biting the bullet and buying private property. Yes, I know you’re thinking it.
Rentals, particularly short-term tenancies not exceeding 1-3 years, can usually be cheaper than buying a private apartment in the short term. We’ve done the math previously here.
Alternatively, you can rent a place from HDB under the Parenthood Provisional Housing Scheme, where rental can go as low as $400 for a 2-room flat at Canberra. And no, you don’t need to have children to apply.
PS: If you’re feeling upset about having to rent and it’s just ‘throwing money away’, that isn’t exactly true – you get freedom and hopefully a space away from prying parents.
Nothing in life is free y’all.
Plan B: Buy a flat in a less mature estate
If location is not a big deal to you (it is to a lot of people), then you should most certainly consider a flat in a less mature estate. Woodlands, Sembawang, Jurong West, CCK, Bukit Batok are areas that come to mind.
These estates may get less love, but as a result, they are also far more affordable. Buying a flat in a less mature location might also give you the potential for capital appreciation, if you’re ready to hold long term.
After all, Singapore is in the process of dispersing business centres or mini-CBDs (Jurong Business District, Paya Lebar Quarter, business parks) throughout the island.
This could mean that your ulu neighbourhood today might become more developed in 10-20 years, which will in turn command higher prices.
Look no further than Punggol for a prime example of this happening.
Plan C: Buy a older resale flat in mature estates
If location IS a big deal to you, then you might want to consider older resale flats in mature HDB estates.
These flats have shorter remaining leases left, and because of that, cost a fraction of what the newer flats cost. We’d argue that these flats are ‘undervalued’ at the moment when compared to younger resale flats which have been getting alot of attention.
Our somewhat radical approach to these older flats is to treat them as long-term leases with full expectation that the value will go to zero in the long term.
This means you can consider looking at your mortgage as rent.
To oversimplify a little, let’s assume you pay everything upfront in cash.
That means a $400,000 4-room flat in Queenstown with 50-years lease remaining is effectively just you renting it for just $666 a month. (Yes, it needs reno). Assuming you live in this place for 25 years and the flat is worth $0 at the end (unlikely), that’s roughly $1,333 a month.
Compare this to a $777,000 4-room flat in Queenstown with 95-years lease remaining, which will cost you about $681 a month. Assuming you live in this place for 25 years and the flat is worth $0 at the end (unlikely), that’s $2,590 a month.
Not a bad deal if you ask me. You could even rent out a room for rental yield to help with the home loan.
That said, under no circumstances should you expect your property to appreciate in value. These HDBs are clearly past the point of no return, so the play here is to keep your costs low, while deploying capital elsewhere for higher returns.
An exception is if your flat is taken back by the government before its lease ends under the SERS or VERS schemes.
However, banking your hopes on this scheme isn’t something we would recommend.
Plan D: Bite the bullet for a pricier, younger flat
Technically, there is nothing particularly wrong with buying pricier HDBs that reach prices in excess of $700,000 or $900,000.
However, the motivation behind buying the flat matters.
If you’re buying these flats because you can afford them and are just buying them as a home, then great.
What we’d caution against is buying these flats, and banking on them as your main investment vehicle. Worse if it leaves you with no cash for other assets such as stocks or REITS.
Why? While some people might see their HDB flat as an investment, we argue that there are many measures in place that discourage the trading of flats for profit.
Overconcentration in such an asset is not ideal. You should still be investing elsewhere in other assets.
What affects affordability?
To make sure buyers don’t overspend, there are several rules in place the government has implemented.
Total Debt Servicing Ratio (TDSR): No more than 60% of your monthly income can go into paying debt. That means if you already have non-mortgage debts, you won’t be able to borrow as much. This applies to anyone buying all types of property.
Mortgage Servicing Ratio (MSR): On top of TDSR, if you are buying a HDB or buying an Executive Condo, only 30% of your monthly income can go into housing-related loans.
Loan to value (LTV): This is basically how much % of the property price you can borrow. Generally, HDB loans allow you to borrow up to 90% of the property price. Banks? 75%.
We use the phrase ‘up to’ because the final % is affected by several factors that are too long to go into one article.
Cash over valuation (COV):
After you’ve settled with a price on the buyer, the property gets valued by HDB/a bank.
COV is the difference between buying price and the valuation, aka what you’ll have to pay in cash.
To calculate your affordability, you’ll have to take TDSR, MSR, LTV and COV into account.
PS: If all this sounds too complex to calculate, you can use DBS MyHome Planner to do the math for you.
Be realistic with your expectations
Of late, I’ve read about young couples complaining about being ‘priced out’ of the $800,000 flats in Bishan, or $900,000 flats in Boon Keng.
Yes, it’s true that these properties are expensive – at least, relative to the median salary.
But what is also true is that these prices are a result of the explosive mix of newer flats located in popular areas.
Of course they are going to be expensive. Fancier neighbourhoods come at a premium. Real estate works just about the same anywhere else in the world.
In the same way not all New Yorkers are entitled to an apartment in Manhattan, affordable flats in Tanjong Pagar, Bidadari or Kallang are not part of the Singaporean birthright either.
There’s nothing wrong with buying an affordable flat now, and then upgrading when you earn more money.
After all, there is merit in learning how to walk before starting to fly.
Stay woke, salaryman
Anyway, that’s our opinion. How about you get a second?
If you think that this blog is a little too obsessed with financially prudent decisions, why not get a second opinion?
DBS has a nifty tool called MyHome Planner on their Property Marketplace where you can figure out how your finances will play out, no matter which stage of your home buying process you’re at.
- Get detailed calculations of future payments based on the property you have in mind
- Figure out the cost of your future house based on how much monthly instalments you can pay or how much downpayment you’re willing to set aside.
They also have a home loan repayment calculator, cashflow timelines, and even property listings. They basically have a tool for everything, so you can just use their calculators to plan out how your finances will look without speaking to a property agent.
Check out DBS Property Marketplace here.