This is something we have agonised and debated over for quite a number of months now, and it basically boils down to the choice between condominium or HDB. (Unfortunately, we do not qualify for the HDB subsidy or this would not be an issue at all.) The pros and cons of each are pretty intuitive: condominiums have much better finishing and additional facilities. HDBs are more spacious and have better locations (since our tight budget cannot afford an MRT-side condo). For quite some time now, the argument has stalled on my reluctance to buy a HDB because I feel it is a depreciating asset in the long term, as compared to a 999-year or freehold private condo. This weekend, I took out the spreadsheets and put this assumption to the test.
The results, rather counter-intuitively, are that HDB flats are a much better investment. This is predicated on the assumption that with a fixed budget, the money not spent paying off the much higher loans for a condo can be invested to reap a conservative return. Thus, although the HDB value is lower in the long term, the HDB buyer has a lot more money in the bank.
Specifically, I tested the hypothesis using the following basic parameters: the initial cash available from savings is $100,000 and the amount of cash available to pay installments is $3,000. The annualised investment yield from a conservative diversified portfolio is 8%. And the two properties under consideration are a $500,000 3-room condominium or a $280,000 4-room HDB flat. (For those not familiar with the terms, both configurations have 3 bedrooms.) Additional renovation costs of $20,000 and $40,000 were incurred for condo and HDB respectively, in order to bring both to a similar comfort level.In the calculation, I used a 20-year time horizen. Over this period, I assumed that the condo would increase in value by 50% while the HDB dropped in value by 10%. To finance these homes, the following loans (from the OCBC Loan Calculator) can be taken:
First, the 20-yr condominium loan, leaving $30,000 cash on hand.
Next, the 20-yr HDB loan, leaving $32,000 cash on hand.
Finally, a 10-yr HDB loan, also leaving $32,000 cash on hand. This would also mean that interest repayments would be high for the first 10 years, but for the next 10 all available income would go into savings.
Below are some graphs that show the Net Asset Value (NAV) of various homeowners over a period of 20 years. NAV is calculated as the value of the home + accumulated savings - loan outstanding. The loan bit is not entirely accurate because you can reduce interest payments by terminating early, but its accuracy will increase towards the tail end of the time horizen which is the main point being examined.
Condo Buyer would be worth $750,000 (Condo value) + $214,156 (Investment Savings) for a total value of $964,156.
HDB Buyer with 20-year loan would be worth $252,000 (HDB Value) + $941,854 (Investment Savings) for a total value of $1,193,854. This is about 24% more than the condo buyer.
HDB Buyer with 10-year loan would be worth $252,000 (HDB Value) + $831,445 (Investment Savings) for a total value of $1,083,446. This is approximately in the middle.
Of course this calculation depends on many assumptions, but the verdict seems quite solid. Ceteris paribus, here are some observations on how variations in data affect the result:
1) Property Values. Condo would be a better investment if its value doubles in 20 years while HDB value remains static. But I am not that bullish on the private property market. An AMEX graph (below) shows that an increase of more than 1.5 times would bring us above the historical high, which I feel is unlikely. This would probably only happen if there is significant developments (MRT, malls, schools) in the surrounding area. The HDB price index also suggests that HDB prices should be fairly stable.
2) Investment Returns. All three net asset values would approximately equalise if the return on investment drops to only 4% per annum, which is about equivalent to the loan rate. But given that the STI went up about 14% in 2005 and 24% in 2006, this seems rather unlikely over a 20-year average.
In conclusion, a HDB seems to be a much better choice to meet capital preservation objectives, even if one does not qualify for government subsidies. It is also much more affordable - how many of us really have $3,000 a month in spare cash, and how many will continue to do so after adding additional mouths to feed and possibly losing a breadwinner.
10 comments:
Hi Andrew,
Interesting assessment. My two cents' worth.
1. A condo usually comes with certain facilities unavailable in HDB e.g. gyms, pool, bbq. The costs of acquiring these via club memberships should be incorporated into the premium of the condo.
2. More impt, the upside from owning a 999-yr condo comes from price appreciation AND the significant longer lease. Technically you have to buy 10HDB flats (after each has matured) to match the same tenure of stay.
3. A condo/house also benefits from enbloc sale which has been a common feature in Singapore (due to lack of premium-level land). This substantially increases the value of the property by nature of the land it sits on, rather than the facilities it possesses. Enbloc is available for HBD flats too. However, the current SERS programme, does not usually allow for a "cash refund" but a compensation via the replacement of a market-value HDB flat.
my goodness! I thot flat choice was just supposed to be good or no good??? This is cheem....
I understand the theory whereby you save more from buying a cheaper housing and investing the difference. But....... as you did mention, at 8% growth consistently, you are there. but at 4% growth, it more or less breaks even. though if growth is at 4%, would your condo be likely to fetch 50% returns still?
however, i would argue that the quality of life WHILE living in a condo during that 20 yr period as compared to a HDB was not being included? that my fren, will nvr be matched up by the $200,000 difference? hahaha..... if u have $900,000 its great...... why shld u worry abt the other $200,000? in all, you can't be sure abt ur returns and stuff..... but u can be sure of ur lifestyle. so there.
e&w: thanks for the comments, i'll just clarify a few points
1. i suppose i should have stated first that i don't see myself having much time to use facilities, except perhaps the tennis court. but for the conservancy fee paid, i could easily get a public court, just a little less convenient. of course this is personal lifestyle choice.
2. the longer leased is already factored into the price, and the rate of appreciation
3. en blocs are great, but whether hdb or private, i'd say that depends on luck
hannah:
if i'm going to spend a few hundred thousand dollars, i'll definitely do the math first!
bored:
quite contrary to what you said, i could argue that the quality of life in a hdb is better because for a lower price,
1) it is much bigger
2) it is in a much more convenient location
I agree that generally the finishing of condos makes them more cosy, but that's why i allocate a hefty budget to renovate the place (and still calculate it is more worthwhile)
yao: you buy already, no need to think so much lah! anyway, most important is not to tie yourself down early in life with a huge loan, or it will limit your career flexibility in the future
here's something add on to 'bored at work''s perspective on quality of life:
your current considerations for quality of life are 1)size of apartment, 2) convenience, which i agree you'll definitely get the better deal with hdb.
however, here's something else you may want to think about (speaking as an architect and a hdb-er):
- NOISE pollution. By the time someone is done with his flat renovations, another comes along. I experience easily 200+ days of renovation noise interference in a year (so mandated peace only comes on weekends). Condo users tend to renovate less cos it's starts off at a higher level obviously. The noise can really ruin your day..
- NOISE pollution 2. Void deck funerals, weddings, kids playing. They DO make an impact! Nuff said.
- NOISE and AIR pollution. I happen to be on the 3rd storey and face a multi-storey carpark, so i get more air and noise from there. Nevertheless, HDB carparks are planned to be shared over a larger pool of people/blocks, in addition to numerous service paths/drop-off zones for vehicles going in and out of the estate (think large garbage trucks etc). Bottomline, even when choosing a condo, choose a smaller development (smaller community) and make sure the vehicle planning is kept significantly separated from the populated areas.
- PRIVATELY MANAGED. if there's anything/people you're not happy about, it's easier to make your point within a small managed community...
If your condo offers a shuttle bus to the mrt (which many do), your convenience problem is alleviated.
hello sir!!
nice assessment.
if u account for the tax incentives from hdb, probably the difference will be greater.
jed:
thanks for the comments, very insightful. good food for thought.
elvin:
long time no c! u looking too?
nope, i was studying taxation last semester, so i did some work on hdb and condo since i was studying basic tax planning for individuals. hdb has more tax benefits than condo in general :P
yao: you buy already, no need to think so much lah!
Now that is NEWS. So where/when did yao buy?
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