The Business Times, Wednesday 20 November, 2002
New or resale HDB flat?
Those facing this dilemma take heed: Mature estates
may offer better location, but new flats appreciate better, and
could provide for a retirement fund
HAVE you read Robert Kiyosaki's book Rich Dad, Poor
Dad and wondered if it is possible to retire early by making property
investments in Singapore? Well, it is not unattainable if you are
willing to make some short-term sacrifices.
For example, many young couples grapple with the
problem of choosing between a new HDB flat and a resale flat. Investment
in real estate is mainly driven by land prices as buildings depreciate
over time. Land prices are in turn affected by the development of
the area and the country's economic performance.
While a resale flat offers distinct advantages over
new flats such as the availability of amenities, established transport
systems and government housing grants, they do not offer the potential
appreciation of a new flat as the area surrounding the resale flat
is often developed. In other words, new flats have two engines of
growth compared to resale flats.
Let's take a simple example (table 1) to illustrate
the financial implications in a young couple's retirement plan.
In our example, assume that there is no economic growth in Singapore
for the next five years. Say, couple A chooses to buy a new HDB
flat now, and sells it five years later when the area is more developed.
They enjoy a 50 per cent capital appreciation because of that, selling
their flat for $300,000. The couple would be able to realise a profit
of $110,000.
Subsequently, Couple A decides to buy a resale flat
in a mature estate. While they incur a mortgage liability of $320,000,
they could use the profits from their first flat to invest over
the next 30 years. Compare this to, say, couple B who purchase a
resale flat, Couple A would have effectively unlocked capital from
the property to finance their retirement. We would emphasis that
it does not matter whether the profit is in cash or CPF as both
are used for investing for retirement.
Table 2 illustrates the financial implications if
Couple A invested the gains from the sale of their new flat for
30 years.
While Couple B enjoyed the benefits of living in
an established housing estate five years longer than Couple A, they
missed out on the appreciation of the new flats which creates a
potential retirement fund of $546,000. Investing it in an immediate
annuity delivers a handsome sum of $3,200 each month.
Though investment in real estate has significant
financial implications, it is often an emotional decision. The lack
of basic amenities and an inefficient transport system may deter
many from choosing new flats. The waiting period can also be daunting
especially under the Built to Order Scheme whereby orders are accumulated
before flats are built and there is hefty penalty for withdrawal
of orders.
In this regard, young couples would need to exercise
patience as the above illustration proves that it is worthwhile
to make temporary sacrifices to realise a long-term gain. To put
it figuratively, young couples have to decide if they want to have
a wallet with lots of cash or an expensive wallet with limited cash
in it. In fact, the opportunities for such gains could be limited
in future as there are diminishing areas in Singapore which are
undeveloped.
In other words, this is a chance of a lifetime for
couples to decide if you want to make the first step towards financial
independence and retire as early as Robert Kiyosakyi! He retired
at age 47.
By :
Chong Kok Peng is an independent financial advisor with New Independent
Vincent Lim is a real estate agent withKV Morgan Realty Pte Ltd
