Should You Keep Your HDB?
In my previous post, I shared about how you should use your CPF wisely. Any amount of withdrawal from your CPF Ordinary Account to pay for your HDB is subjected to CPF accrued interest of 2.5% per annum. It may seem a small amount at the beginning, but because of compound interest, you would likely be surprised at the lump sum of accrued interest, should you eventually decide to sell your HDB.
What is a compound interest?
Compound interest is defined as "the addition of interest to the principal sum of a loan or deposit, or in other words, interest on interest. It is the result of re-investing interest, rather than paying it out, so that interest in the next period is then earned on the principal sum plus previously accumulated interest."
To put it in the layman terms, the total amount of CPF accrued interest keeps increasing every year, even if you have fully paid off your HDB. It will only stop when you let go of your HDB.
In other words, the longer you hold your HDB, the lesser cash proceeds you get from the sales of the flat.
For learning purpose, allow me to share with you my personal record. I sold my HDB in November 2017. Because I held my HDB for close to two more years from the date of MOP (Minimum Occupation Period: 5 years), I lost an opportunity cost of more than $90,000 in CASH!
Note: This was recorded on 15 Nov 2017. The accrued interest based on my principal was $12,008. The accrued interest will continue to increase until the sales of my HDB reaches completion in end March 2018.
What I show you is only my account. I have not included my wife's. Our total accrued interest is estimated to be more than $30,000 by end March 2018.
Do bear in mind that we didn't use HDB loan. We used bank loan. Thus, our mortgage loan interest had been significantly lower than HDB loan interest for the past 7 years. We started from 0.88% and it had been lower than 1.8% all these years. HDB loan interest is consistently high at 2.6%!
Furthermore, if you took a HDB loan, it is compulsory to first wipe out every amount of CPF monies in your CPF Ordinary Account, before you could loan the remaining amount from HDB.
In other words, under HDB loan, most HDB owners have to pay a higher interest rate and higher initial downpayment for their HDB flats.
This means that the total amount of CPF used (principal amount) is MORE, resulting in HIGHER amount of accumulated CPF accrued interest.
My wife and I used bank loan. We paid lower interest rate for 7 years. Neither did we have to wipe out our CPF monies from our CPF Ordinary Accounts. As a result, our total CPF accrued interest is lower in general.
Yet it is still about $30,000!
As shared in my previous post, when you sell your HDB, you will need to return the total CPF used AND the total CPF accrued interest back to your CPF Ordinary Account. This means that if the CPF accrued interest is $30,000 (in my case), you will have $30,000 LESSER in cash proceeds from the sales of the HDB.
The longer you hold on to the HDB, the higher the accrued interest and the lesser the cash proceeds.
Some people say, "Well, don't worry, my HDB price will keep appreciating. One day, I can sell it at rocket high price."
Is this really true?
Let's take a look at history.
In General Election GE 2011, Singapore saw a 6.46% swing against PAP from GE 2006 to 60.14%. It was the lowest since Singapore's independence.
Source: Singapore opposition makes historic gains, Financial Times, 8 May 2011
It was also at the same election that PAP lost Aljunied GRC to the Workers' Party. Including Hougang GRC, the Workers' Party ended up with 6 seats in Parliament. That was the best opposition parliament result since independence.
Public housing prices and shortages of supply were the top problem in GE 2011, resulting in Minister Mah Bow Tan to eventually step down from the Cabinet after 27 years of being an MP in Tampines GRC and 12 years of being the National Development Minister.
Source: Politics, The Straits Times, 23 August 2015.
When Minister Khaw Boon Wan assumed the role as Minister of National Development, he did many changes to HDB policies in order to stabilise HDB prices. In fact, he did such a great job that he was promoted to do Transport (probably one of the toughest portfolio).
Mr Khaw had one focused objective: To bring down HDB prices gradually by ramping up the supply. We all know that he has succeeded.
He said the followings:
"The social objective is to ensure home ownership and affordability."
"If there is another supply crunch like that of the last few years, BTO buyers will come into a windfall as resale prices pull away from those for new flats."
Source: HDB will be the price-setter: Khaw Boon Wan, The Straits Times, 13 April 2013
Mr Khaw reiterated that the prices of public flats will not rise forever. He added, "If housing (referring to HDB) prices keep rising, it won't be good. If we can maintain them or even lower them by a few per cent, for example 5 per cent, that's good."
Source: No drastic price drop for HDB flats: Khaw Boon Wan, The Straits Times, 6 May 2013
In August 2013, MAS (Monetary Authority of Singapore) tightened the loan eligibility of buyers by capping the mortgage servicing ratio (MSR) to 30%. Maximum loan tenure for HDB loan was also reduced to 25 years in January 2013.
With the loan eligibility tightened, HDB prices cannot rise too high. If it ever rises too high, many buyers would not be able to afford a flat - whether it's a BTO or a resale flat.
What would then happen?
As Singaporeans like to complain, we would face another GE 2011, should our government ever allow that to happen again.
In 2014, as if multiple changes were not enough to bring down HDB prices, new HDB valuation procedure was introduced. During Minister Mah Bow Tan's days, cash over valuation could go up as high as over $100,000-$200,000 for resale HDB flats!
But Minister Khaw Boon Wan changed the policy in 2014, so that COV could be reduced to zero and that resale flat prices would be stabilised in the long-term.
Source: Singapore Budget 2014: 5 things about cash-over-valuation or COV, The Strait Times, 4 March 2014
After Mr Khaw took over the office, he started to ramp up the supply of HDB flats. Minister Lawrence Wong, who took over Mr Khaw's role in 2015, continued to do so.
Source: Gentle fall in HDB resale prices a good thing: Khaw, TODAY, 30 December 2014
27,000 BTOs were launched in 2012.
25,000 BTOs were launched in 2013.
24,300 BTOs were launched in 2014.
15,100 BTOs were launched in 2015.
17,951 BTOs were launched in 2016.
18,095 BTOs were launched in 2017.
17,000 BTOs will be launched this year 2018.
Let's take a look at how this impacts the resale prices.
The Resale Price Index (RPI) had risen drastically from Q1 2007 to Q2 2013. Since Q1 2007, it rose a total of 70.2% !!!
From Q3 2013 onwards, after a series of cooling measures and ramping up of supply, the RPI began falling. From Q3 2013 till Q4 2017, we saw a total drop of ONLY 12%.
In December 2014, Mr Khaw said that "A single-digit fall in public housing resale prices next year would be manageable and a very good development."
He added, “A soft single digit is something the human mind, and employers, employees, the environment and the economy can adjust to.”
Mr Khaw referred to the total percentage drop per year. For many years since 2007, it had been double-digit growth. Hence, our government has been planning for it to have single-digit fall.
Now, if the RPI had risen 70.2% since the beginning of 2007 to Q3 2013, and merely dropped 12% from Q3 2013 to end 2017, it seems that there would still be continual (and gradual) drop for many more years to come.
This will keep public housing affordable and Singaporeans happy.
We can see the government reinforcing this with recent new polices.
In October 2016, Minister Lawrence Wong introduced the new BTO scheme, where the wait time will be shortened to 2.5 years.
Source: Shorter wait for BTO flats on the horizon: Lawrence Wong, The Straits Times, 10 October 2016
At the beginning of this year, a new resale procedure started. HDB will now confirm the valuation of the flat.
"Another change is that buyers will soon get the HDB to confirm the value of a potential flat directly, instead of getting a report through a panel of valuers."
This will further prevent the rise of resale HDB prices.
Source: HDB resale transaction time to be halved to 8 weeks from 2018, The Straits Times, 19 October 2017
Do you really think that HDB prices will keep going up like the past?
In my personal outlook, with the continual supply of BTOs, new policies and many cooling measures in place, it is unlikely that public housing prices would reach rocket high prices like the past. In fact, HDB prices will continue to remain stagnant, with very little or no growth for many years to come.
Returning back to my own example, I shared that I had sold my HDB in November 2017. Because I held my HDB for close to two more years from the date of MOP (Minimum Occupation Period: 5 years), I lost an opportunity cost of more than $90,000 in CASH!
Why?
1) The supply of BTOs in Punggol has been consistent
2) There are many MOP units in the market every year
3) HDB resale prices are generally following a downward trend
As a result, the resale prices keep falling.
Note: If you stay in Sengkang/Punggol, the value of your flat will likely keep going downwards for many years to come.
My HDB cluster reached MOP in early 2016. Below were the early transactions of my cluster.
One and a half year later, the transactions were as follows:
Source: HDB Resale Prices
For 4-room Punggol Central, the price dropped from $455,000 to $405,000 based on 7th-9th floor.
For 4-room Punggol Central, the price dropped from $480,000 to $430,000 based on 13th-15th floor.
That is a difference of $50,000 CASH!
In my scenario, because I waited close to two years before I sold my HDB (7th year), I lost this opportunity cost of $50,000.
Not only that, I had to pay a resale levy of $40,000 CASH because I missed the opportunity to purchase those available EC units without resale levy!
Some may say, "Well, since we have to pay resale levy from now on, we won't face the same loss of opportunity cost."
I agree with that. But do you know that there is another opportunity cost this year, especially during the first half of 2018? I will share more in another post, as this post is already pretty informative.
In my scenario, I lost an opportunity cost of $90,000 cash. Not forgetting that I still have to return ANOTHER $30,000 cash from my sales proceeds due to CPF accrued interest. If I were to let go of my HDB two years earlier, the accrued interest might have been reduced by $10,000. That would have been a total opportunity cost of close to $100,000 cash!!!
I'm sharing all these so that anyone who reads this post doesn't repeat similar loss of opportunity cost.
In conclusion, should you keep your HDB?
It depends on your unique household situation. Not everyone can do the exact same thing. In fact, do NOT sell your HDB without planning the next move wisely. Property is a mid-long term investment.
With detailed analysis, risk assessments and thorough financial calculation, you may be able to let go of your HDB and go for asset progression, so that you can leverage on your asset to grow your savings and wealth, instead of losing your hard-earned money. More often than not, asset progression is actually easier for many HDB owners than they realise.
For more information on whether you should keep or let go of your HDB, and receive a free assessment on wealth creation and financial multiplication, click here.
In my next post, I will share more on asset progression and what most property agents don't reveal in internet/facebook marketing.