My previous blog article on 'HDB flat a valuable asset?' was published under the forum page in Todays paper. Unfortunately it was heavily edited as the newspaper editor did not agree with my 'unconventional' interpretation of 'monetary gain'. The title was also changed to 'How much would I have made?' There were some discussion over the internet too, but most folks go for the 'conventional' interpretation, which does not give a true picture of the value of HDB as an asset to an ordinary citizen who consider it a home rather than a money spinner.
Perhaps an analogy would help. In order for something to be valuable and profitable, not only must it be in demand, but the owner must be able to do without it and sell it too.
Let say I bought a 10Kg bag of rice for storage 10 years ago for $10. There is a global famine and food shortage 10 years later . Now I need food to survive, so it is unlikely I would sell it to make a profit no matter how much the price of rice has appreciated. Thus, though rice is valuable, but it is not a profitable asset as it is a basic need to me.
Let us presume that I did sell 10Kg of rice and got $30 for it. I used $20 to buy a loaf of bread. My profit is not $10 nor $20! (depending which route of conventional interpretation one adopts) It is in fact zero ! We have to consider the cost of the rice I paid for years ago. I also got back much less than I have before - a loaf of bread. We should not forget that the price of other food stuff has also increased tremendously and it is a basic need we cannot do without!
Now let say I bought 10 ounce of gold instead of rice 10 years ago. If there is a global famine, of what value is this gold to me since I can't eat it to survive ? I definitely cannot sell it to make a profit either, as no one will be interested gold under this situation.
Back to the HDB flat issue. I got a 4 room flat for $90k, 26 years ago. If I downgrade to a 3 room HDB flat, the difference between a 4 and 3 room flat is $100k. Most folks fall for the conventional thinking that I make a huge profit. The editor of Today papers took it that my profit is $100k. (which is not my original interpretation). Some even argued over the internet that I make a profit of $400k -$90k = 310K. (current 4 room flat price minus my flat cost)
But have we forgotten that for something to be profitable, we must be able to sell it because we do not need it.
I cannot just sell my flat as I need a roof over my head! So if I downgrade - we need to deduct what I paid for my original flat since a home is a basic need. Hence it should be $100k-$90K = 10K profit. (the rice and bread analogy) Divide this over 26 years and it works out to be a miserable $384 per year ! Besides inflation which reduces the value of money over the years, there are also many other cost to consider, - legal and administrative fee, GST, home relocation expenses....So much for profitable asset, sigh...If all these expenses are taken into consideration, is it a negative sum game. The 7% GST itself is already more than enough to wipe out the $10k of profit.
Is a HDB flat to an average citizen a valuable and profitable asset then ?
Do not forget that it is 99 years lease and HDB normally repossess it before the lease period. We would need to buy another flat. The price will be sky high then and the floor area will be also very much smaller.
Besides,the demand of a HDB flat could always change (the gold analogy). It could be affected just by twitting of the law - which they are in fact doing now.