It's all about Amelioration

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The HDB conundrum – A Contrarian View

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The public housing conundrum. Some are loving it, others detest it and some just plain ignorant.

The ignorant –  They are so caught up in their little office environment, oblivious to the issues of their country. They don’t have the means but still want to “keep up with the joneses”. Everybody’s taking that 30 year mortgage, so they think it’s a norm and don’t see the long-term implications of it. They  don’t mind paying that $50,00 cash over valuation (COV) for that resale flat because they think that prices will rise forever and our beloved ruling party will take care of everything. Some might only be enlightened only after they have committed to their new flat.

The upper class of our society will love it, owning

Photo by photo_gratis

at least 2 properties, some a mix of private and public housing even, able to cash in on the so-called “wealth” that our MM boldly declared. The high influx of foreigners creates an almost inelastic demand. That coupled with limited supply of public housing translates into soaring resale prices and rental yields which create overnight fortunes. Speculation is the name of the game and nothing like an irrational market to thrive on.

The people who detest are the middle, lower class and first time purchasers like young couples, who cannot fathom what public housing is anymore. They basically want to get out or avoid  the debt cycle. However with new policies targeting to surrender the profits from selling their HDB flats back to their CPF and irrational exuberance pushing up prices for public housing – these group of people  are really bogged down. With record prices starting in prime areas like Queenstown and Tiong Bahru, but now, with a sub urban areas like Bishan hitting almost a million dollars , they start worrying about whether the effect will trickle down into their desired area of purchase in the near future. After all the government is trying to spruce every area in Singapore, in effort to boost up public housing prices and fatten their coffers. With a planned water sports park at Punggol and business hub at lake side, Jurong, it seems that there will be no such thing as sub urban or outskirt in Singapore anymore. Everything will be prime area, which justifies the need for high public housing prices or the need for more private developments. This group also do not understand why the term HDB public housing became synonymous with words like penthouses as reported in the media.

Hell, I am dead sure that if the ruling party had a choice, the entire Marine Parade HDB strip will be uprooted and all kinds of lush private enclaves will take over. Probably kicking themselves in the butt for not having the foresight. Gees

To buy or not to buy?

Let’s put it in financial sense.  Assuming you are investing in a bond. How much the bond is worth at a given time is just the present value of all future payments plus the final redemption value at its maturity. Essentially, when a bond is nearing maturity, its value diminishes in the secondary market. The reason why I compare the HDB flats to a bond is because these flats are  on a 99 year lease which is like a maturity period. Thing is, unlike a bond, people expect the value of HDB flats to increase all the way to maturity. Putting things into perspective, basically we are only leasing from the government . Thus, placing so much money in something with no long-term value (since it’s a lease) and depreciates yearly, does it make any financial sense? Will an investor pay a premium on your purchase price if the lease of your asset is shortening?   Plus, if you were to pay such a high price for the flat, stretching the loan to 30 years or so, there are many negative implications for  your cash flow and even future generation as the debt might be passed on to them. It will seem to take eons to pay of just the interest portion of the mortgage. One more issue that many people overlook is that unlike private property, since you do not really own the HDB flat,you cannot collateralize your flat for either investment purposes or retirement, rendering it an illiquid asset.

Of course some might argue that they are riding the property wave, hoping to offset the flat once the minimum occupancy of 3 years for a resale flat is over. Look at the HDB resale chart, will you feel comfortable investing in something that is on an all time high? Do you think prices will rise even further to offset the yearly depreciation of your flat? Furthermore, in the coming 3 to 5 years, it is too short term to predict what might happen.  Policies from the government might change which exposes you to the risk of the reaction. After all with the elections coming, the current ruling party might try to soften the market further in view of increased public outcry.

How about external factors as I mentioned in my earlier post about the private property market, like the interest rate environment and the global economy? What’s the next impetus for growth considering that we are still struggling to transform our industrial/manufacturing based economy to a technology/knowledge based one? Case in point 1996, where the property bubble burst, and prices only recovered after almost a decade in 2008. Is that a savvy investment considering the opportunity cost of recovery?

Yes, I enjoy being a contrarian at times. Not being a schadenfreude, but simply questioning and making sense of it all.


Written by Nabs

April 5, 2010 at 7:35 am

Posted in MIND, Politics, Ramblings

10 Responses

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  1. […] Singaporeans – It’s all about Amelioration: The HDB conundrum – A Contrarian View [Thanks […]

  2. It’s actually worse than a bond cos at least from the bond, you will get back principal amount at maturity…theoretically we get back nothing when the lease expires…

    In any case, buyers have been treating their HDB properties like a perpetual bond with an ever-rising coupon rate…

    No wonder the prices are running amok!


    April 6, 2010 at 6:49 am

    • Very true about not getting back anything at the end of the day xtrocious, especially with ridiculous prices these days. Makes the creating wealth logic by our MM even more baffling does ‘nt it?

      I’d never thought that that I ‘ll see a HDB flat hitting a mil, but it seems the reality is sinking in.

      I simply can’t wait for the elections and the defense argument that our ruling party will provide when faced with this issue again. The things they say are getting more and more amusing to comical these days. Sophism at its very best……


      April 6, 2010 at 12:24 pm

      • I’m waiting to see which minister would utter “the ground is sweet” this time round. LOL


        April 7, 2010 at 10:55 am

  3. […] “ seems that there will be no such thing as sub urban or outskirt in Singapore anymore. Everything will be prime area..” Nabs […]

  4. lmao nice info bro.


    May 1, 2010 at 2:45 am

  5. wow nice info bro.

  6. insightful..


    May 23, 2010 at 6:04 am

    • Many thanks for reading jS!


      May 24, 2010 at 12:10 am

  7. […] a comment » I once blogged on the HDB conundrum issue [link], but a recent report that stated resale prices rising 3.8% for last quarter triggered me to […]

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