Your HDB Flat Is No Longer the Asset You Think It Is

Since 2008, HDB flat owners have been enjoying steadily rising resale and Cash-over-Valuation (COV) prices. To look at a graph of the rise and fall of resale prices is to be reminded of the tracks of a roller coaster. No, I'm not talking about some “kiddie coaster” like the Shrek ride at Universal Studios Singapore – I'm talking about one of those coasters with a huge incline that's both terrifying and exhilarating to ride on. That was until the second quarter of 2013, when resale values suddenly began to fall rapidly. That's the bad thing about roller coasters. Once you reach the peak, you're left with is a horrifying drop that you can't avoid – all you can do is go along for the ride.

Why You Shouldn't Get Your Hopes Up About Using Your HDB Flat as an Asset

“Big deal, prices rise and fall, that's completely normal!” some say. Surely we'll eventually see prices rise up again so we can ride the roller coaster once more right? Well, not exactly. In the past, you could have expected prices to go up and down according to the market. But things are different now, because of government intervention. The reality is that government intervention is what's keeping HDB property prices from becoming even more unaffordable than they already are. Think about it – according to the HDB resale price index, the value of resale flats increased by over 175% from Q1 1992 to Q1 2013! That was until the government took the following actions:

• Implemented Cooling Measures: The first few rounds of cooling measures didn't seem to have much impact on resale prices. But once the government got serious and reduced the Mortgage Servicing Ratio (MSR), loan tenures, and restricted PRs from buying for 3 years – that pretty much did the trick.
• Commenced Building New Flats: HDB released a record number of flats in 2013. In fact, according to the Minister of National Development, over the next three years we'll see about 80K new flats being completed.

Long story short – after releasing 8 rounds of cooling measures and a deluge of BTO flats, MAS finally brought down skyrocketing HDB resale prices in 2013 the same way a .450 Nitro Express bullet brings down a charging rhino. The proof can be seen in falling resale flat prices, which dropped almost 2% in the second half of 2013 and is expected to decrease by as much as 10%. Also, the median COV price has dropped by over 85% over the last 4 years, and continues to drop.

What Can You Expect In The Future?

In trying to make property “more affordable” for the average Singaporean, the government also created a painful Catch-22 situation for HDB flat owners. That situation is this – HDB owners now have to start dealing with the reality that their flat is no longer an asset; now it's just public housing, with a value that's no longer controlled by the market, but the government. Changing the perception of HDB flats from a money making asset to a living space that you and your descendents can inhabit for 99 years will be a painful process. But the reality comes down to these important points:

• HDB flats started out as “affordable public housing,” in the 1960s, turned into VERY profitable asset over the span of a few decades, and now the government wants to make them “affordable” again.
• You don't own your HDB flat, you're only leasing it.
• Your flat's value ultimately becomes $0 at the end of your 99-year lease, because HDB flats will return to their true owner – HDB.

But you don't have to take my word for it. Worker's Party MP Gerald Giam learned that tough truth from the Minister of National Development in an interview posted on his blog. Sure, you'll have outliers like the $1 Million dollar Bishan flat, but for the most part, HDB flats will rise and fall based off the government periodically tightening home buying restrictions when values go too high, and loosening them so resale values can go up. Almost sounds like a form of torture doesn't it? Do you think HDB flats should stay an asset, or do you think the government cooling measures were needed to make public housing more affordable for the next generation of Singaporeans? Share your experience on Facebook! And to find even more useful information on everything personal finance, visit MoneySmart today! Image Credits: TZA