A 4-room HDB with a 45-year lease recently sold for a record S$1.53M. Why so much? Because it’s big.

Disclaimer: Unless otherwise stated, any opinions expressed below are solely the author’s.

Whenever HDB resale prices hit the local headlines, the response seems to be a mixture of dismay and disbelief.

Why is public housing so expensive? And who in their right mind pays S$1.5 million for an old apartment with less than half of its original lease left?

Are they not throwing away money?

Something to lose

The beauty of the free market is that willing sellers meet willing buyers, and if we can see a pattern in their behavior, it probably doesn’t mean they’re crazy, but that they understand something others don’t.

Let’s look at a recent example: a four-room HDB in Bukit Merah, which recently set the record for the most expensive HDB flat of its size. It was sold for a whopping S$1.53 million, despite only having 45 years left on its lease.

Yes, it’s a jumbo apartment, occupying 1615 sqft—much larger than you’ll find among new public apartments—in a cozy, four-story building in Tiong Bahru.

But surely, you might think, something to lose. After all, the lease is going to be so low that few people would be interested in buying it from the new owner, right? Who will pay a decent amount in 30 or 20 years?

But that’s where the point lies—it’s no longer about resale value.

Still stealing

While new homes are considered a store of value, older apartments command high prices not because they are a good investment, but because, as the lease ends, they become front-loaded rentals. And although their price may seem high, it is actually a huge discount compared to the normal market rates.

$1.53 million over 45 years works out to approx S$2,800 per month. Meanwhile, some HDB flats above 1500 sqft in size, located in relatively attractive areas, near the center of Singapore, are currently listed for rent. S$4500 until S$5000.

It means that Bukit Merah jumbo flat record offers 40 to 50% discount in comparison. Also, let’s remember that prices rise over time, while the buyer pays everything in advance in today’s money. So, in the long run, it’s an even bigger savings.

Moreover, unlike a rental property, you own the property so you can renovate it however you like, bring it up to date, effectively creating condo-like conditions for half the price (the same condo would set you back around S$3 million or more).

Buyers accept a few compromises—like going up a few floors without an elevator, old building standards and fewer spaces—to get a large, comfortable space in the center of one of the world’s most populous cities.

More investment-oriented owners may try to convert the property into multi-family rental housing, potentially multiplying their ROI over time.

And what’s the worst that could happen? That in about half a century, they will have to get out of it. But there is also a good chance that these buildings qualify for a redevelopment plan or get an opportunity for lease extension, especially in Tiong Bahru, given the unique nature of these small buildings.

What if you need to sell?

Of course, it’s hard to be sure if you’ll want to stay in the same place for 45 years. What if you wanted to move somewhere else? Can you sell without accepting pennies for it?

I don’t see why not. Now, obviously, since Singapore itself is only 60 years old, we don’t have examples of apartments that have 10 or 20 years left on their leases. Under 30, potential buyers will find it difficult to get financing, and under 20, even HDB will not give a loan. And you can’t use CPF to finance such purchases, so the buyer pool is shrinking fast.

On the other hand, right now, the price will be linked to the prevailing rental rates, and they tend to increase over time. Therefore, the resale price will always be a duplicate of what you would pay if you rented it, with a discount. At no point does the sales price fall off a cliff—it just slowly drops to $0.

However, by that time, the owner will have spent a lot of money on his record purchase.

• Read other articles we have written on Singapore current affairs here.

Also Read: Most HDB flats could cost more than S$1M in the 2030s. It is not only good but necessary.

Featured Image Credit: Google Street View