Why Buying A Home You Love (Not One For Profit) May Be A Better Bet In Singapore

When you say you’re not concerned about upgrading and just want a place to enjoy, the response is sometimes eye-rolling and condescension. “So naive,” some people will say, or “So impractical.” But here’s an unpopular opinion: there’s genuine merit in purchasing a home simply because you love it, with no emphasis on wealth progression. In fact, ignoring the social pressure to chase returns might be the smartest move of all.

Here’s why:

What’s “wealth progression,” and why is the idea foisted on new homebuyers?

The idea of “wealth progression” is to use each home as a stepping stone to a better one. By coincidence, that’s also a good way to persuade people to buy more and more expensive properties.

Here’s an example of the concept in action:

You’re looking for your first home, and a private property is way beyond your budget for now.

However, all your family, colleagues, property gurus, etc. are constantly telling you a private property is the goal to aim for. Also, you need to get it fast, as private property gets more expensive every year (that part is generally true.)

At first, you were thinking about balloting for a BTO flat, so you can spend less. But already, some wealth progression experts wagged their fingers at you, and told you resale is better: because you can sell and upgrade after just five years.

Note that the five-year Minimum Occupancy Period, or MOP, begins at key collection – not when you first buy the flat. So if you buy a BTO flat and wait, say, four years for construction, it becomes nine years before you can sell and upgrade.

For many wealth progression advocates, that’s too slow. From their point of view, every year you wait raises the risk that you’re priced out of the market.

So upon their advice, you buy a resale flat. You had to compromise and get something older, smaller, not in a practical location for you, etc. because you want to sell in five years and upgrade. It’s a must.

You also compromise and do bare-bones renovations, because what’s the point of expensive reno if you’re going to sell in five years anyway? Too bad if the living room looks like a furniture store on a closing-down sale.

Then the next other compromise involves your cash flow. You need to refund your CPF monies used when you sell the flat. So to avoid having no cash in hand when you sell (i.e., a negative cash sale), many wealth-progression advocates will suggest using more cash (or even all cash) to pay for your flat. This ensures you have sufficient money to upgrade later.

After five years of bearing with all that, you hopefully can sell and upgrade. But since a private property is still out of the question, your next stop is an Executive Condominium (EC).

At this point, a whole other round of compromises comes into play. Most ECs are quite far from MRT stations, by the way, or are in less mature areas. On top of that, switching to an EC now pulls you away from the caring arms of HDB, as you can no longer use an HDB loan. Now you’re at the mercy of a private bank loan; and unlike HDB, banks will not bend over backwards to avoid foreclosure.

You’ll also experience the constant anxiety of fluctuating interest rates which, depending on your situation, may be a risk better absorbed by more affluent home buyers.

During the five-year MOP on your new EC, you pay maintenance fees that can reach $300 to $400, as well as higher property taxes and possibly higher interest rates*. After that, you hope once again that you can sell and make enough money to upgrade.

*Whether you pay more interest on private loans versus HDB loans is entirely dependent on luck. Between around 2009 to 2018, for example, private bank loans were often cheaper than HDB loan rates. But they started rising, dipping again during Covid, and now currently hovering above HDB rates. It’s a constant roller coaster.

Another five years pass. You’ve been lucky and can finally make the jump to private property; but can you finally relax and indulge?

Like a toxic habit, wealth progression may be ingrained at this point. If so, you’re probably still buying with lots of compromises, to chase better potential gains. The property value must go up.

It’s surprising how far the focus on wealth progression can remain, even at this point. For example, we’ve met buyers who chose a Clemeti-area condo when they worked in Punggol.

The argument was that Clementi has better resale potential because of its denser HDB cluster, its schools nearby, established transaction histories, etc. And we’d have to concede: in terms of pure financial reasoning, the numbers would all verify all that.

Their satisfaction may differ on Monday mornings when they have to commute to work. But they’d be right about potential gains. But hey, the wealth progression strategy whispers, just bear with it for a while and we’ll upgrade again to something better.

Even at the condo-ownership stage, a whole host of other compromises still get made: picking a higher floor because it would sell better, even if they personally prefer a pool view.

Not merging rooms for greater comfort, because having one more bedroom is better for resale.

Buying a location they don’t really like because it’s closer to the MRT station, even though they drive all of the time; because again that’s good for resale value.

So where does the wealth progression obsession end?

The whole wealth progression concept tends to become an ingrained habit. Some people don’t stop at the first private property and now aim for a bigger condo, or a landed property. Some people effectively never stop for their entire lives, because even they’re thinking of the property value for legacy planning (i.e., how much can my children or grandchildren get if they have to sell this?)

This can result in a rather unhappy home journey, that drags on for a lifetime. Some people do see results from wealth progression, but others may find it was just misery by the end of the road.

Why do homeowners do this to themselves?

The sneaky part is that wealth progression can, superficially, feel like you’re doing something smart or wise. It can feel like you’re being more cunning, more ambitious, more informed, etc. than the simple homebuyer, who just looks at personal comfort.

There’s also a certain emotional kick from seeing your property value rise, and feeling like a four-bedder condo, landed property, etc. may truly be within reach “in a few years.”

But again, it doesn’t come true for everyone; and it can result in a series of uncomfortable homes because each one is regarded as a “temporary stepping stone.”

Where did the whole wealth progression trend begin?

A lot of agents are trained to use wealth progression as the basis of a sales spiel, but it’s hard to pinpoint when exactly this became an industry-standard selling point.

From asking around, some realtors and investors suggest it started around the 1990s when Singapore property tycoons like the Kwek Family (Hong Leong) and Ng Teng Fong (Far East Organization) began to make the headlines. It may be no coincidence that the EC scheme started in 1995, at around this time.

Other market watchers claimed the start was the aftermath of the Global Financial Crisis in 2008/9. At the time, record-low mortgage rates*, coupled with a lack of restrictions like the Total Debt Servicing Ratio (TDSR), made upgrading much more feasible.

Whatever its point of origin, many property agents today use wealth progression – or some variant of it – to justify property sales and purchases. Some realtors also say it’s their clients who approach them with this concept before the agent has even said anything; so it seems finance gurus, property seminars, etc. have also pushed the same concept on the public.

*At one point in 2011, some home loan packages were so cheap their interest rate was negative. We’ve yet to see it hit this level again.

But why is wealth progression NOT the best philosophy for all home buyers?

Our short answer is that home buyers are not investors, and that obsession with wealth progression blurs the lines between the two. It often does so in a way that’s unhealthy.

1. Home buyers should have a more personal view than investors

Last week, we spoke to some homebuyers who embody what genuine owner-occupiers should look for; but to give you another example, consider a “harder-to-sell” unit like a dual-key three or four-bedder. These types of units are less favourable for resale, as they appeal to a niche group of buyers (i.e., most people don’t feel the need to pay a higher price per square foot for an extra sub-unit, if they’re not renting or have no extended family.)

But a dual-key unit allows grandparents to live at the same address as the grandchildren, which can be preferable compared to relying on domestic helpers or childcare. It allows children to look after ageing parents instead of depositing them in a nursing home. And it allows all this with total privacy on both sides, as the units are separated (and you also won’t need to pay ABSD for a second home, if you’re buying for your dependents.)

Will a dual-key unit ever be the top-performing unit in terms of resale gains? Perhaps not, due to the higher cost and smaller pool of prospective buyers. But in terms of quality and life and practicality, the layout may still be worth choosing anyway.

The same issues extend to location. Being further away from an MRT station may lower resale values; but if it means being in a quieter area, or having more living space in your home, that might be a compromise worth making. Likewise, wise home buyers prioritise distances to school and work over potential gains, because this affects their quality of life in a very significant manner: don’t underestimate the value of an extra hour of sleep before work or school.

For homeowners, the “gain” should be in the comfort and lifestyle a home provides, more than its resale price.

2. Wealth progression is dependent on personal financial situations

We’re not in the field of personal finance, so we can’t go into too much detail on this.

But a good example of this is the TDSR cap, which limits your home loan repayment (plus other debt obligations) to 55 per cent of your monthly income. While an upgrader could buy a condo under such conditions, we suggest asking a financial planner what they think of 55 per cent of one’s income being swallowed by debt. We’re certain most of them would caution against this.

Likewise, not everyone is ready to deal with the realities of a fluctuating interest rate, a maintenance fee of $300 to $400 a month, or the cash flow issues arising from servicing home loans, stamp duties, etc. in cash. Even if you could upgrade, it may not be prudent in your situation.

From our perspective, wealth progression works best for buyers in a higher-income demographic, and especially for buyers who have more than one property already (they can reserve wealth progression concerns for assets besides their actual home.)

3. The decision to sell is not as easy as it’s made out to be

Is a sharp rise in your property value a sign to sell and upgrade? On paper, the answer may be yes. But reality is much more messy.

Remember that if you can sell high, you’ll probably also have to buy high. A bull market might mean that, despite the rise in your property value, you’re still priced out of the private market. Likewise, property trends can change. If your layout or project is no longer in vogue, should you sell now when the price is stagnant (leaving you with limited upgrading options), or hold on and risk seeing it get worse?

What about factors such as en-bloc attempts, an economic downturn, a sudden hike in stamp duties or other cooling measures, or any of a thousand other things that might happen? At that point, you may realise the idea to just “sell and upgrade later” is oversimplified. It’s not easy to time the market, and decide when to make your move to upgrade; the process can be extremely stressful.

There are also lifestyle factors involved. Some homeowners find it hard to separate their child from their group of friends, or for elderly family members to be cut off from routines and familiar routes of transport.

4. One twist of bad luck can make years of sacrifice useless

Consider suffering for five years in a location you dislike, just because you’re hoping its appreciation will be better. But toward the final year, your financial situation changes:

Sudden loss of income, medical issues, etc. means it’s no longer possible for you to upgrade. Now you’re stuck in a location you dislike, and what you thought you’d only tolerate for five years is going to be extended indefinitely.

Or perhaps, despite your best efforts, your savings and the appreciation of your home are simply outpaced by a rising market. It’s also possible that new policy measures, like new loan curbs, can extend your waiting time. If that happens, are you happy to hold on to your unit, for decades longer than planned?

For many homeowners, this is too much of a risk to take.

You shouldn’t settle for a choice worse of home, just because you assume it will appreciate better or that your stay is only temporary. Always factor in the possibility you need to stay longer than expected. You’ll want a comfortable home in those circumstances, so don’t throw those qualities away in the interest of wealth progression.

We’re not saying wealth progression is always a wrong strategy; just that it’s wrong to apply it so universally

The harsh truth is that some homeowners are better off not considering property wealth progression. Property is a capital-intensive and illiquid asset, and for some, it’s safer to consider other investment options. An index fund, or something of the sort, might still end up buying them a condo one day.

In the meantime, they should focus on their home being a comfortable place for their family, and on its resale potential second. Or maybe even not at all.