Personal Finance, Real Estate Investing

Feeling Poor After Purchasing A Home

The property market in Singapore is one of the hottest in Asia. Even COVID-19 could not dampen the property prices here. 

Housing sales rebounded sharply in June after circuit breaker (Singapore’s version of a lockdown) was partially lifted.

I always find it amazing that people here in Singapore buy property like hotcakes. Most private homes cost millions, yet people are still buying them in droves. 

Even recently, government-subsidised housing (HDBs) had approached the million-dollar mark. It has become increasingly common to see HDBs being sold for a million. Just google ‘million dollar HDB’.

Often, you hear the term ‘cash poor, asset rich’. Well, once you buy a property in Singapore, most of your net worth is from the value of the property – asset rich. And if you are not wealthy, most of your cash will be used to pay the house or service your housing loans, making you ‘cash poor’.

Recently I too bought a new home. It did make me cash poor, but it did not make me asset rich.

The reason is I bought a resale HDB.

Note: The word ‘HDB’ in this article can be confusing. HDB is the Housing Development Board, a government board that develops subsidised housing. Somehow, Singaporeans tend to name the flats developed by HDB as HDBs too. So HDB can also refer to the houses developed by HDB. Confusing right?

How Buying A HDB Makes You Cash Poor

My definition of cash does not include CPF OA. Although technically the CPF OA is your cash, it is not liquid, and there are so many restrictions on using it.

In my recent purchase, our life savings were gone because we had to fork out quite a bit of cash. The regulations governing the purchase of HDB resale flats were one of the main reasons (other than the most obvious reasons – property prices in Singapore are way too high).

Loan-to-Value Ratio

For those of us who are not rich, we will need to take up a loan to buy a house. The Loan-to-Value ratio (LTV) will be a crucial consideration.

The LTV determines how much you can borrow to pay off your house. The current LTV is 75%. Hence, if I wanted to buy a home for 1 million dollars, I could only borrow $750,000. I will have to pay the remaining $250,000 upfront in cash or with CPF OA.

25% downpayment is a lot of money, and my CPF OA was wiped out previously to pay the housing loan for my current house.

The good news is that the LTV does not apply to HDB loans. You are allowed to borrow up to 90% of the home value with a HDB loan. 

However, with the current low-interest-rate environment, a 2.6% p.a. HDB loan seems like daylight robbery. It would be more expensive in the long run, taking a HDB loan rather than a bank loan.

For me, I will rather be cash poor now taking a bank loan than paying more interest to HDB.

Cash Over Valuation

When buying a resale HDB, another critical thing to take note is the cash over valuation (COV). What it means is that when you buy a HDB flat at a price above the HDB’s valuation, you have to pay the difference in cash. 

So, if you agree to purchase a resale HDB for $1,000,000 but the HDB valuation price is $950,000, you will have to pay the $50,000 in cash. The COV is $50,000 in this example. And for the bank loan, you could only take 75% of the HDB valuation, which is $950,000. Even though you bought the house for $1,000,000, you could only take a loan up to 75% of $950,000.

The price has to be agreed first between the buyers and sellers then HDB will valuate the flat. It keeps the process fair as both parties will not know the actual valuation until the price is finalised. So, if the valuation is below the price, the buyer will have to pay COV; if the valuation is above the price, then the buyer does not have to pay COV.

Throughout my buying process, COV was an unknown, and we were most nervous about the HDB valuation – a lower valuation would mean we need to pay more in cash.

Buying An Older Flat

All HDBs are 99-year leasehold, meaning that after 99 years, the HDB will be returned to the government, and its value will be zero.

When you are buying an older flat, some rules govern how much CPF you can use to pay for it. You are allowed to borrow the maximum 90% from HDB loan if the remaining years on the lease can cover the youngest buyer up to 95 years old. So, to qualify, a 30-year-old must buy a HDB flat that is 34 years or younger.

How Buying A HDB Makes You Asset Poor

Specifically, I purchased an older HDB resell flat. Unlike fancy condos or landed properties, HDB prices tend not to appreciate as much, and the main reason is that the government controls the supply and demand for it.

How HDB Controls the supply of HDBs

Starting from the most obvious, HDB controls the supply of HDBs (does it sound confusing using two HDB in the same sentence? Why do we name the building after the board that develops it?). Ultimately, the mandate of HDB is to keep housing affordable for the local population. Therefore, it will build more houses when the demand for housing increases to keep prices stable.

How HDB Controls the Demand For HDBs

HDB also controls demand by restricting who is eligible to buy a HDB (sorry I couldn’t help using HDB over and over again). For example, here are some restrictions:

  • Only Singaporean or Permanent Residents can buy a HDB – eliminating foreigners from owning
  • You cannot buy a new HDB if you already own a property
  • Imposing regulations which limit your ability to use credit – COV, LTV of 75% of the property price, etc. 
  • Enacting rules which prevent people from flipping or buying and selling frequently – minimum occupancy period, additional buyer stamp duty, seller stamp duty etc.

All these rules prevent foreigners from buying HDB, discourages Singaporeans or Permanent residents from buying HDB for investments and eliminates the cash-poor people from buying HDB.

Whereas for private, anyone with the cash or ability can buy private, whether you are a foreigner or local, the rich or not so wealthy etc.

I had written an article on the hidden costs of real estate investing and covered the additional costs there.

The 99-Year Leasehold

And because HDBs are 99-year leases, its value will drop to zero when the lease expires. New HDB flats will increase and will peak at a certain point. After which, the prices will go down the older the apartment is.

Once the lease expires, you will have to vacate and do not expect any compensation from the government – they are not required to.

However, it is common nowadays for condominiums also to have 99-year leases. The value of these condos will again meet the same fate as HDBs once the lease expires. The advantage of condos is that they have fewer restrictions when it comes to buying and selling; hence they are still more valuable than HDBs.

There are also freehold properties in Singapore, but they will never be HDBs. Private housing is the only option if you want to have a property which you can pass down generations. 

Of course, the freeholds are not cheap.

Caveat Emptor

Caveat emptor means ‘let the buyer beware’ in Latin. What it means is that the buyer has the responsibility of checking the quality and condition of the house before buying it.

Buyers will have less information about the house than the sellers – there is information asymmetry. Therefore, as buyers, it becomes our responsibility to check for everything before purchasing the home. The buyer bears the cost for any defects or damages uncovered later.

The reason I brought this up is that your asset might be worth less than you had bought it. You might have to spend money to fix up the house, which increases your cost.


These are the reasons why I believe that buying a HDB makes one cash poor and asset poor too (in a sense). 

Nevertheless, I may be too extreme, saying that HDB is not a valuable asset.

It is because a HDB ultimately provides the value of a home. A home is a valuable asset (maybe not financially, but it offers excellent utility – hence it is an asset). That was my main reason for buying a resale HDB too – to give a bigger house for my family.

HDB can be great investments too. HDB can provide excellent sources of rental income, and it costs significantly lesser than private properties. You can recoup the cost of your HDB if you rent it out for many years. When rented out long enough, you would have already made money from the property and you can let the lease expire with a positive return.

Should we follow the advice of the woke salaryman and buy the most affordable house that meets your needs? For me, not necessarily, but it is an excellent place to start.

The better advice is: buy HDB to live in and buying for investing should be secondary. And make sure it meets your future needs too. You might start a big family and eventually need to upgrade to a bigger house. I started with a three-room BTO, and I had to upgrade to a bigger house because the circuit breaker had made us realise that we had too many people crammed into a small box.

Also, the article from the woke salaryman assumes that you would invest your money with discipline and rationally. If you did not put the money you saved by buying a small house to fair use, it might have been better to buy a bigger house because your money’s value will be eroded by inflation over time. The value of the house might beat inflation over time. A mortgage does force you to consistently put more of your money into an asset – so in a sense, it forces you to ‘invest’ in a disciplined manner.

And if you can afford private housing, why not? It does give better returns.


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