People always say "Bigger is better". But if that's true, then why are small homes on the rise? Is this just a trend that will eventually pass or is it here to stay? And more importantly, does size really matter in real estate?

Whether you like it or not, small flats are gaining popularity. Just look at HDB transactions from 2020-2024. From January to November 2020, there were only 388 2-room flats sold. In the same period last year, the number almost doubled at 740 units. It's clear that 2-room flats are taking the lead here.

Chart: STRAITS TIMES GRAPHICS

There are many reasons behind this phenomenon. Affordability, for one, is a huge factor. Between the growing property prices and rising cost of living, smaller flats are simply more accessible for many people, especially first-time buyers. 2-rooms mainly attract singles while 3-rooms attract both singles and families. Renovation costs for smaller flats are lower than larger ones as well, making small flats more budget-friendly all around.

In addition to that, many young couples nowadays are opting to have just one kid or even go completely child-free. So, household sizes have been shrinking along with the need for larger housing. In 2014, the average HDB household size was 3.4 people, but by 2023, the number had gone down to 3. During the same period, households with three or fewer members grew by 38.2%. Clearly, the DINK lifestyle is affecting the property market.

Then, we also have older residents who want to downsize to smaller flats. For some, it's a way to free up cash to cover living expenses. For others, smaller flats decrease the risk of accidents and are just easier to manage as they get older and less mobile.

All things considered, it's likely that the preference for small flats is here to stay. This seemingly new direction is driven by shifts in demographics and buyer sentiments rather than a passing trend. From the falling birthrate and ageing population to evolving lifestyle preferences. Smaller flats align well with these changes. Plus, grants like the Enhanced CPF Housing Grant (EHG) make smaller flats more accessible to young buyers.

Don't let size fool you. Small flats have shown good appreciation, perhaps even better than larger flats. Take a look at this graph of HDB transactions over the past decade. We can clearly see that at one point in 2020, 2-room flats really took off. And the gap between them and larger flats continues to grow today.

Source: PropNex Investment Suite

In merely five years, 2-room flats appreciated by nearly 57%, which is significantly higher than their larger counterparts. 3-room and 4-room flats went up by 49.28% and 51.42%, whereas 5-room and executive flats only grew by around 42%. I did the math for you and we're looking at an appreciation rate that is 34.8% higher than that of executive flats.

Source: PropNex Investment Suite

Smaller units can also command higher rental yields due to their lower price points. For instance, an $350,000 2-room unit rented at $2,100 per month generates a gross rental yield of 7.2%, while a $600,000 4-room unit rented at $3,200 yields only 6.4%. So technically, smaller homes do outperform larger homes when it comes to rental income. But at a smaller scale, the figures are simply not as significant. I mean, would you rather collect the $2,100 or $3,200?

From what we've seen, 1- and 2-bedroom units do tend to sell out the fastest during launches. That's because the overall cost is lower even though the price per square foot is higher. For example, an 800 sq ft 2-bedroom condo priced at $2,000 psf will cost you $1.6M, whereas an 1,300 sq ft 3-bedroom condo priced at $1,850 psf will cost you over $2.4M.

However, condos do perform differently than HDB flats because they cater to a different demographic. As I've mentioned before, many buyers opt for smaller HDB flats for affordability reasons, so it wouldn't make sense for them to choose condos, which are significantly more expensive.

Let me put it into perspective. Last year, the average price of a 2-bedroom condo was $2,047 psf, whereas the average price of a 3-room HDB flat was $601. If affordability is your main concern, a condo (no matter how small) is likely out of the question.

Aside from that, condos are often seen as investment assets. Investors may be drawn to smaller units because they are cheaper and easier to rent out, but appreciation trends will differ. HDB flats benefit from strong demand among homeowners, while condos are influenced by broader market conditions like foreign interest or economic cycles.

So even though small homes are trending in general, the impact is felt differently across the two markets. Small flats in the HDB market are experiencing strong appreciation, whereas small apartments in the condo market are seeing a more measured response.

As you can see below, 1-bedroom condos actually make the least amount of profits, and 5-bedroom condos make the most (though 3-bedroom units come close).

Source: PropNex Investment Suite

Yes, it does matter. Not because bigger is always better, but because different sizes serve different needs. While larger homes offer more space and flexibility, smaller homes offer affordability, lower maintenance costs, and better rental yield.

The rising demand for small homes that's affecting the HDB market isn't just a passing trend, but rather a reflection of deeper social changes, such as shrinking household sizes and changing priorities. Smaller homes are simply more accessible to singles, young couples, and downsizers.

Meanwhile, the condo market is less affected by the change because they cater to a different crowd with different priorities. With many buyers being investors, larger units tend to be preferred due to their stronger capital appreciation.

Ultimately, what size property you should get depends on your needs and priorities. If you're unsure or have any questions, don't hesitate to reach out. Our agents are more than happy to help you in your property journey.

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