Why are Many HDB Owners Selling When Reaching MOP?
This question has been on the minds of many HDB owners and let us address it today!
With close to 80% of Singaporeans living in HDB flats, it is easily the most valuable asset for most of us.
The question is, if that is the case, why are there still so many HDB Owners selling their most valuable asset, especially after their 5 years Minimum Occupation Period (MOP)?
First of all, we agree with most Singaporeans that we love our HDB flats! HDB flats are built in satellite towns which are self sufficient. Residents get to enjoy the convenience of the surrounding amenities as well as efficient unit layout, all at a subsidised price!
While the good location, amenities and layout suits most people, do you foresee yourself staying in this HDB flat for the rest of your life?
If your answer is yes! Congratulations! Perhaps you have found your dream home in your current HDB! Just take the following as added knowledge.
If your answer is no! Then the following may be a huge wake up call.
You may be considering to upgrade to a bigger flat, an Executive Condo, or Private property (Condominium/Landed) in future. Or some may consider to Right Size (downgrade) to a smaller unit to cash out for retirement.
Whatever the reason is, if you plan to sell your HDB at ANY point in future, please read on!
Trap that Most People Fell into. Making it Hard or Even Impossible to Cash Out from Your HDB
1. CPF Accrued Interest
CPF Accrued Interest is applicable if you have withdrawn your CPF funds to pay for your property. It is the interest that you would have earned if you have kept the funds in your CPF Ordinary Account (OA). This is to ensure that Singaporeans have enough CPF savings for a secured retirement.
In short, CPF funds are for retirement. Money in CPF OA earns interest. Since you have 'borrowed' the money for your housing needs, upon sales, you will need to return the CPF with the interest that you would have earned.
That sounds beneficial. But why is that a trap?
Lets us explain what happens to the sales proceeds.
Mr and Mrs Teo purchased a 4 room BTO flat for $350,000 and it'll take 3 years to build.
Considering they took a HDB loan (Max 90% - $315,000), there is a downpayment of 10% ($35,000), stamp duty ($5,200), legal fees and miscellaneous cost which we rounded up to $45,000 for ease of illustration.
While waiting for their BTO to be completed (Temporary Occupation Permit, TOP), Mr and Mrs Teo have racked up $3,460 in accrued interest for using $45,000 to downpay their flat.
Once they collected their keys to their new home, their mortgage loan kicks in and they start to pay $1,429 monthly from their CPF OA. Below is what they will pay for the next 5 years.
After fulfilling the 5 years Minimum Occupation Period (MOP), Mr and Mrs Teo's Accrued interest will be $16,477.
If they were to sell their HDB at $500,000 with the outstanding loan of $267,219 and CPF and Accrued interest of $147,216, their estimated cash proceeds will be around $85,565. (without considering Sales Charges, Agency Fees, etc)
Considering if they have amassed $60,000 in their combined CPF OA, with their CPF and Cash Proceeds, and are able to qualify for a 75% loan, they will have enough to upgrade to an EC or Condo of $1m.
Best of all, they will not need to touch any cash savings to upgrade! A stress-free upgrade in lifestyle for the family. And most importantly, to preserve and grow their wealth!
On the other hand, now assuming, Mr and Mrs Teo have been monitoring the market and contemplating whether to sell. They finally decide to sell after 13 years and let's assume the selling price remains at $500,000. Here are the numbers.
As time passes, more and more CPF funds were used to finance the mortgage loan. Which means the Accrued Interest also increases.
The longer it takes to sell, the more funds is needed to put back into CPF. This meant lesser Sales Proceeds for the couple.
At Year 13, after they sold their flat at $500,000, they will need to deduct the outstanding loan of $176,612 and CPF and Accrued Interest of $332,921. This results in a shortfall of $9,533.
This situation is known as a negative sale.
Logically speaking, since CPF's aim is to ensure that Singaporeans have enough CPF for a secured retirement, CPF Board would have required sellers with negative sales to make good the shortfall using cash savings.
Some good news for those in this situation. The current policy is that as long as the flat is sold at market value, seller will not need to top up the shortfall. That being said, I'm sure you certainly will not want to have negative sales because that will still mean flushing your hard earned money down the drain!
And who knows whether the policy will change especially when more HDB becomes older and loses their value. I'm sure CPF Board doesn't like to keep writing off CPF funds because of negative sales.
That brings us to our 2nd point.
2. Value of HDB Flat
In the example above, when Mr and Mrs Teo decide to sell their flat after 13 years, we assumed that their selling price remains same at $500,000.
Is this assumption accurate? Let us check out HDB Resale Price Index.
Prices of HDB have generally been on an upwards trend all the years until 2013, where it dips.
High HDB prices and low supply of BTOs have been a hot issue in the 2011 General Election.
Since then, the Government moved another significant step to stabilise new BTO prices by delinking them from resale flat prices.*
HDB then sets new flat prices based on a cost-plus basis. This approach allows HDB to better protect BTO flat buyers against price spillovers from the resale market and their volatilities.
As a result, HDB can keep BTO flat prices affordable.
With more buyers buying BTOs, it put pressure on the HDB resale market, especially on older flats after the Government cautioned against speculations of Selective En Bloc Redevelopment Scheme (SERS) for these assets.
The transaction data below shows the price difference of BTOs around the 5th and 10th year mark. Imagine holding a flat for 5 more years and sell for $100,000 lesser!
If we have followed the same trend for Mr and Mrs Teo's flat, after holding for 13 years, it is unlikely for them to still sell at $500,000. And selling lower will mean that there will be much more CPF shortfall being written off.
It is definitely not a good situation to be in.
In summary, HDB Owners are facing a double whammy of increasing Accrued Interest and Depreciating Value.
If this continues, upgrading will not be a matter of upgrade in lifestyle but it will be necessary to keep our hard-earned money from being eroded away.
And more people are starting to realise this and take action while they still can.
We hope this short guide is able to give you some insights into how we help our clients plan their Property Portfolio.
At the end of the day, we need to understand that we all have different ambitions, goals and limitations. It is therefore important for you to speak to an experienced and knowledgeable realtor who will be able to explain and illustrate the various scenarios, and customise a unique solution for you.
Take the first step today! Book your complimentary discussion to understand more and decide what benefits your family and yourself more!
*Quoted from https://www.channelnewsasia.com/news/commentary/hdb-income-ceilings-new-enhanced-housing-grant-affordability-11965140 from CNA by Associate Professor Sing Tien Foo - Dean's Chair and Director of the Institute of Real Estate and Urban Studies, NUS. Published on 06 Oct 2019