Upgrading to a condo is considered a rite of passage for some Singaporeans; like getting through NS, or appearing on Stomp. But are these Singaporeans making a smart or dumb move, by rushing to sell their flat right after MOP? Here are the main considerations:
What would anyone want to sell soon – or right after – the MOP?
Mostly, they believe that time spent holding on to the flat – as opposed to getting a condo – is money lost. This is based on the premise that, with few exceptions, HDB flats do not appreciate as well as a condo.
For example, let’s look at how the prices have moved from 2010 to 2019:
On a average, HDB flats island-wide have seen prices rise from around $381 psf, to about $415 psf last year. That’s up by around nine per cent. Conversely, condo prices have risen by more than a third in the same tine; from an average of $1,170 psf across Singapore, to just over $1,600 psf today.
In fact, here’s something to note about HDB prices since around 2013:
For about seven years now, HDB prices have been struggling like an asthmatic grandma up the steep side of Bukit Timah hill. The average price of a resale flat was about $475,000 in 2013; but today, it’s around $430,000; and this is expected to get worse in 2020 and 2021, given that a record-breaking 50,000 flats will be reaching their Minimum Occupancy Period (MOP) in this time.
(Having that many flats reach MOP at once could raise the supply of resale flats, as there’s a bigger influx of people selling to upgrade).
Here’s the scenario that some upgraders have inside their head:
Say they buy an HDB flat at $430,000, and the trend since 2013 continues. Roughly 10 years from now, they sell their property at close to the same price (if not lower).
So say they bought at $430,000, and they sell with an outstanding loan of about $200,000 (the outstanding loan is owed to HDB). That leaves them with $230,000.
But they’ve been paying the interest on their home loan as well; and after 10 years, that amounts to roughly $85,000. Now, they’re left with $145,000.
But we’re still not done. Remember they need to refund all the money used from their CPF for the down payment, monthly loan, stamp duty, etc. This has to be refunded with the CPF interest rate of 2.5 per cent. Assuming this comes up to another $200,000, that would leave them with negative $55,000 in cash proceeds.
Now they don’t have to pay back that remaining $55,000 to CPF if they don’t have it; but it does mean they’re going to have zero cash in hand after selling their home.
This can make it hard to upgrade to, say, a private property; a bank loan will require a minimum of five per cent cash down for a private property or Executive Condominium. And while they can use their existing CPF for another property again, they would still have lost money due to the interest paid, conservancy fees, home maintenance, etc.
The people who believe this thus prefer to offload their HDB flat as soon as they can, and upgrade to a private property.
*10 years of interest estimated using a full HDB loan of 90 per cent, at 2.6 per cent with a 25 year loan tenure
But are they actually being smart?
If upgrading is an affordable for move them, then it comes down to where you believe HDB and private home prices are going. There are some real signs that HDB flats are no longer the powerhouse, “never fail” assets they were once seen as: seven years with a price movement flatter than a cheap prata have seen to that.
There’s also concern that HDB flats’ 99-year leases loom bigger in our consciousness today; and worries of the 99-year time bomb will grow as the country ages. That can continue to make resale flats less attractive than before.
On the other hand, some people will point out that more liberal use of CPF and the new Enhanced Housing Grant will mitigate some of these effects. Some other valid arguments are:
- Upgraders often end up trading up in value but down in size; the condo units they can afford tend to be smaller than their flats
- Upgraders shouldn’t lose sight of the fact that condos mean higher property taxes, and average maintenance fees of about $1,200 to $1,500 per quarter; this is even higher in more premium developments. HDB flats may not appreciate as much, but HDB conservancy charges are usually two digit figures every month.
- We don’t know how private property prices will move either; while flat prices don’t appreciate as sharply anymore, condo prices may be too high and due for a correction (especially if the current supply overhang and cooling measures intensify).
With this regard (i.e. making more money or being more comfortable), it’s a bit of a toss-up.
It does become a dumb move, however, if they end up going beyond their means
For those who end up with big cash proceeds from selling the flat, it can make them take leave of their senses. Some of them over-leverage by getting a condo that’s way beyond their means, or even have one spouse go and buy a whole condo on their own*.
As we’re fond of saying, the home you’re upgrading to shouldn’t cost more than five times your annual household income; seven times at maximum. And your home loan repayments, plus outstanding debts, should remain at 40 per cent of your monthly household income or below.
If you can be prudent while upgrading, it’s a viable strategy. Otherwise, it’s a dumb move; wait till you can afford it, MOP or not.
*See our opinion on sell one, buy two here.
Do you intend to upgrade almost immediately after the MOP? Voice your thoughts in our comments section or on our Facebook community page.
Looking for a property? Find the home of your dreams today on Singapore’s largest property portal 99.co! You can also access a wide range of tools to calculate your down payments and loan repayments, to make an informed purchase.
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