Why Buying a House in Singapore now is Not a Good Investment or for Rental Income

Following up on my post on why HDB resale flats are so expensive.

It dawned on me that while current HDB flats are providing returns on invested capital (ROIC) of 5.4%, it cuts investing into them too close to be considered as good investments now. This is because 5.4% returns can easily be obtained in the stock market or even among the REIT space in Singapore (Singapore's Keppel REIT is providing 6.73% dividends).

Here are some risks that can depress your potential returns when buying a property here:

Risk 1: Higher Interest or HDB Loan Rates

Worldwide interest rates are rising and locally, this is no exception. Presently housing loan rates are around 4.5% while HDB Loan is 2.6%. This is far below global rates where risk free rate are 4.5-5.0% and property loans are being sold at 6% region (US's 20 year housing loan rates are now at 6.71%)

An uptick in home loan rates here will reduce the ROIC to invest or rent out a property. The current ROIC is currently too low for comfort (5.4%)

Risk 2: Building Oversupply in Singapore 

A massive supply of completed flats and private apartments are completing.

BTOs supply are kicking in with HDB increasing it to 21,000 flats annually

Foreigners are moving out of Singapore due to high rents, Singles renting flats are moving back to their parents, the full effects of foreign worker quota tightening will start from 2024.

An imbalance is soon where incoming supply will outstrip demand growth. Rentals run a high risk of falling which will affect the current ROIC.

Risk 3: Inaffordability Issue Prompts Further Policy Responses

The issue of housing inaffordability in Singapore is very real and a big problem. I doubt cooling measures will end and more policy responses will be done to ensure homes are affordable for Singaporeans. This will cause current resale value to drop and a segment of  renters to leave once public housing becomes affordable again

All in all, the risk of buying a property in Singapore or even buying and then renting out is very high now. I don't feel it is worthwhile buying a property. To add to that, buying/selling/renting properties is an illiquid transaction and incurs a high commission (2% or 0.5 month of the rent). REITs investing or buying blue chip Singapore shares seems to be better option than previous where property prices could move up a lot due to the red hot rental demand in Singapore's market.