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What Are The Returns On Investing In A HDB flat?

If you are in your 20s, you would not be a stranger to remarks like “Buy HDB sure earn money!”. Chances are… these remarks came from your parents too.

Yet, is it really true that buying a HDB will really earn you a good sum of money? Especially if you only have 100k to start and have to borrow the rest?

Lucky for you, this article will settle this question once and for all with some analysis of the numbers.

Assuming these conditions:

  • Price of HDB at $500,000. This is in line with the rough average prices.
  • Initial Equity at $100,000. If you have more, please treat me to a meal.
  • Loan Tenor of 10 Years.
  • Average Interest cost of 4% (Actual rate over the next 10 years might be higher)
  • Rental Yield of about 4%
  • Average HDB price appreciation of 6%

Given that the historical rate of appreciation of HDBs is 6.85% since 1990s, we set the average HDB price appreciation at 6%.

With those results,

We obtained the following projected cashflows.

Initial costs are set at about $12,600. This arises from the buyer’s stamp duty of $9,600 for a 500k HDB, $2,500 for legal fees and $500 for valuation.

Since our initial equity is only $100,000, this implies that we must take a loan amount of $412,600 from the bank.

Maintenance costs for the property are estimated to be about $6,000.

Rental income is set to scale with the property price appreciation (This might not be true and indeed rents could remain sticky).

Property tax calculated as per the AV of the HDB.

Through this analysis, the implied Internal Rate of Return (IRR) is 12.67%. This means that investing in the HDB gave you returns of about 12.67% annually.

Read also: Pros And Cons Of Taking A Loan In Singapore

What drives returns?

There are 3 main factors for our IRR in this analysis. They are HDB price appreciation rate, rental yield and interest rates.

HDB price appreciation is probably the biggest driver of returns here. It determines the ending terminal value of your asset (the HDB).

The second helper to returns would be the rental yield. You can think of this as an assisting hand that pushes along returns. A higher rental yield increases your overall returns.

Finally, the third determinant is interest rates. This is particularly important here as you took on a loan to finance the asset purchase. A higher rate of interest would thus be detrimental to your “carry”

Sensitivity of HDB returns

Sensitivity table, keeping interest costs at 4%

Sensitivity table, keeping HDB price appreciation at 6%

What does this mean? 

Simply put, if everything went well. HDBs are indeed set to give you high returns. However, be warned, these experiences with HDB’s high returns were based on historical numbers. You know. The kind of asset price increases that your parent’s generation had.

Moving forward, will HDBs continue to appreciate in value at 6%? Will interest rates continue to be so low?

My personal take is that we should all be on the side of caution. Instead of looking at the same 6% annualized rate of housing price appreciation, perhaps a right number to consider would be somewhere around 2-3% (not very exciting, i know). Also as interest rate policy normalizes across the world, perhaps an appropriate interest rate to consider would be about 6%.


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