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)

How to earn a Higher than Bank Interest for Retirement

Many of us know what is CPF because a portion of our pay is always "locked" to it. But in the current low interest environment, did you know the CPF system is probably the best money hack available to grow our wealth for retirement? One way is through the CPF Retirement Top Up Scheme. 

CPF Retirement Sum Topping Up Scheme (RTSU)

CPF RTSU is a scheme which allows us to make voluntary cash contributions into our CPF Special Account (CPF SA). The money goes into your SA which then grows over time.

If you like most Singaporeans have to continuously work to make ends meet, there is an extremely high chance that at age 55 (or later), you will be able to withdraw and enjoy the RTSU top up amount you have put in.

Benefit 1: High and Stable Interest

The CPF Special Account gives you 4% interest and is backed by the Singapore Government. In short, you are buying Singapore government bonds which continuously yields 4% each year that you can withdraw at 55 (or opt to continue holding post-age 55 to enjoy the 4% interest). 

If you do an RTSU top up at age 25, its the same as buying a Singapore bond of 30 years. 

In the current market, private investors have to accept a 1.3% interest yield when investing in a Singapore 30-year bond, however we as CPF Account holders get to enjoy a 4% interest ! CPF has never lowered the SA interest to be lower than 4% since 2000.

Even among banks, there is no bank that is offering such a high interest rate for their personal banking accounts or FDs (in fact many banks are lowering their interest rates for accounts)

Below is a comparison of Singapore Bond Yields vs CPF:

                    ^Data Extracted from MAS website on bond yields.

Benefit 2: Top up early and you will be in a much better position than others

Let's create two hypothetical person in the world: Jack and Daniel. Both earn the same pay and progress the same; the only difference is that Jack puts in $7,000 annually in his RTSU from age 30-39. Here is the low down: 

If both of them decide to work until 65 and only start to withdraw their CPF SA, the difference in their CPF SA balance is going to be huge.

At age 65, Jack has an approximate $220,000 head start over Daniel to enjoy for his retirement. This was due to Jack's decision to set aside $7,000 yearly from age 30-39 to prepare for retirement.

Benefit 3: Tax Savings in the Present 

The first $7,000 you top up each year allows you to enjoy tax savings. This will be automatically filed into your annual income tax assessment.

However not Everyone Qualifies for it

CPF has an annual contribution limit of $37,740. Any money that you top up into CPF and exceeds the contribution limit will be refunded to you and you will not enjoy any of the above benefits. This means only those earning $100,000 and below annually can enjoy this.

In addition, if your CPF SA balance has exceeded the value of the current full retirement sum ($181,000 as of now); you will not be able to do RTSU.

Act on It!

Based on the above information, it is perhaps wise to start RTSU in your 30s to 40s. This is because if you start too early at the early 20s, your money is going to be locked in for a long duration of 30+ years. However if you do it too late at say age 50, there may be a chance that your CPF SA has exceeded the full retirement sum and you will not be able to top up or there is too short a time frame for your money to compound by leveraging on the high interest yield of CPF SA.

So plan your retirement and remember out there, there exists a scheme called the RTSU - available for many ordinary folks like us to act and take advantage of. 

To read up more on this scheme, click on the link here (it leads you to the CPF website)

Getting to know: Home Protection Scheme (HPS)

The Home Protection Scheme (HPS) is a mortgage-reducing term insurance which covers an individual’s liabilities on home loans in the event of death or permanent disability. Its premiums are affordable and is a government initiative. For every $100,000 coverage under HPS, the annual premium is about $76; that is cheaper than most term insurance.

Eligibility

Currently home owners making HDB loan repayments through CPF-OA have to be enrolled into HPS. Exemptions from HPS is allowed if one shows proof of other forms of insurance coverage. However, in my opinion, the HPS is the most affordable plan and it is difficult to find a similar plan at a lower dollar to coverage rate. It is good too for HDB owners servicing their home loan through a bank to consider the HPS.

Why it is important to learn about HPS

Often, financial planners may unwittingly advise to obtain more coverage (through whole life plans) on the pretext that you are now a home owner with a housing liability (home loan). As many may not be aware that they are covered under HPS, as the funding of premiums is through CPF savings, they may land up in a situation of being double covered - under HPS and a more expensive insurance plan recommended by the adviser. Hence knowing if you are covered under HPS reduces your insurance expense.

To summarise, the HPS covers an individual’s home liability loan. You have to be insured under HPS if the servicing of your housing loan is through CPF-OA, following this reasoning, one can safely presume many new HDB owners are in fact covered by HPS (I wonder how many are aware of this). Furthermore, HPS is one of the best dollar for coverage term insurance, being priced at approx. $76 per $100,000 coverage.

For majority of Singaporeans, it is important to be aware if we are covered by HPS before embarking on insurance planning. It ensures optimal planning and prevent us from falling prey to purchase seemingly more expensive private insurance. To know if you are covered under HPS, do check your CPF statements to see if an annual HPS premium is deducted from your CPF savings. Alternatively, feel free to email CPF to make an inquiry.

Planning your finances and retirement using CPF

CPF has been a much talked about topic in recent years. However, most discussions has centred on how it works, why it’s good etc. Little has been discussed on how best to work with it to optimise savings for retirement or for monthly expenditures.

Make CPF our savings

Our CPF savings comprises of three accounts: ordinary account (OA), medisave account (MA) & special account (SA). It is funded by us and our employers’ monthly contributions. For different age groups, a certain percentage of our salary goes to the respective accounts. The table below shows the allocation rates.

CPF OA

In my opinion, the CPF OA should never figure prominently for retirement. It should be utilised almost fully for our housing purchase. This means we should purchase homes where the loan’s monthly instalment is approximately 20% of our salary. This is so that our mortgage instalments are funded by the OA with a bit leftover being able to enjoy a 3.5% interest and can be used for later loan repayment.

Paying our mortgage entirely through CPF means we can use our take home salary for other purposes such as equity or bond investing or provide comfort to the family. It makes our life easier as no cash form our pocket is needed. Lastly, HDB housing loan is a strategic debt.

CPF MA

The CPF MA should be used for retirement, pay hospital bills and meet the stipulated minimum sums at 55. As it yields a 4% annual interest, it is strongly advised not to draw down for insurance premiums unless you are a pretty good investor. Otherwise, please do not touch it as it makes a good “long term bond”.

CPF SA

The CPF SA is your retirement and bond fund. To buy into this statement, it is important to accept this point.

We can meet the minimum sums

In my analysis, I painted a scenario where an individual starts off with a pay of $3,000 (inclusive of one month bonus), works from age 25 to 55 with a 3% annual increment. Eventually he will accumulate $360,077 in his CPF SA and MA accounts. This figure is higher than the current Basic healthcare sum and retirement sum set at $48,900 and $80,500 respectively. Adjusting for 3% inflation and 30 years period, the figures is only $314,087. Regardless, you would have accumulated more than the minimum sums.

Furthermore, my assumption is simplistic because for females, they are likely to start work at 23. Hence, accumulating slightly more than the $360,077 projection. For males, it is important to note we will receive $3,000 to $9,000 more in our CPF SA due to completion of national service and reservist cycles. This was not factored in my analysis; hence it is likely we can meet the minimum sums.

Bond/Retirement Fund

Having established we can meet the minimum sums. It can then be said: Voluntary contribution to our SA account is a “bond investment fund”. This is because whatever is voluntarily topped up into SA can be withdrawn in full at the age of 55 since the minimum sums are met.

With the ability to tap on a “CPF bond” yielding a 4% return (CPF SA’s interest) and AAA rated, it is a great bond to be invested in. Due to the low risk but decent returns, we can use the CPF SA to create a product better than insurance products sold by banks. I will advise for individuals to top up into the CPF SA preferably between the ages of 30-35 to capitalise on it.  

After 55, we can opt for our “bond investment” to be converted into an annuity plan through CPF Life. Alternatively we can withdraw and enjoy its fruits during retirement. It is important to note as we get older, our portfolio should not just be chasing returns but focus on income stability. This is why annuity plans are catered for older folks.

Click here to learn more about voluntary contributions to CPF SA.

Planning finances

So there you have it. CPF OA for housing expenses, MA for medical expenses and retirement; while the CPF SA for our retirement/bond fund.  

A long term alternative better than the Singapore Savings Bond (SSB)

Many of you have heard about the Singapore Savings bond which offers 2.63% returns if one holds it for 10 years. But did you know there is a long term bond instrument presently in the market, is as low risk as the Singapore Savings Bond but yields a higher return?

Introducing the CPF Special Account (SA)

Yes no mistakes here; the CPF bond is it. However, do note unlike the SSB, it cannot be redeemed at any time, only after you are 55.

How do we buy these bonds?

If you are interested in buying the "CPF bond", just make a voluntary contribution into your CPF Special Account (SA). Furthermore, the CPF Bond accepts any amount; there is no minimum of $500, no $2 application fee charge or risk of not getting your full no of bonds. It is advised only individuals who meet the below criteria makes a voluntary contribution to CPF SA:

(a) Earn $6,000 and below in monthly wages and; 

(b) Are very likely to meet the minimum sums

There are two reasons. Firstly, it is due to the annual contribution limit of $31,450 into CPF. Any amount higher than this, you will not be able to voluntarily contribute. For an individual earning $6,000 monthly, his total monthly CPF contributions will be 37% (20% from employee and 17% from employer) or $2,220. Hence, it is likely he will be close to the CPF contribution limit. CPF will just refund you the amount without interest for amounts above the contribution limit.

Secondly, it is important to meet the minimum sums because we do not want our voluntary contribution trapped in CPF forever. Currently, with the Basic healthcare sum and retirement sum set at $48,900 and $80,500 respectively, I believe it is easy for majority to meet it should we work continuously from age 25 to 55. Using a basic scenario where an individual starts off with a starting pay of $3,000 (inclusive of one month bonus), works from age 25 to 55 with a 3% annual wage increase; the eventual accumulation of CPF proceeds in MA and SA accounts will be approximately $359,077. Hence it is safe to assume we can meet these minimum sums (even if they are adjusted for inflation), and whatever is voluntarily topped up into our CPF SA can be withdrawn in full at the age of 55. After all, CPF are our own savings.

CPF Bond is AAA-rated

When one contributes to the CPF SA account, the money is used to buy special government securities backed by the Singapore government, therefore we are in fact buying a triple A rated sovereign bond.

Do note, as our CPF SA proceeds can only be withdrawn at the age of 55, there is a maturity date for our “CPF bond” (depending on the age you top up the money). For example, if a 27 year old investor voluntary tops up $3,000 into his SA, he will be buying a “28 year CPF bond” (since he can only withdraw the money at 55) which will yield a 4-5% annual return.

Benefits of contributing

There are two benefits. Firstly, the interest provided by “CPF bonds” is much better than ordinary Singapore bonds sold in open market. Let's use the example of a "28 years CPF bond". On the open market, a similar 26 year SGS bond is sold at 3.01% yield. Hey, that is way much lower than my "28 year CPF bond" returns! 

Singapore Government Current Bond Yields

Now let’s use another example of an older folk who makes use of these to invest in bonds; Mr Tan (aged 45) makes a voluntary top up to his CPF SA. Using this mechanism, Mr. Tan is in fact buying a "10 years CPF bond" which still yields 4%. Again cross referencing with the open market, a 10 year Singapore bond is sold at 2.70% yield!

Secondly, you will obtain tax savings for voluntary contributing to your CPF SA. For example, a voluntary top up of $3,000 into your CPF SA will gain you a tax savings of $210 (assuming 7% tax bracket range). This extra $210 can be used as to treat your family to a meal or be used to invest in the STI ETF to grow your wealth.

We are already heavily weighted in bonds

While you may be tempted to invest in these bonds, it is important to know this.

As Singapore Citizens and PR working in Singapore, 37% of our salaries are already channeled into the Central Provident Fund (CPF). Given what I have explained earlier where the proceeds in our CPF are being used to buy special government securities bonds (returns of 2.5% to 4.0%) to fund our retirement. This means much of our net worth is already in bonds. Hence, it is unwise to invest more of our wealth into bonds as we will become over weighted in bonds and thus affecting our returns. Personally, I will recommend for approximately 40-50% of our net worth to be in bonds.

So how do we calculate our portfolio weightage? Suppose Mr. Tan has cash savings of $50,000, stock holdings of $50,000, a 5 year retail bond of $50,000 and a CPF total balance of $50,000. From this scenario, Mr. Tan will have a portfolio of 25% cash, 25% stocks and 50% bonds (CPF + retail bond).  

To conclude should you feel you need a larger allocation to bond; you may consider the “CPF bond” for long term bond investing.