How Your Property Can Still Provide For Retirement In 2023 And Beyond
Retirement planning is paramount to many Singaporeans. Beyond the traditional portfolio of stocks and bonds, real estate has always been a compelling and tangible asset class that can redefine your golden years. In this age of uncertainty, where economic landscapes can shift unpredictably, the stability and resilience of real estate make it a beacon of hope for those seeking a robust retirement strategy.
The past few years have seen significant changes in the Singapore property market – from a sudden upsurge in prices to a new Prime and Plus model of flats to increased stamp duties. To top it off, we’re headed into a more volatile economy, due to external factors like wars in Europe and the Middle East. This has led to questions over whether residential property remains “the way to go” as a retirement asset, and how expectations have changed.
HDB flats as a retirement asset?
HDB resale flats
In considering HDB flats as a retirement asset, let’s first look at the situation with resale flats today.
At the time I’m writing this, it’s November 2023. Here’s a snapshot of prices today, and how far they’ve moved in the aftermath of Covid:
Note: All data is from Square Foot Research
HDB flat prices saw their sharpest uptick in prices throughout the post-Covid period. Resale flat prices now average $572 psf across Singapore, up from $452 psf in 2020.
Prior to this, resale flat prices had actually declined since the last peak in 2013. To grasp how big a change this is, the past two to three years have managed to reverse almost eight years of decline since 2013. Here’s what it looks like over a decade:
Back in 2013, the government imposed the Mortgage Servicing Ratio (MSR). This capped monthly loan repayments to no more than 30% of monthly income, when buying an HDB property.
On top of that, HDB no longer allowed sellers to do a valuation report before selling their flats because they were using the valuation as a benchmark to set their prices, resulting in Cash Over Valuation (COV).
The issue of lease decay, especially for older flats, came into the spotlight in 2017 when our minister, Mr. Lawrence Wong, cautioned that not all flats will be eligible for the Selective En Bloc Redevelopment Scheme (Sers). This caused many homebuyers to shun older flats.
The result was a gradual decline in resale flat prices, making them much more affordable right up to Covid. But once Covid struck, construction of BTO flats came to a screeching halt. Even after the lockdown period, the resumption of construction was very slow. Completion of BTO flats was delayed. Naturally, many people turned to resale flats. This caused a surge in demand for resale flats, thus pushing resale flat prices very quickly over a very short time, as you can see above.
(I wrote in May 2021 what is driving the red-hot HDB resale market)
The introduction of the new Prime and Plus housing models may compound this effect, at least over the near-term.
BTO flats new classifications: implications for HDB flats as a retirement asset
In August 2023, it was announced that the old system of mature versus non-mature neighbourhoods would be scrapped. Flats will come in three categories: Prime, Plus, and Standard by 2H2024.
Prime flats are located in central areas, such as Queenstown or Tanjong Pagar. Some currently existing Prime projects include Verandah @ Kallang, Farrer Park Fields, and Alexandra Vale.
Plus flats do not yet exist at the time of writing. However, these are flats that will be closer to malls, MRT stations, or their individual neighbourhood hubs (although the neighbourhood may be a fringe area.) The first of these will be Bayshore, to be launched in 2024.
The main differences between Plus, Prime, and Standard (normal) flats include:
- Plus and Prime flats will enjoy more subsidies than Standard flats but will be subject to a Subsidy Recovery (SR), which must be paid back when the flat is sold. This applies only to the first batch of buyers, and the amount varies for each project. This is to make up for the bigger subsidies involved.
- There is a 10-year MOP on Plus and Prime flats, including for resale buyers.
- During the 10-year MOP period, owners can’t rent out the entire flat or invest in a private property.
- Other eligibility requirements, such as the income ceiling, continue to apply to Plus and Prime flats, even at the point of resale (normal resale flats have no income ceiling.) The exact list of requirements for Plus flats will be disclosed in greater detail when the information becomes available.
However, existing resale flats, which are close to Plus and Prime flats, have seen no rule revisions. These flats now have an equally good location, but also don’t suffer from restrictions like the 10-year MOP, or some eligibility factors like the income ceiling. As you might expect, this has caused many sellers close to Prime projects to ramp up their asking price. They have all of the advantages and none of the drawbacks.
This being said, the momentum in the resale flat market is likely unsustainable
Those who sold their flats in the aftermath of Covid may well have seen windfall returns, compared to the eight years preceding the pandemic (ref: the chart above.) However, this surge in resale flat prices is unlikely to last.
HDB aggressively ramped up flat construction after Covid, with the deliberate aim of keeping resale prices low. In 2022, for instance, HDB completed 23,782 new flats, which is the highest amount since 2017. The government built so aggressively, that HDB incurred a $5.38 billion deficit to ramp up supply.
The number of BTO flats, along with interest in Plus and Prime flats, is likely to siphon some demand for resale units. In fact, given the high prices of resale flats, some first-time buyers have no choice other than to wait for BTO units. And in the long term, these new flats will end up joining the resale market, thus satisfying demand.
As such, I wouldn’t be over-optimistic regarding flats as long-term assets, despite the surge in prices over the past couple of years. Covid was an outlier event and not part of a natural market cycle.
Implications regarding resale flats as retirement assets
There are two notable implications going forward:
1. Plus and Prime flats show a repositioning toward ageing-in-place
One of the consequences of Plus and Prime flats is the phenomenon of self-sorting. By this, I mean that buyers of these flats are unlikely to want to upgrade, and hence take themselves out of the competition for standard flats.
Both Plus and Prime flats are not ideal, for those who want to make the jump to private property. The main reason is time: the MOP starts from the point of key collection, and stretches for 10 years. As such, if you factor in construction time of four to five years, buyers of Plus and Prime flats need to wait 14 to 15 years. During this time, private home prices would have appreciated even more (see below), thus making it harder to move up into condos.
The further restrictions on Plus and Prime flats – such as having an income ceiling and subsidy recovery – also limit the flats’ future gains; the wealthiest buyers would be earning too much to purchase these homes (the income ceiling on an HDB flat is $14,000.)
For these reasons, those who seek to upgrade will choose standard resale flats instead.
That the government placed so many restrictions on Plus and Prime flats also clarifies its position: these homes, which are in high-demand areas, are angled at those who want to live in them indefinitely; possibly for their entire lives. This shows a growing regard for HDB flats’ roles as pure homes, rather than investment vehicles.
Simply put, you may be rewarded with a better location, if you’re willing to stick with the same flat for the rest of your life.
2. Increased supply could moderate long-term appreciation
The larger number of flats, which will eventually enter the resale market, will place downward pressure on resale flat prices. Based on lessons learned during Covid (and the subsequent shortage), one possible outcome is HDB moving away from the slow BTO model.
That is, HDB may decide to build-as-appropriate, rather than wait to see sufficient interest before commencing sales and construction (the current BTO model.) If this happens, we will see even more supply in the market going forward.
Simply put, I think HDB has learned its lesson from the last supply crunch and will keep numbers high to avoid a repeat spike in flat prices.
Private condo as retirement asset
New launch condos
New launch condos are still priced at dizzying heights, averaging $2,339 psf, up from $1,815 psf back in 2020. Do note that the price has actually dipped slightly from February 2023 though, which saw a peak of $2,627 psf.
It’s quite a struggle for new launch prices to fall, even as more condos are completed. This is because developers are facing high land costs, increased material and labour costs, as well as higher ABSD and Land Betterment Charges, which limit the amount of discounts they can give. Profit margins have also been very slim.
Despite the high prices of new launch condos, many investors still prefer them to resale condos.
See my article on 6 reasons why new launch is better than resale as investment property.
In the resale condo market, prices also soared to an average of $1,585 psf, rising from $1,261 psf back in 2020. This is also, to some extent, related to the uptick in new launch prices (new launches in a neighbourhood have a knock-on effect, and will also cause local condo prices to rise slightly.)
As with HDB flats, however, the supply crunch is being resolved. This year, a number of particularly large meta-developments, such as Normanton Park (1,862 units!) and Treasure at Tampines (2,203 units!) will be completed. This is likely to soak up demand from the existing market, and we’re already seeing the impact in rental markets. In August 2023, rental rates were already slowing from a six-year high, as more units finally became available.
However, it remains to be seen if recent ABSD hikes won’t curb resale supply. Owners of multiple properties may be resistant to selling, even in collective sales.
Consider that, if you bought a second condo without ABSD before, selling now means that your replacement unit will cost 20 percent ABSD. As such, en-bloc sales have yet to see a resurgence, despite the 2017 tranche of properties already being completed and sold.
Hence, it’s unlikely that private property prices will fall per se though volume has dropped; at best, we may see a slower pace of price hikes.
As the last round of cooling measures was so recent though (June 2023), we will have to wait a while to gauge the extent of its impact. For now, it’s possible the full consequences of the ABSD rate hike may not yet have fully sunk in. A chief concern here is the ability of individual buyers to take on a full mortgage.
Because the ABSD rate is so high, investment properties make the most sense if you can decouple to buy separately (i.e. a husband and wife both buy units under their individual names, to avoid incurring ABSD). The problem is that, with home prices and interest rates currently high, it is tougher to qualify for separate home loans. For now, it’s a toss-up on whether many can afford to decouple and dodge ABSD.
Implications of condo units for retirement planning
- Due to higher costs, it becomes ideal to upgrade before the age of 40, when financing restrictions start to bite
- There may be more impetus to upgrade if possible, as flats become less investment-oriented
- En-bloc sales have become less reliable as an exit strategy
1. Due to higher costs, it becomes ideal to upgrade before the age of 40, when financing restrictions start to bite
Consider decoupling to avoid ABSD. This requires each spouse to take on an entire mortgage individually. Given that a 1,000 sq. ft., new launch unit now averages $2,339 psf, this means at least one spouse is taking on a family-unit with a quantum of over $2.3 million.
On top of this, the Total Debt Servicing Ratio (TDSR) caps monthly loan repayments to 55 percent of monthly income, using a floor rate of four percent per annum.
Now assuming a maximum loan quantum of 75 percent of the property value, at 25 years, this is a loan of around $1.67 million. This is a monthly repayment of $8,815 per month, which would require an income of over $16,000.
This is already quite a high bar, and most buyers would end up having to make a bigger down payment to meet the TDSR. But if you wait past the age of 40, your maximum loan tenure will decrease (as your age plus the loan tenure cannot exceed 65, or else maximum financing falls to 55 per cent.). Shorter loan tenure will translate into higher monthly mortgage payments.
In short, those who want dual properties without paying ABSD, and rental income after retirement, need to act sooner. The older they get, the harder it is to get financing; and again, property prices may not fall, so much as just slow the pace of increase.
2. There may be more impetus to upgrade if possible, as flats become less investment-oriented
HDB has given clear signals that flats are intended for home ownership first. Investment benefits are secondary; it’s nice if it happens, but it’s not the primary benefit. This is not entirely a bad move, by the way, and it’s much fairer to those who seek pure owner-occupancy.
However, this could fuel motivation to own a private property, with regard to having a retirement asset. Because if all else fails and retirement funds run out, a condo can still be sold off while you right-size to a flat. But if all you have is a flat, there’s not much left to downgrade from (except perhaps to a smaller flat, or to sell off the excess lease, which may only be a marginal help.)
They are not, however, as lucky as the previous batch (from the 2008 to 2013 era) who were able to buy without ABSD concerns.
3. En-bloc sales have become less reliable as an exit strategy
Unless sale proceeds for en-bloc become so high that sellers can replace the property, even despite 20 percent or higher ABSD, I would expect tooth-and-nail resistance to collective sale. Doubly so from investors who are foreigners or corporate entities, as their replacement units would cost 60 percent ABSD (!)
Developers are already facing higher ABSD rates and financing rates, and the surge of Chinese developers with deep pockets – as we saw in 2017 – is unlikely (China’s real estate market is in a severe crisis, so we shouldn’t expect their big developers to come and throw money around like before.)
For these reasons, I would be cautious of counting on en-bloc sales as an exit strategy going forward. Private property can still be a retirement asset in terms of providing rental income, or resale gains to individual buyers; but not in the sense of developer buyouts.
For insights into a specific property for retirement, or a review of your property progression in 2024 and beyond, do contact me for personalised help.
Danny Han has always been in the people’s business, having spent 23 years as a church pastor, five years as an insurance agent, and the last 16 years as a property consultant.
Danny has a genuine interest in people and firmly believes in personal integrity. While helping homeowners with their property needs, their interest always takes precedence over his personal gains. Hence, Danny has consistently earned his clients’ complete trust and loyalty. Many of them have become his personal friends.
Danny received his Diploma in Mechanical Engineering from Singapore Polytechnics and Bachelor of Science from Oklahoma Christian University of Science and Arts in Bible & Psychology.
Besides keeping abreast of the property market trend and constantly equipping himself to better serve his clients, Danny is a passionate foodie, a weekend cyclist, and an avid hiker.
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