HDB flats serve the primary purpose of providing an affordable and quality shelter over the heads of many Singaporeans. Naturally, the issue of affordability is often discussed whenever prices increase sharply.
On one hand, HDB resale prices rose for eight consecutive quarters to fresh highs from 2020 to Q1 2022, which also saw a record number of million-dollar HDB flat transactions. On the other hand, HDB rents also rose to record highs over the same period across all flat types in both mature and non-mature estates.
The record high resale HDB property prices and a strong rental market could pose a difficult conundrum for potential homebuyers to decide whether they should buy or rent an HDB flat in this current environment. This is where the price-to-rent ratio could be used to objectively decide on the best course of action.
Here’s what you need to know about the price-to-rent ratio.
What Is Price-To-Rent Ratio
The price-to-rent ratio is a metric that is used to gauge the relative affordability of renting and buying in a specific property market.
Price-to-Rent Ratio Formula
The price-to-rent ratio is derived by dividing the median home price by the annualised median rent. The formula for the price-to-rent ratio is as follows:
The lower the price-to-rent ratio, the more favourable the property market is for buying versus renting. Similarly, a high ratio could mean it is better to be a renter in the market.
The general guideline used for the price-to-rent ratio is as follows:
- Price-to-rent ratio of less than 15: It is better to buy as it is more affordable than renting.
- Price-to-rent ratio of 16 – 20: It could be thought of as a neutral position, as it is neither cheap to buy nor expensive enough to deviate towards renting.
- Price-to-rent ratio of over 21: It is better to rent than to own.
These ranges could differ for different property markets depending on the demand for housing in that region or location. For example, major metropolitan cities have generally higher price-to-rent ratios compared to suburban areas.
Current HDB Price-To-Rent Ratio
The following table was compiled based on the 1st Quarter 2022 HDB resale and rental statistics.
| Towns | 3-Room | 4-Room | 5-Room |
| Ang Mo Kio | 15 | 17 | 23 |
| Bedok | 15 | 17 | 21 |
| Bishan | No data | 21 | 25 |
| Bukit Batok | 15 | 19 | 21 |
| Bukit Merah | 16 | 22 | 23 |
| Bukit Panjang | 17 | 18 | 20 |
| Bukit Timah | No data | No data | No data |
| Central | 16 | 23 | No data |
| Choa Chu Kang | 18 | 19 | 21 |
| Clementi | 15 | 23 | 24 |
| Geylang | 13 | 18 | 27 |
| Hougang | 15 | 18 | 20 |
| Jurong East | 15 | 16 | 19 |
| Jurong West | 15 | 17 | 18 |
| Kallang/Whampoa | 14 | 24 | 24 |
| Marine Parade | No data | No data | No data |
| Pasir Ris | No data | 19 | 22 |
| Punggol | 16 | 19 | 22 |
| Queenstown | 14 | 24 | 26 |
| Sembawang | No data | 19 | 20 |
| Sengkang | No data | 19 | 21 |
| Serangoon | 15 | 18 | 22 |
| Tampines | 16 | 18 | 21 |
| Toa Payoh | 13 | 21 | 26 |
| Woodlands | 17 | 18 | 18 |
| Yishun | 16 | 18 | 21 |
Some key takeaways from the above table:
[3-room HDB flats]
The price-to-rent ratio for 3-room flat types is generally lower compared to the 4-room and 5-room flat types. The lower the ratio, the higher the rental yield the flat buyer may stand to get. In that regard, Geylang and Toa Payoh offer some of the best opportunities for higher rental yields if viewed from an investment angle. This can be attributed to the more aged flats that make up these two towns. Contrastingly, Choa Chu Kang has the highest ratio of 18, making it the most expensive town for 3-room flats in Singapore.
[4-room HDB flats]
Ang Mo Kio, Bedok, and Jurong West have the lowest price-to-rent ratio for 4-room flat types. These three towns share the same ratio of 17, giving it a neutral score in terms of affordability. On the higher end of the scale are Kallang/Whampoa and Queenstown at 24. We can deduce that these two towns were highly sought-after by buyers of 4-room flats in the 1st quarter of 2022.
[5-room HDB flats]
Unsurprisingly, 5-room flats generally have a higher price-to-ratio than the other flat types. Space is a prized commodity in a small country like Singapore, which explains the generally higher ratio. The more affordable 5-room flats are found in Jurong West and Woodlands with a ratio of 18. Last but not least, Geylang takes top spot as the most expensive town for a 5-room flat with a ratio of 27. This makes it the least attractive HDB flat type for rental yield across all the towns.
How To Apply Price-To-Rent Ratio When Deciding To Purchase An HDB Flat
We can use the price-to-rent ratio in two ways. One, we can use the insights from the table above to help us determine which town and flat type gives us the best value (ie: most affordable).
Two, we can also use the price-to-rent ratio to determine if the unit that we intend to purchase is priced above, under, or on par with the median price ratio of the town. To compare, we need to determine the price-to-rent ratio of both the HDB town and the estate of the unit that we are eyeing for purchase.
For example, let’s apply the price-to-rent ratio to the latest record-selling five-room HDB flat at City Vue @ Henderson, which sold for $1.4 million in May 2022.
First, the estate is part of Bukit Merah Town, which has a price-to-rent ratio of 23 for five-room flats.
Next, as the units in City Vue @ Henderson have not reached MOP yet, there are no rental transactions lodged with HDB. Hence, we will use the median rental ($2,900) for five-room flats at nearby blocks 81 to 83 Redhill Lane from January to May 2022 as a proxy.
[Price-to-rent ratio] 40 = $1,400,000 / ($2,900x12months)
Comparing the price-to-rent ratio for five-room flat types in Bukit Merah Town (23) against the City Vue @ Henderson (40), it is easy to see by how much the property is overvalued. Hence, we can conclude that the buyer would be better off renting a unit at this place instead of buying it.
Drawbacks Of The Price-To-Rent Ratio
The price-to-rent ratio does not account for a few other important factors when deciding on a property purchase.
First, the ratio does not account for interest rates. For example, in a low interest rate environment, a property purchase may look more viable than renting.
Second, the ratio does not take into account the full cost of homeownership. Additional costs like stamp duty, agent fees, home renovation and repair costs, property taxes, and other miscellaneous costs could be avoided when renting.
Third, the ratio does not account for personal circumstances like preference for location and financial capacity. Moreover, purchasing a resale property may come with a minimum occupation period (MOP) of five years, meaning you may not be able to rent out the whole unit or sell it until the MOP is completed. This could serve as an important consideration when making the decision to buy or rent.
Given the limitations of the price-to-rent ratio, it should be factored in conjunction with your other considerations when deciding whether to purchase or rent your next property.
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