Comments, opinions and an occasional ramble
HDB flats and the illusion of wealth
The escalating prices of HDB flats is in the spotlight once again with MM Lee’s remarks about HDB flats increasing in price since independence, and that the upward climb will continue into the future.
The Singapore government, from time to time, uses the rising prices of HDB flats as an indicator of the rising affluence of Singaporeans. Most Singaporeans own at least one piece of property, the HDB flat, and with the increasing prices of HDB flats, the implication is that Singaporeans are becoming more and more affluent. I personally think the rising prices of HDB flats across the board is merely an illusion of wealth for the owner.
The reason is pretty simple. The flat is worthless in actual monetary terms unless it is exchanged for cash, i.e. sold. Paper value isn’t exactly real money. The best part is that, most Singaporeans only own ONE HDB flat. If they sell their HDB flat, they’ll need another one to stay in. If the price of HDB flats keeps climbing upwards, even if you make a profit from selling, because of the fact that you have to buy another flat to get a roof over the head, most of that profit will vaporise because you have to pay a high price for a new flat.
If people keep on believing that their flats are worth lots of money, the logical result is that there will be an upward spiral in flat prices. How sustainable this upward spiral is, that’s anybody’s guess. With an upward spiral of flat prices, the biggest winners are not the people who own HDB flats, but the government and property agents.
I personally do not see a solution for this upward spiral of prices, other than trying to contain the speed of the increase. The reason is because it is politically suicidal to force down the prices of HDB flats after years of telling Singaporeans that their flats are valuable assets. Furthermore, with all the upgrading schemes that’s going on that are being marketed as flat value enhancers, even an old HDB flat will not be cheap. Cheap public housing is not possible in Singapore anymore. This is why the ministers are very judicious in their choice of words these days, describing HDB flats as “affordable”.
If you own one HDB flat that’s worth a few hundred thousand dollars, you are not wealthy at all, especially when most flats are around the same price. You are only wealthy if you can make someone cough out 600 to 700 thousand dollars for your flat and then buy one for 300 to 400 thousand dollars. What are the odds of that happening?
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about 8 months ago
What’s the point of “investing” hundreds of thousands of dollars in four walls and a roof that can be monetised if needs be because we endup asset rich cas poor (not enough CPF savings to retire on). Why not have really affordable public housing (not artificially inflated at “market prices” and let the people set aside their surplus CPF savings and even extra cash in a national wealth fund that pays more than the current CPF interest rates? Uniquely Singapore!
about 8 months ago
Welcome back Aaron.
Just for your information, your site has been recommended by a reader. Your articles will be listed henceforth.
SZ
about 8 months ago
Another example: if you pays rises by 50% but you now pay have to pay 50% more for your plate of char kway teow and everything else. Are you really richer?
To be considered richer, your income must exceed your cost of living.
The problem with this illusory rise in property value theory is that while your flat and everything in it remained unchanged, you are asked to pay more tax because some investors and speculators are playing the market to increase thier profit at your expense.
There should be a law that says that a house or flat owner should not be made to pay more tax on his property until he sells it and profit by the increased property prices.
about 8 months ago
You can increase the odds if you consider migrating to another country.
Good to see you updating the site again. =)
about 8 months ago
there are two ways to be ‘affluent’ in the context of rising property prices in Singapore.
1) own two properties. when prices rise, you sell one, profit the gain. Of course, many will say that buying one is tough enough, buying two is even harder. That is why, the rich becomes richer. If you are rich enough to buy two or more properties, you are never really affected by rising property prices. I know of people whose gain in the second property pays for the cost of the first one.
2) buy a flat in singapore, rent it to foreign ‘talents’ in Singapore and work abroad. Find a country where real estate prices are cheaper and create a second home. When it is time to retire, sell the flat in singapore and retire abroad.
If you are middle income and stay in Singapore, you face a few issues. In an ultra small market like singapore, your opportunities are limited. Make a small mistake and it is difficult to get back on your feet. Which is why you are always living in constant fear. Many will spend their entire lives paying for one property and end up with, well, not enough cash for retirement because everything is tied up to property. Only the lucky ones can get out of this vicious cycle. For those born in the late 70s or early 80s, chances are most of their parents already own a flat.Technically the day will come when the parents will, well..move on, and the gain from the sale of this flat/property can be distributed to the children.
about 8 months ago
Thanks for the warm welcome, everyone. It’s the time of the year when I have more time to sit down and pen my thoughts, and this topic happened to be a topic I was explaining to my wife a week or two ago, so I thought it’s a good time to summarise my thoughts in a short entry after hearing what MM Lee has to say.
I think John has succinctly offered the two main solutions an individual can try to resolve the issue of escalating cost of housing. The part on having two properties is the best option, but it really is hard to do for a young couple who’s starting out, unless there’s careful leveraging. Any carelessness will be costly.
As a side note, I really do think that the government should try to slow down the appreciation of flat prices. It’s illogical not to allow flat prices to appreciate as Singapore develops, but at the rate prices are appreciating relative to income appreciation, the future political ramifications are huge, unless the PAP doesn’t care less and already have plans to bail out quickly, taking the coffers along. If that happens, our flats are worth bananas.
about 8 months ago
\\
If that happens, our flats are worth bananas.
\\
Nope. Banana fungus to be exact.
You can eat bananas.
Wow … this article is radical by your usual standards …
about 8 months ago
Aaron Ng,
Our search records indicate Darkness & Co used to visit here, this is an out of point subject. I do hope you can bear with use as he is not responding to our usual channels of communications and this is really the only way to contact Darkness & Co. Could you by any chance help us as it is really very urgent that we speak to him. On the slight that he should visit, I am sure this will be important to him.
Sorry for the inconvenience Aaron for being off topic. I hope this does not in any way disrupt the flow of your conversation with the others. Many thanks and regards
http://singaporedaily.net/2009/11/20/daily-sg-20-nov-2009/#comment-7228
AK (Internet liaison officer of the Saffron Route)
about 8 months ago
That is true.
Besides property agents and government, another party benefiting from it is those who can have the luxury to rent our their HDB flats. Cuz higher cost means better rental. While you can’t convert paper value into cash, you can collect rental money.
about 8 months ago
Hello there,
Your arguments are almost there, just that you lack the knowledge to connect the dots. So I will share two main observations with you.
Just some background, I live in Australia and currently own two properties. Will be leveraging into a third soon. The sole reason I provide this information is to establish my credentials on this subject.
After following a few articles on the Internet, I think it is very hard to have a meaningful discussion on the subject of property. Simply because the vast majority of Singaporeans do not understand real estate fundamentals.
As an example I will cite the poster above me. Rents have nothing to do with higher cost of property. Property costs are linked to supply and demand while rents are linked to incomes and inflation. If rents were linked to the cost of the flat, there would be no such thing as negative and positive gearing.
So most debates on these websites end up revolving around emotional arguments because most participants do not have the knowledge to come up with logical points.
1) Leverage is the huge advantage property has over other asset classes. The basic strategy is to use leverage to accquire multiple properties WITHOUT SELLING your original property.
You have already noticed this with your point about people owning only one flat.
The “secret”, which I have never seen mentioned on any website whatsoever, is that it is prohibited to leverage against a HDB flat. Effectively making any kind of gain in its value worthless for this purpose.
You can find the policy here under “Re-Mortgage of HDB flats”.
http://www.hdb.gov.sg/fi10/fi10207p.nsf/WPDis/Servicing%20Your%20Mortgage%20LoanPolicies?OpenDocument
2) Another point you will find interesting is that it is not so much housing is expensive; rather more that salaries are absymally low in Singapore. Personally I am earning double what I would make in Singapore without considering the forex rates.
Housing is at the 400-500K mark in Australia too; however when a fresh grad gets 50K/year (and those in demand making up to 70K) and a typical professional bringing home 80-100K, prices are still affordable – especially if you are double income with a combined 200K/year and you have equity in an existing house.
I would encourage everyone to learn more about property and what people are doing in other countries. All the information is on the internet and it is really easy to learn – then you can fully understand how the system is stacked against you
In this country, people start buying properties to invest at 18 years old. Just go and look up some internet forums, you will be amazed.
about 8 months ago
Thank you for the insightful blogpost. The Singapore Democrats have featured your post in our blogs of the week section – http://yoursdp.org/index.php/news/blogs-of-the-week
about 8 months ago
This is an auto-bot message issued from the council of the wise of the brotherhood – a communique of regret concerning the DDOS and Darkness 2009 episode.
http://www.temasekreview.com/2009/12/25/temasek-review-continues-to-thrash-state-media-on-google-news-in-terms-of-readership/
Doberman code / broadcasted to all known channels / EP 9937843884 OP
about 8 months ago
“The “secret”, which I have never seen mentioned on any website whatsoever, is that it is prohibited to leverage against a HDB flat. Effectively making any kind of gain in its value worthless for this purpose.” — Melbourne’s comments.
Hi — I can’t really understand the word ‘leverage’ in this context here. What does Melbourne mean when he says that “it is prohibited to leverage against a HDB flat”? I can’t really follow the implications here.
Also, about John’s comment:
“For those born in the late 70s or early 80s, chances are most of their parents already own a flat.Technically the day will come when the parents will, well..move on, and the gain from the sale of this flat/property can be distributed to the children.”
I was born in precisely this period. I think that my parents would be hurt if they read this, although I think I follow the spirit of what John is saying. Just some thoughts.
about 8 months ago
I am not really into this, and do not really know much.. but i have a thinking, they raise the price of the hdb flats, reason is to,of cos by the author, make us think we are earning $$$ from the flat we own…make us feel rich.
The other reason is to suck more money out from our CPF…. :!
about 8 months ago
J,
I guess what Melbourne is trying to say is that you can’t mortgage your flat to raise capital for another property. You have to sell your flat if you want to raise capital, and if you do that, you run into the problem of needing another roof over your head, so you still end up with only one piece of property rather than two pieces of property, which would have happened if you can mortgage your flat to buy a second property.
about 8 months ago
Alvin,
To be fair, the government did not raise the price of HDB flats. It would be more accurate to say the government allowed the price to increase. Anyhow, both are just different sides of the same coin.
Anyway, you got what I was saying, that is, you feel rich, but you are not rich in reality because to monetise your gains, you have to sell your flat. So if you sell now and make a profit, you need to buy another one now, and since the market is going up, your “profits” go back into the new flat since you have to pay more.