Is It Worth Keeping Our Executive HDB Or Selling Upon MOP To Buy A Condo (And Avoid ABSD)

Hi Stacked,

I am writing in as I found myself in a rather interesting situation. My wife and I are 29 and have a combined annual income of approximately $250k. We are currently staying in an Executive Apartment for 3.5 years and am currently serving out the MOP. The property has saw its resale prices go up by 20% over the last few years and are now transacting at approximately $800k. We co-own the property.

My father owns a half-stake in a landed property valued at approximately $5-6M as tenants-in-common with his ex-wife. Due to a divorce order, he is not able to liquidate his position in the property for the lifetime of his ex-wife. He has since willed his share of the property to me. Unfortunately, my father has met with some health issues during the last few years.

Due to the lease decay of the HDB, my wife and I intend to move out of our HDB flat within the next 5 years. In the situation that my father passes on and I then inherit the half-stake in the property, we are stuck in a situation where I may not be able to liquidate my position in the property even after inheriting it due to the divorce order. This would mean that we would incur ABSD when my wife and I look for our next property to purchase. 

At the same time, we are cognisant that if we are able to liquidate our position of the private property, it would mean a significant cash inflow which we could use to fund our next place. 

Based on our analysis of the situation, we considered the following options:

1) Moving out ASAP to an intermediary condo ($1-2m) before inheriting the stake in the private property, allowing us to avoid ABSD.

2) Staying in the HDB and potentially facing lease decay in our current property and wait for the stake in the private property to be liquidated (which has no definite timeline)

Our goal for a forever home is a larger sized condo (>1300 sqf in the city fringe). What should we do to be able to achieve these goals and are there any other alternative options to what we managed to come up with?

Hi there,

Thanks for writing to us!

You are certainly in a unique situation and I’m sorry to hear about your father’s health issues. Since the timeline for liquidating your inherited property is uncertain, that does make things a lot harder to plan for. 

Before proceeding, I must add that the following will be based on the assumption that you’ll inherit the stakes in the private property after your HDB reaches its Minimum Occupation Period (MOP).

As per usual, I will begin by accessing your affordability before looking into the options you’re considering.

Affordability

For the purchase of a private property 

The above affordability hinges on you having the funds required for the 25% down payment (5% in cash, 20% in cash/CPF) and Buyer’s Stamp Duty (BSD). This is your current affordability without taking your potential inheritance into consideration. 

So if you are looking at buying a private property ranging from $1-2M, the following are the funds you will need. 

It is important to note that if you’re buying a resale private property, the BSD will have to be paid in cash first and you can apply for a reimbursement from CPF afterwards. But if you’re buying a new launch property, the BSD can be deducted directly from your CPF account. 

Let’s now run through the pros and cons of the two options you’re considering.

Potential pathways

Option 1. Move to an intermediary condo before inheriting the stake in the private property

Considering that the last HDB Executive Apartments (EA) were constructed in early 2005, your unit is likely to be at least 19 years old. As HDB no longer constructs units of this size, the supply is limited, making Executive units the sole option for buyers seeking spacious HDB flats.

While this scarcity may potentially contribute to stabilising executive unit prices, concerns regarding lease decay persist. The age of the flat is particularly impactful for younger buyers, as it affects their loan and CPF housing grants.

If the remaining lease of the flat does not cover them until the age of 95, these buyers would be required to allocate more cash towards the purchase, potentially dissuading them and reducing the pool of potential buyers.

Based on the HDB Resale Price Index (RPI), it is evident that HDB prices are currently at a peak. When examining the 10-year growth rate of Executive units compared to all HDB types during the past decade, Executive flats generally followed the overall market trend but exhibited slightly better performance on average. Notably, when observing the Year-on-Year (YoY) growth, it becomes apparent that the majority of the growth occurred during and after the pandemic. 

This surge in demand for larger unit types occurred as people transitioned to remote work and required more living space. However, it remains uncertain whether this rapid growth rate is sustainable over the long term.

Source: HDB

Examining the RPI reveals a gradual deceleration in the percentage change from one quarter to the next, indicating that the market is entering a phase of stabilisation. Your purchase timing was indeed advantageous, coinciding with the early stages of price escalation. 

Potential to leverage on capital appreciation of private property

Comparing the average growth rates of HDBs and non-landed private properties over the past decade, it becomes evident that the latter exhibited stronger performance and more consistent year-on-year growth. Following the implementation of three rounds of cooling measures in 2013, prices for both property types experienced declines. However, non-landed private properties began to rebound from 2017 onwards, steadily increasing in value, whereas HDB prices remained relatively stagnant until the onset of the pandemic, when they surged significantly. As seen earlier, recent trends in the HDB RPI suggest a slower rate of increase, indicating a potential stabilisation of the market.

Given that HDBs are primarily intended for owner-occupation, their market is subject to more stringent regulations, and resale HDBs typically do not see substantial appreciation, as witnessed during the pandemic—a unique occurrence. In essence, the selection of the right private property will be a safer bet than relying on your HDB EA not being subject to lease decay. 

Switching to a private property with a longer tenure

Given this uncertainty in the holding period, it’s prudent to select a younger development with growth potential and sustained demand in the coming years. I’m unsure about your family planning with regards to your property, but with a budget of under $2M, securing a newer and adequately sized 3-bedder may require exploring options in the Outside Central Region (OCR). While there’s a chance of finding a younger 3-bedder within your budget in the city fringe, the unit size may be notably smaller.

Cons of this option

Compromise in terms of size and (maybe) location

As previously mentioned, considering the price range you’ve specified of $1 – 2M, the unit size is likely to be smaller than your current EA. The location will vary depending on the unit type you’re interested in.

Since May 2023, here’s a look at the transaction volume by market segment based on the above criteria:

A brief search on PropertyGuru also reveals that available 3-bedroom units with over 1,000 sq ft and priced under $2M, completed in 2018 and later, are primarily situated in the OCR. There are only a few options available in the RCR.

Option 2. Stay in the HDB while waiting for the stake in the private property to be liquidated 

As you’ve noted, there’s no fixed timeline for this option. If you choose to relocate from your HDB after inheriting the private property, you’ll be subject to ABSD on the subsequent property acquisition.

Pros of this option

Comfortable living situation and lower monthly outgoings

Continuing from the previous point, remaining in your HDB will provide you with a more spacious living environment. Comparable sizes may not be attainable if you transition to a private property. Moreover, you’ll need to secure a larger loan for your next purchase, accompanied by higher monthly maintenance fees. 

Let’s delve into the numbers to assess the potential variance in monthly expenses.

Since I do not have your exact figures, I will be making the following assumptions for calculation purposes.

HDB purchase price (3.5 years ago): $640,000

Assuming 75% loan: $480,000 (25-year tenure, 4% interest – bank loan taken)

Outstanding loan after 5 year MOP: $418,102 (20-year tenure remaining, 4% interest)

I will use a 10-year holding period for calculation purposes.

Average monthly expenses: $1,313 (excluding mortgage repayment)

Suppose you purchase the private property at $2M.

Average monthly expenses: $5,166 (excluding mortgage repayment and BSD)

The calculation above indicates a substantial contrast in monthly expenses between remaining in your HDB and relocating to a $2M private property, amounting to $3,853. This figure does not encompass mortgage repayment and BSD payable, making the difference even more significant.

Cons of this option

Lease decay may inhibit the growth of EA

I’ve covered this sufficiently above, and this remains the same case here. 

What should you do?

You are indeed in a unique situation here. In both scenarios, your stake in the inherited property remains a constraint. Unless you’re able to acquire your forever home solely in your wife’s name, you’ll be subject to ABSD regardless of the choice you make regarding purchasing before your stake is liquidated.

Of the two options, the first of transitioning to an intermediary private property presents a higher likelihood of appreciation if the right development is selected, which would mitigate your concern of the potential lease decay of your current home. 

While the second option offers a more spacious and potentially more affordable living environment, the uncertainty surrounding the timeline for liquidating your stake raises concerns. Additionally, depending on the age of the flat, the EA may face lease decay issues as you’ve also pointed out. 

However, in the event that you inherit the private property before your HDB reaches its MOP, lawyers can potentially delay the transfer of ownership. That said, I would advise you to consult with a solicitor for more detailed information on this.