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Whenever record HDB resale prices hit local news headlines, the response seems to be a mix of disappointment and disbelief.
Why is public housing getting more expensive? And who in their right mind pays S$1.5 million for an old apartment with less than half of its original lease left?
Aren’t they throwing money away?
Certain loss
The beauty of the free market is that willing sellers meet willing buyers, and if we can observe a pattern in their behaviour, it likely doesn’t mean they’re insane, but that they understand something that others don’t.
Let’s look at the latest example: the four-room HDB in Bukit Merah, which has just set a record for the most expensive HDB flat of its size. It was sold for a whopping S$1.53 million, despite having just 45 years left on its lease.
Yes, it’s a jumbo flat, spanning 1615 sqft—considerably larger than what you can find among newer public apartments—in a cosy, four-storey building in Tiong Bahru.
But surely, you might think, it’s a certain loss. After all, the lease is about to reach levels so low that few people would be interested in buying it from the new owner, right? Who’s going to pay decent money when it has 30 or 20 years left?
But that’s where the point is hiding—it’s not about resale value anymore.
Still a steal
While newer homes are considered a store of value, old apartments are not fetching high prices because they are a good investment, but because, as the lease runs out, they effectively become a front-loaded rental. And while their price may seem high, it is actually a huge discount compared to regular market rates.
S$1.53 million across 45 years works out to just about S$2,800 per month. Meanwhile, alternative HDB apartments over 1500 sqft in size, available in comparably attractive locations, close to central Singapore, are currently listed for rent at S$4500 to over S$5000.
It means that the record Bukit Merah jumbo flat offers a 40 to 50% discount in comparison. Plus, let’s bear in mind that prices creep up over time, while the buyer is pre-paying the whole thing in today’s money. So, in the long run, it’s an even bigger saving.
In addition, unlike a rental, you actually own the place so you can remodel it in any way you like, bringing it up to modern standards, effectively creating condo-like conditions for half the price (an equivalent private home would likely set you back around S$3 million or more).
Buyers accept the few compromises—like having to climb a few floors up without a lift, older construction standards and fewer facilities—for the enormous, comfortable space in a central location in one of the most densely populated cities in the world.
More investment-oriented owners may try to convert the space into rental housing for several people, likely multiplying their ROI over time.
And what’s the worst that can happen? That in nearly half a century, they are going to have to vacate it. But there’s also a good chance that these properties qualify for a redevelopment scheme or receive a chance at a lease extension, especially in Tiong Bahru, given the unique character of these small buildings.
What if you needed to sell?
Of course, it’s hard to be sure if you’re going to want to live in the same place for 45 years. What if you wanted to move somewhere else? Would you be able to sell without having to accept mere pennies for it?
I don’t see why not. Now, obviously, given that Singapore itself is only 60 years old, we have no examples of flats with 10 or 20 years left on their lease. At under 30 years, prospective buyers would struggle to get financing, and below 20, not even HDB would provide a loan. You’re also unable to use CPF to finance such a purchase, so the buyer pool shrinks quickly.
On the other hand, just like right now, the value is going to be linked to the prevailing rental rates, and they tend to go up over time. So, the resale price will remain a multiple of what you could pay if you rented, with a discount. There’s no point at which the resale value falls off a cliff—it just gradually declines to $0.
By then, however, the owner will have already extracted plenty of value from his record purchase.
- Read other articles we’ve written on Singapore’s current affairs here.
Also Read: Most HDB apartments could cost over S$1M in the 2030s. It’s not only good but necessary.
Featured Image Credit: Google Street View