Commentary: Three ways our brain tricks us when it comes to buying an HDB flat

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SINGAPORE: Even as the “Singapore Dream” evolves, home ownership remains a quintessential component for many. It’s a part of “adulting”, a signpost of maturity and responsibility and widely regarded as a retirement egg nest.

Despite the exuberant post-pandemic property market, a Housing and Development Board (HDB) flat remains affordable to the majority.

According to the 2024 Home Attainability Index published by global nonprofit Urban Land Institute, Singapore’s public housing reported a price-to-income ratio of 4.7, a sharp contrast to similar cities such as Seoul (17.8) and Hong Kong (25.1). The ratio reflects how many years of annual income would be needed to purchase a home.

That said, there are also worrying indications that some consider public housing as a vehicle for wealth creation, a foolproof way for quick financial returns. The rise in resale HDB prices – 44 per cent over the past four years – especially at prime locations and the preference for larger apartments that yield greater capital gain are signs that public housing is not regarded as merely a roof over the head by some.

The residential market is fuelled by many factors, such as the global pandemic and the consequential delay in construction activities. But underneath the robust demand, however, are three interwoven cognitive biases, that shape how we think and talk about housing.

REPRESENTATION BIAS: ARE MILLION-DOLLAR HDB FLATS THE NEW NORMAL?

Headlines on million-dollar HDB transactions have captured imaginations in the past two to three years.

Notwithstanding that the market value of flats is a positive reflection of economic progress, social and mainstream media coverage of these cases often creates what psychologists call a representation bias, where readily available information dominates the decision-making process.

In this case, buyers and sellers come to view million-dollar transactions as the norm. This inadvertently sets a benchmark of desired outcomes that do not reflect the broader and more varied market of typical home values.

Based on a check of publicly available HDB data at the time of writing, it concerns a small fraction (3.66 per cent) of more than 26,000 resale transactions this year. And it pales in comparison to the pool of 21,225 new units launched in 2024. 

OPTIMISM BIAS: IS THE HOUSING BOOM A NEVER-ENDING PARTY?

There is a prevailing belief that housing prices will only continue to climb due to the post COVID-19 residential shortages. This view is reinforced by market players whose narratives emphasise continuous growth, playing up representation bias in their favour in marketing brochures.

In unpacking home buyers’ motivation, it is therefore critical to examine assumptions of the longer-term outlook. Specifically, the sense of optimism bias, where buyers are confident that property at any price point today is a sound investment for the future.

But there have been sombre periods for home buyers caught in cyclical adjustments. In the last 30 years, public housing registered more than four consecutive quarters of negative or flat quarter-on-quarter price growth during three periods: nine quarters of decline from 1997 to 1999, five quarters from 2000 to 2002 and 24 quarters most recently from the third quarter of 2013 to the second quarter of 2019.

It is a timely reminder to be financially prudent amid economic uncertainty.

LOSS AVERSION BIAS: IS WAITING AN “OPPORTUNITY COST”?

The last cognitive frame to unshackle is loss aversion. We are more sensitive to the prospect of losing than gaining a good bargain.

With buoyant resale prices, home buyers may feel pressured to commit quickly for fear of missing out. Waiting for more affordable options becomes an “opportunity cost” and some may accept asking prices that push the boundaries of their affordability, if they are convinced prices will only go up.

In Singapore’s urbanised and land scarce environment, there is both a competitive and comparative element, especially for units located in prime locations.

The concoction of the three psychological processes makes the housing resale market tricky to navigate, especially when everyone involved – sellers, buyers and realtors – have a vested interest in an extended bullish market to preserve their prospective return on investment. 

OVERCOMING OUR PSYCHOLOGY

While these biases shape decision-making, bad choices are not inevitable. A 2021 OCBC survey suggests that more Singaporeans are learning to look beyond instant gratification and adopt healthier financial habits, such as making retirement plans earlier and simpler.

This adjustment in attitude is a function of policy and public education. And these tools can also be applied in the context of public housing.

First, a new flat classification by land pricing is now in place to curb buyers from speculative practices and social stratification. The New Flat Classification Framework (Standard, Plus, Prime) comes with additional subsidies and restrictions, such as subsidy clawbacks and a longer minimum occupation period, that aim to keep HDB flats in more attractive locations affordable, fair, and inclusive.

Second, real estate advertisements that provide misleading information, promise unrealistic resale prices, or selectively highlight outlier transactions should be actively and decisively tackled by the authority. This acts to rein in misinformation and misrepresentation of the market.

Third, it pays to moderate expectations and prepare buyers for possible income fluctuations in the years ahead. Singapore’s major global partners, such as the US, have retreated to a more protectionist frontier. It helps that buyers appreciates how tectonic geopolitical changes may impact their financial resilience.  

Last, buyers need to remember the potential downsides of overextending financially. Drawing lessons from past market cycles can encourage a more grounded approach, and help buyers weigh the risks of stretching mortgages, which may lead to lifestyle constraints or financial stress in the long run.

The high proportion of home owners is unique to Singapore. This remarkable achievement is a result of our calibrated approach to public housing.

HDB estates are microcosms of our multicultural society and are designed with the principles of stability, security and inclusion in mind. While it is crucial that residential real estate remains healthy, it is even more important that it is sustainable and inclusive.

Dr Leong Chan-Hoong is Head of Social Cohesion Research Programme at the S Rajaratnam School of International Studies (RSIS), Nanyang Technological University.