Why are HDB Resale Flats So Expensive?

35 is the magic number I have aged into. And with it, my eligibility to buy a flat as a single Singaporean starts!

However, sieving through the numerous "catalogues" of houses on resale, one thing stands out- HDB resale flats are expensive!! For a 2017 completed 4 room flat (94 years lease remaining) at Tanah Merah, it is going at $800,000; a similar flat with remaining lease of 60 years is being offered at $560,000.

No small numbers to contend with.

Why are HDB Resales Expensive?

Its simply due to the factor of the rental income these flats can obtain. A 4 room HDB flat (based on latest HDB rental data as of end 2022 of that area) can command a 3k monthly rental if a foreigner rents it from a Singaporean; factoring taxes, period of idle and comission which at most will incur 2 months of rental (usually it is only 1 month in cost). The HDB flat is an impressive "dividend" machine of $30,000 per year. 

When compared against local stocks, it is a steal and there are a large number of foreigner who will eagerly rent from you. Add to that, HDB rentals are escalating as foreign workers are priced out of condos and moving to rent HDB flats instead. 

Effectively the HDB resale is a REIT machine with escalating rents! Who needs REITs when a HDB flat is such an impressive dividend machine. No wonder property blogs are more popular than investment blogs.

Low CPF OA Rates will mean Housing Prices Remain Sky High

In addition, Singapore has been able to maintain the home loan interest rates at a low level of 2.6% or 3+% (if one is taking bank loans) currently. Hence, there is a positive leveraged multiplier effect. 

The chief culprit is CPF Home Loan rates which are set at CPF OA Rate + 0.1% (currently it is at 2.6% per annum). Financially, taking 60% of loan at 2.6% interest while renting out a flat means prospective owners are going to nett 5-6% returns; if one borrows more, the returns is even higher.

(A) Housing Price: $800,000

(B) Loan: 60% ($480,000); Invested Capital (40%): $320,000

(C) Rental Income: Assuming 2 months of rent netted off for property taxes, commission and idle costs - $3,000 * 10 = $30,000

(D) Interest on Loan based on CPF OA Rate: 2.6% * $480.0000= $12,480

(E) What Owners Get From Renting [D-E]= $17,520

(F) ROIC [E divide by A]= 5.4%

5.4% for a dividend machine with prospect of appreciating in price is darn right attractive and this is probably why HDB resale prices are high.

Will it Last?

This is a question people may wonder. In my view, as long as HDB allows the rental of flat space to foreigners as opposed to its pre-1990s policy where the rental of flats were restricted to only Singaporeans and their family members; I expect HDB resale prices to remain sky high. This is because a 5-6% "dividend machine" is impressive in Singapore's investment landscape. 

Secondly, the CPF OA rate must continue to remain below 4%. In my opinion, for CPF OA rate to move to 4% is very difficult due to how it is computed. There are 2 local banks which are suppressing interest rates at very low levels. This in turn makes resale housing extremely expensive.

Thirdly, unless the property tax rate for the "annual value of properties being rented out" is raised, HDB resale prices will remain sky high

Affordable but not Accessible

HDB has tried to keep public housing affordable but due to its ability to control only BTO pricing, the accessibility of affordable public housing for its citizens is now at a stretch. Without more public houses put out for Singaporeans under the BTO scheme, buying a resale flat for the purpose of family planning is stretching people's finances precariously.

However, this is because the HDB resale market is subjected to the forces of rental demand. It is something for the agency to ponder. As for now, this blog is only able to explain why HDB resale flats are expensive and list one of the reasons behind it (from the perspective of investing)