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).

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.

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.