Investment potential and risks of various property types in Singapore
What is considered an “Asset”? In properties or otherwise, anything that carries a monetary value is an asset. Of course, there are assets that lose value and assets that appreciate in value. We’d call it Good assets and Bad Assets.
If you are looking at an investment, but you are saying that you don’t like that furniture, you don’t like the view. You are clouding the investment decision with personal views. What is important is not your liking, but the liking of the people who would eventually rent or buy your place. That is an investment mindset, putting your own preferences last, putting your customer’s preferences first.
Of course you will still need to consider getting a Singapore home loan and make sure you properly calculate the cost.
What is the right investment mindset
Investors look for yield and capital gains. If someone tells you that he/she is investing in a BMW 3 Series car, then our question to the person is, how is this car going to give you yield? (Rent it out?) How is this car going to give you capital gains? Will you use it and then sell it for a profit?
Many people say, I will invest in myself, to get a good car, to enjoy the ride to and from work. When I feel good, I am more productive at work, I can earn more, etc. We would rather call it a consumption. Anything that is non monetary in yield and gains is not considered an investment in the strict investment sense.
Is Buying a HDB flat an investment or consumption?
The question to ask yourself is, are you buying this HDB to stay in or to lease out?
If you are buying to stay in the HDB flat, then you are using it. And after you used it, it is consumed. Same as buying a car, after you use it, after several years, it is consumed. It becomes old and useless. You do not receive income from the property.
Can your rental cost be considered a form of income?
Several things to consider, if you are currently renting a place, it costs you money. By buying a HDB flat, you immediately save on rental. In this case, this saving from of rental cost can be considered an income.
You will then be replacing your rental with housing loan repayment, it’s a matter of how much you will pay for housing loan interest versus rental. Do note that you will need to do principle repayment which could mean a larger sum of money sunk into the house.
However, you must then consider whether this income is sufficient to pay for your HDB installment and repayment. And general investment rules applies.
In the case of a rental replacement, we can tweak it to say it’s an investment. However if you rent something cheap and you are later purchasing something too big and luxurious, then the rent you have paid and any savings may be insufficient to pay for your interest for the home loan, let alone the Interest + Principle payment. If you end up paying too much, that means you have stretched yourself too much buying too expensive and too luxurious or that you were too thrifty when you were renting a place.
The decision can then be, should I reevaluate?
Can HDB flats be considered an investment?
If HDB flat or a Private condo is your only home, then will you sell when the prices appreciate?
If the prices run up, will you sell it? Where will you stay?
Therefore HDB should be first and foremost considered a home. Asset values don’t really matter.
HDB flats are for mass market, don’t feel shy about it
HDB flats are more than 80% of all housing types. If there is a pricing rise, it mainly reflects general supply and demand conditions. Of course HDB has been known to mis-manage the supply and demand quite badly leading to a squeeze in HDB prices, leading to a wave of upgrades to Mass market condominiums. Everyone is happy with making money and upgrading to Condo, but do they really know the cost of doing so?
In a scenario of generally buoyant market conditions, the entire moves up. Pricier assets will move up in quantum much more than HDB flats.
Upgrading from a HDB to a condominium during the buoyant market can be detrimental to the wealth of the individual. In cases where Condo prices run up first (Condo prices leads HDB price rise), then in this scenario, when HDB prices also start to run up, when HDB home owner sells his HDB and upgrades to a condo, he would end up paying a lot more.
Percentages are not a good way to measure affordability. If a HDB owner’s flat rose 100% from $300,000 to $600,000 and he went on to buy a condo which has gone from $500,000 to $1,000,000. In this case, he would have been better off to upgrade to a Condo when the price difference between Condo and HDB was at $500,000 – $300,000 = $200,000 difference rather than $1,000,000 – $600,000 = $400,000.
In terms of financing cost, the Condo property buyer would end up paying $400,000 ($1m – $600k) rather than an extra $200,000 ($500k – $300k) in financing cost.
So in the case of an equal rise in property values (in terms of percentages), this would put the HDB seller into a precarious financial situation.
As such costs are interest bearing if you take a Singapore Home loan, therefore it further eats into the property buyer cash flow. Assuming income levels are similar before and after shifting into Condo, the home owner is said to have increased his consumption.
So Can HDB be an investment?
Can anyone make money from HDB flats? The answer is YES. If someone is a Permanent citizen (PR), or is a Singaporean living overseas, as long as that someone does not need a place to stay or has a place to stay after capturing the capital gains.
