Who can afford a $1m HDB flat?

This always makes headlines. There are many opinion articles online, not counting the endless discussions in forums and group chats.

Crazy, who are there people? How are young people supposed to own a house now? Last time so cheap, now $1m. It's a national lottery, don't miss out, you can profit too. Sell your HDB immediately after MOP.

Why do headlines like "HDB flat sold for more than $1m" create a stir?

Let's go back to basics. What is the purpose of a house? It is one of the basic necessities of living. You need a shelter to have a basic level of dignity and survival. But there is a strong undercurrent in the local property market: using owner-occupied property as investment or retirement fund. Buy as expensive a property you can, the prices can only go up. Sell for profit, upgrade, rinse and repeat. Don't worry if you don't have savings now. Next time sell and downgrade to unlock the value of your house and use it for retirement. Sounds good; after all, so many people have profited from this. So many people are climbing the property / asset ladder. (It's survivorship bias; how many people "lost money" from this? You don't hear from them as much.) Alas, we forget, what is a house for? Deep inside, I think people know it's a basic necessity, hence it creates a stir when housing prices are no longer "affordable".

Measure of affordability

What is "affordable" then? You will commonly hear: Get as much loan as you can. Use CPF to pay mortgage, no or little cash required anyway. CPF cannot touch for many years anyway. In this case, "affordable" means no or little cash for monthly mortgage repayments. It doesn't help that the common narrative is that most people service their HDB mortgage fully with CPF OA, with no or little cash. (Here is a short opinion on this)

This is a bad metric. Let me show you why. To improve the metric of "proportion of people paying mortgage with CPF OA funds, with less than x% of $y in cash", just shift the proportion of CPF contributions to OA – nothing else changes, no extra contributions, no extra income, nothing – and the metric magically improves. It's reward hacking. People who work with complex systems know that a bad metric can break everything. Off the top of my head, CPF is meant for retirement, but what happens if you use most of it to buy a house? You have don't have enough for retirement, and you can only hope to "unlock the value of your house" one day. Then, the house you are occupying becomes an investment asset for your retirement. You see where this is going?

This adds fuel to the already hot property market, since higher loans means higher purchasing power – maybe $1m will not be the headline numbers anymore in the near future. Then it creates an expectation of rising property values, which induces more risk-taking behaviours in expectation of future profits – it's an upwards spiral.

Bonus: any alternative measure?

So if "how much cash do I need to use to pay mortgage" is a bad measure of affordability, are there alternatives? One example is the so-called 3-3-5 "rule", or I like to call it a "framework" since it not really a rule to be followed. It roughly goes: to consider if you can afford a house at a given price, evaluate if you can meet the following,

1. Initial capital of 30% of purchase price to cover downpayment and fees
2. Mortgage no more than 1/3 of monthly income
3. Purchase price no more than 5 times annual income

Notice it doesn't say whether the mortgage is serviced using CPF OA or cash – remember, money in your CPF accounts is also your money. This framework allows you ample buffer should your income decrease, or you fall sick, or you lose your job, etc. And it allows you to save up and invest for your retirement.

Now, suppose a $1m purchase price, with the above 3-3-5 framework, it means:

1. $300,000 initial capital.
2. $10,170 monthly income. Assuming $750,000 loan for 25 years at 2.6% p.a. interest, resulting in $3,390 monthly repayment.
3. $200,000 annual income.

Is the above considered affordable? Maybe to some. But I would hardly think so for the masses and definitely not for young growing families. And don't forget if you do earn at least that annual income, the income tax is not insignificant (which means effective annual income is lower). Most importantly, remember public housing is for the masses and everyone priced out by the private housing market.

To be fair, public housing in Singapore is indeed reasonably priced compared to other affluent cities. I'm not saying HDB did a bad or perfect job – honestly it's a pretty impressive feat. But it is a product of its time, and so it should also be a product of this current time.

What to make of it?

First, what to think about it? Accept it – property prices can only go up especially in such a small city with little land and growing population. But it doesn't have to go up that fast and without any fundamental changes in the economy (for example, income level and distribution) – especially not for public housing, which is precisely a protected market by design.

Then, what can we do personally? Get your priorities right. Everything else will follow. What is a house for? What is it to you where you stay, or what kind of house you are staying in? What are your needs? What can you do to plan for retirement without relying on selling your owner-occupied property? Yes, a property you are staying in can be a store of value, but don't expect it to be "productive" or "profitable" – you are benefitting from it already by securing your basic survival needs; now let others do so too.

Summary

Want to sell your property when the market is at a high price to unlock value or profit? Remember, you need a house to stay in. And to buy a new property in the same hot market means buying at a high price too, and you will be feeding the fire even more. Know your needs, and make your decisions accordingly.

I am not saying we should be blind to these issues. Understand it, talk about it, don't reinforce it.

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