Is Buying A More Expensive Home Always A Bad Financial Decision?

Nah, I am not on the lookout for a 2nd property or upgrading my current 5-room Punggol BTO flat.

First, I can’t afford it and secondly, the law doesn’t allow that. Well, there’s still more than a year to go before my Minimum Occupation Period (MOP) is up.

Furthermore, “conventional” personal financial advice dictates that we shouldn’t over-consume on our house.

But wait, is that really really really…. TRUE for everyone?

4-Room HDB Vs 5-Room HDB Purchase in 1990

This is just a theoretical example. After all, I was only 4 years old in 1990 and knew nothing about personal finance then.

I also could foresee that it’s probably really hard to find real-life examples of two different households who had the option of choosing between a 4-room or a 5-roomer in the same town in the same exact year.

However, I feel the figures in the table below is pretty realistic (do correct me if you think I am very wrong).

4-Room HDB 5-Room HDB
HDB Resale Price Index in 1990 24.3 24.3
HDB Resale Price Index in 2016 134.7 134.7
Price of flat in 1990 $60,000 $75,000
Price of flat in 2016 $332,500 $415,500

Assuming a Mr Tan had a choice of buying a 4-room or 5-room HDB flat then, hindsight actually compels me to suggest that a 5-room flat would have been the better choice back in 1990. 

The main reason is because of the phenomenal rise of price of HDB flats. Looking at the HDB Resale Price Index, even with the recent cooling of the property market, the average prices of HDB flats had increased by 5.5 times over the past 26 years. That’s an annual growth rate of 6.8%!

If Mr Tan had to take a larger mortgage in 1990, I am pretty sure the average interest rates he paid over that time is lower than 6.8%. As an investment, he would likely have made a larger profit on a 5-room flat.

Before you tell me that equity returns had been solid at around 7-8% during that period, I doubt a typical Singaporean was sophisticated enough to invest in equity then. And my view is that in the stock market, the Pareto Principle applies strongly. That is, the top 20% of the investors take home 80% of all the profits. The likelihood is that the median investor would probably have lost money investing in equities.

The $15,000 saved is unlikely to turn to $80,000 in 2016.

HDB flats had truly been valuable assets for Singaporeans judging from historical numbers.

A Condo Purchase In 2008/2009

In 2008/2009, before I balloted for my BTO, I was monitoring the prices of HDB flats during the aftermath of the Great Financial Crisis. The prices of HDB flats barely dropped and I turned my attention to BTOs instead.

However, for the private property market, it was an entire different story as prices plummeted.

A friend, who is a couple of years older than me, took a bit of a calculated risk, and actually bought a freehold condominium in Newton for around $1 million.

6 or 7 years on, the prices have recovered and he could easily pocket a $1 million profit if he were to sell today.

I think 90% of the population would find it easier to time the property market as compared to the equity market and upgrading to a more expensive home during bearish periods might prove to be a very profitable investment.

Upgrading To An Executive Condo in 2010

This example is more recent and also closer to my heart.

It explains how my in-laws fulfilled the “typical Singaporean dream” to stay in a condo.

Back in 2010, the Mrs and I had secured our BTO flat in Punggol. It was sort of a leap of faith then since I had stayed in Bukit Panjang and she in Jurong East for most of our lives.

At the same time, the in-laws’ flat in Toh Guan was showing signs of ageing. It was about 15 years old and as it was an Executive flat with 4 bedrooms, it commanded a value of about $600,000 then.

Coincidentally, an Executive Condominium a 5 minutes walk from our new BTO in Punggol was launched and a decently sized 3-bedder was going for around $700,000.

The Mrs and I thought that there was value in this project and she persuaded her parents to ballot for the EC. Our rationale was that this was a good chance for them to take a second bite of the cherry and be subsidised for getting a brand-new apartment:

  • There was no resale levy imposed for ECs then. On the other hand, buying a resale flat would attract one.
  • They were ready to downsize their living space since their daughter was moving out.
  • We could stay close together in a new developing town.
  • Their HDB flat had little upside for appreciation left as compared to this new EC.
  • They could take a loan and arbitrage the difference between the OA rates and mortgage rates. 1% on $500,000 is considerable.
  • They could lock in the purchasing price in 2010 and then sell their house in 2013. This was beneficial in a property market that was picking up.

Basically, a no-brainer.

Image result for no-brainer

Things panned out really well as they managed to sell their flat at a high in the region of $700,000 in 2013.

They managed to trade a HDB for a smaller EC for the same amount of money and interest rates have continued to stay low, allowing them to profit even more from the arbitrage.

I understand a post like this could invite some backlash.

Honestly, I am not promoting property investment over equity investments. I truly believe each has its own merits. In fact, I painted an equivalent scenario about a year ago. And yes, past returns are not indicative of future returns. 

I understand that for most people, a house is regarded more as a home rather than an investment. I will make a caveat here and state that I tend to be less emotional over this issue. If someone offers me $700,000 for my flat in a year’s time, I will sell it without much hesitation and move on. 

I also think it’s ok to be asset rich and cash poor. When I am 50, I would rather have a $2 million home and $0 cash rather than a $1 million home and $500,000 in cash/investments. 

If push comes to shove, everybody will downgrade to free up cash flow. I, for one, would definitely not try to turn to the government for help if I own a $2 million property.



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11 thoughts on “Is Buying A More Expensive Home Always A Bad Financial Decision?

  1. Jared - SMOL

    Hello 15HWW,

    Don’t worry.

    You have described and shared the majority and mainstream EXPERIENCE of most Singaporeans who owned their homes.

    I highlight the word experience as that’s an important difference from opinion 😉

    We can verify it anecdotally with our parents, uncles, older cousins, colleagues, etc.

    Or statistically like one ang moh business writer has shown – Singapore properties have outperformed Singapore equities. But then, statistics can be manipulated to get what we want by changing the time frame…

    I too share something similar at Kyith’s blog:

    I don’t know who started the spin that REITs/equities better than physical properties?

    I suspect its probably younger bloggers just starting out…

    It’s much easier to afford 100 shares of a REIT or stock; and blog about what you can afford?

    Just to be clear, I am not favouring property over equities. I’m agnostic about such things. I’m just a speculator man-whore.

    Anything that can make money, I’ll turn over the rock and investigate a bit before casting it aside 😉

    1. My 15 HWW Post author

      Hi SMOl,

      Don’t worry. I never worry about your “poking”.

      I knew a topic and content like this is likely to garner your approval. SERS rocks!

  2. Cory

    In 80s/90s our income level relative to developed countries is still quite a gap. So when we catch up and exceed, naturally property price will shoot. In-addition to that, Property tax is nominal compared to US which range in 5 digits for a good home to be paid annually. Another is 1990 to 2016 ~ 26 years of inflation.

    Is unlikely we will see huge jump in capital gain again however the tax rate will still helps a lot in getting reasonable returns. My 2 cents.

    1. My 15 HWW Post author

      Hi Cory,

      I agree with you. Returns should still be reasonable and as far as I know, policies will likely try to make that happen.

  3. Fred

    I bought my resale HDB EA in Tampines for $178k in 1990. Whilst shopping around, most 5 roomers in Tampines then ranged from $120 to $150k then. Most Tampines flats just MOP( i.e. Just 5-6 years old) in 1989 and 1990.

    Your numbers are suspect. My in-laws bought their 4A flat direct from HDB for $60k+ and another a 5A for $75k, also direct in 1984-85.

    1. My 15 HWW Post author

      Hi Fred,

      Thanks for the heads-up. If Tampines 5 roomers are $120k then, they should cost around $650,000 now, which is closer to the market value.

      I guess my figures could be more relevant for less popular towns like Bukit Panjang?

  4. Fred

    Just for the uninitiated, HDB flats prices were flat until 1991-2.

    After 1992, thanks to Hong Kong handing over to China in 1997 and the Taiwan lifting of martial laws, Singapore property market experienced a great run-up in prices till 1997.

    I bought my resale HDB EA in 1990 for $178k in Tampines and I sold it for $650k in 1997. I spent only $3k in ‘Reno’.

    Let those who insist on HDB flats are only for living and not for profiteering, wallow in mud to try and save up for retirement esp in the current interest rate environment of sub-zero percentage.
    The system provides every Singaporean with two cherry bites on direct purchase of HDB flats but we refuse and want to compete with PRs and foreigners for resale HDBs and Pte condos etc.

    There is no need to exhaust our minds and risk all that we have through ‘value investment’ etc.

    1. My 15 HWW Post author

      Hi Fred,

      Congrats on making a good profit on your flat in 1997!

      Having had a first bite of the cherry, I am patiently awaiting the 2nd bite!

  5. Jared - SMOL

    1) Fred,

    You more direct than me!

    Couldn’t have said it better myself 😉

    2) 15HWW,

    That’s why I’m back again and again 😉

    You’re a good sport! Its fun to be with people with conviction, yet have room for diversity.

    For singles during my time, we can’t buy BTO – only resale 🙁

    But I took the singles grant, and with the SERs compensation, I considered myself as having 2 bites of the cherry too!

    Bought my HDB 3 room resale at 125K, selected my new SERs unit for 398K without forking a single cent as that’s paid by SERs compensation. Resale 3 room flat in vicinity is going for 500K.

    Even buying HDB resale, if we are lucky, can still make money one.

    And no harm in helping Lady Luck find me with active study and educating myself on properties at age 30 – 5 years before I can qualify to buy HDB resale at 35 😉

    Passive? Well, make sure GuanYinMa loves you!

  6. Sam

    hi 15HWW,

    just discovered your blog and was reading with interest.
    one of your quotes caught my attention “I also think it’s ok to be asset rich and cash poor. When I am 50, I would rather have a $2 million home and $0 cash rather than a $1 million home and $500,000 in cash/investments.”

    i am currently 46 and thinks vice versa from the quote, reason being, i would like the $500k investment to provide some passive income (dividend) in the later years. Maybe i have been missing something. Care to share your thoughts on that?

    many thanks in advance.

    1. My 15 HWW Post author

      Hi Sam,

      I think that way because with that $2 million home, there’s always the option of moving to a $1 million home and having $1 million in cash/investments.

      That would be a better outcome than a $1 million home and $500,000 in cash/investments.