There have been a lot of discussions lately about the rising cost of housing in Singapore, and just how expensive buying a home in Singapore has been. HDB resale flats have not been spared.
The Resale Price Index as of 4Q2022 is at 171.9, up about 10% compared to 4Q2021 (155.7). When compared to 4Q2020 (138.1), HDB resale prices have gone up about 24%.
Source: HDB
Unsurprisingly, this has also been a talking point for many Singaporeans and that has also led to the government enhancing the CPF Housing Grant for resale flats for first-time homebuyers. As of 14 February 2023, the CPF Housing Grant for Resale Flats has been enhanced from $50,000 to $80,000 for eligible first-timer families buying 2-room to 4-room resale flats, and $40,000 to $50,000 for 5-room or larger resale flats.
In addition, first-time home buyers can also qualify for the Enhanced CPF Housing Grant, which gives them up to $80,000 in housing grants. The exact amount depends on your average monthly household income, with lower income homeowners getting a higher amount.
While there is no doubt that HDB resale flats are more expensive today compared to what they used to be a few years ago, the more important question we should also be asking ourselves is whether they are truly ‘unaffordable’.
Defining Unaffordability
The first thing we should ask ourselves is how we wish to define ‘unaffordable’.
Just because something is more expensive than it used to be doesn’t automatically mean it’s unaffordable. For example, paying $1.50 for the same cup of kopi that previously cost me $1.00 a few years ago annoys me but this doesn’t immediately mean it’s unaffordable, especially when I still choose to buy it daily.
Neither does it make sense to say that resale flats are unaffordable just because we can’t get the best (and usually the most expensive) flats that we want. This should be logical. People who earn more can afford more expensive things while those with a modest income will naturally need to select the less expensive options.
Given the amount of grants that first-time homeowners can get, and assuming they want to purchase HDB flats on the resale market because they are unable or unwilling to wait for a BTO flat, we decided to find out just how affordable/unaffordable it is to purchase an HDB resale flat today.
To calculate the numbers, let’s make a couple of assumptions first.
– Instead of using median salary, we will use the gross monthly income from work for full-time employed residents at the 20 percentile level. This is $2,779 as of 2022 (inclusive of employer CPF contribution). This means the gross salary for the individual would be $2,375.
– For this, we will assume both couples are working and earning a salary of $2,375 each, or $4,750 per month.
– Assuming they buy a 2-room to 4-room resale flat, this entitles them to a housing grant of $80,000 for the CPF Housing Grant for Resale Flats, and $45,000 for the Enhanced CPF Housing Grant. In total, they receive $125,000.
*If they choose to stay within 4km of either of their parents, they get another $20,000 via the Proximity Housing Grant (PHG). For our calculation, we will assume they don’t get the PHG.
Source: MOM
The final assumption we will make is that the couple chooses a housing estate where the 3-room flats are cheaper. This may be a contentious point. For this article, however, our aim is to focus on affordability, rather than the desired preference to have an ideal home like a 5-room flat in Bukit Merah/Kallang, which would then naturally be unaffordable for a lower-income family.
Based on our recent estate guide on the cheapest HDB estates in 2023, the estates that offer the most affordable 3-room resale flats are Geylang, Toa Payoh, Jurong West, Bedok and Bukit Batok. These are good estates spread across Singapore so buyers can choose their preferred locations whether it’s the east, west or central. We will assume the buyer wants to stay in the east so we will look at Bedok – where the median price for a 3-room resale flat is currently $360,000 (as of 4Q2022).
How Affordable Would A 3-Room Resale Flat Be For A Lower Income Couple?
If we get an HDD housing loan, the minimum down payment required will be 20%. Based on a price of $360,000, this would be $90,000 so our housing grant of $125,000 is more than enough to cover the down payment.
To simplify the calculation, we will assume that the couple doesn’t use any CPF OA savings to increase the down payment paid. In reality, they should already have some OA savings if they have been working for a while.
The loan required would be $235,000. Assuming a 20-year HDB housing loan with an interest rate of 2.6%, the monthly installment would be $1,257.
Based on their current salary, their total CPF contribution each month to their CPF OA account would be $1,093 per month. This means an additional cash outlay of $164.
For the couple, their take home salary would be $3,800 (80% of $4,750). This means the cash outlay would be 4% of their monthly income.
If they do not want any cash outlay, they can opt for a 25-year HDB housing loan. This would bring down their monthly installment to $1,066 which can be fully covered by their monthly CPF OA contributions.
HDB Flats Can Be Affordable, But Only If We Purchase Within Our Means
Given that no cash outlay is required for the down payment in our hypothetical example, it’s hard to argue that such a 3-room flat is unaffordable. Furthermore, the monthly instalment is largely covered by CPF contributions, or can be fully covered if the couple decides to take a longer loan duration.
The caveat here, of course, is that the couple has to make a housing decision that is in line with their modest income. While a 3-room flat in an older estate (though one can argue that Bedok could also be a choice location given that it’s a mature estate that offers good amenities) may not be their first choice, this is no different from any other purchasing decisions we make on a regular basis where what we spend on should not only be based on what we want, but also how much we can comfortably afford.
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