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The ticking time bomb of the 99-year-leasehold HDB flats

Image credit: Wikimedia Commons

A letter published in the Straits Times claimed recently that the promise of owning a 99-year-leasehold HDB (Housing & Development Board) flat as an investment for old age is no longer valid today. The letter writer, Ronnie Lim Ah Bee, pointed to the announcements by National Development Minister Lawrence Wong to bolster his claims.

Writing for his Ministry’s blog in March last year, Mr Wong asked HDB flat owners to not assume that all old HDB flats will become eligible for Sers (Selective En bloc Redevelopment Scheme). He said that “only 4% of HDB flats have been identified for SERS since it was launched in 1995”, and that “it is only offered to HDB blocks located in sites with high redevelopment potential”.

About 70,000 flats (of the 1-million HDB flats) are more than 40 years old, and almost 10 percent of flats will face lease expiry in 50 years. The Minister’s announcement essentially means that such flats will have zero value once it reaches 99 years and owners will have to vacate their homes. Most owners will see the land their flat was on being returned to the State at the end of the 99-year-leasehold.

The letter writer said that “many seniors who want to downgrade to Built-To-Order studio apartments for the elderly are in a fix as they are unable to sell their old flats”, and that many such seniors “stand to lose their deposits on their new flat if they cannot sell their old flat.”

Analysts expect 99-year-leasehold HDB flat prices to remain flat this year

HDB’s flash estimates says that the median price of resale flats dipped by 0.8 per cent in the 1st Quarter of 2018 from the previous three-month period. The price drop is significant from its peak in the 1st quarter of 2013.

Image credit: HDB

Some, like Mr Lim, are disappointed by the price drop in HDB resale flats. “Most of them were hoping to downgrade and live on the profits from selling their flats but have become disillusioned,” Mr Lim said.

He added: “The Government needs to step in to manage this problem and not just leave things to market forces.”

Without the possibility of lease renewal, the implications for HDB flat owners of older resale flat owners are less certain, as a steady and steep depreciation may wipe out what many count on as a retirement asset.

The Government implemented market pricing and the asset enhancement policy for public housing in the late 1980s. The aim of this programme was to allow heartlanders a chance at enjoying the appreciation of their HDB flat – which is a key asset for most of them. The programme led to more than 10 fold increase in the price of HDB flats in the next 30 years.

Mr Wong’s comments about Sers in 2017, caused many to doubt if the Government was scaling back on its Asset Enhancement Programme. For example, Donald Low, an Associate Dean at the Lee Kuan Yew School of Public Policy, commented on the news of Mr Wong’s blog post saying: “This is as close to an admission of the mistakes of that policy from government as we’re ever going to get.”

In a subsequent Facebook post, the Minister assured home owners that 99-year-leasehold properties are still a “good store of asset value”, so long as one plans ahead and makes prudent housing decisions. This caused some to ask how in one fell sweep, HDB flats had gone from being “asset enhancement” to “good store of asset value”.

Prominent socio-economic commentator Chris Kuan for example, responded to Mr Wong’s Facebook post saying that there no getting away from the “gorilla in the room”- which is the fact that the value of HDB flats will be $0 at the end of the 99-year leasehold period.

“The depreciation of HDB flat over time will still be driven by the reversion to zero at the end of lease. That in turn will always drive the amount of money extracted from monetization of the flat. The worse outcome is a double whammy of the depreciation effect of reversion to zero in the lease coupled with a sharp fall in real estate prices…the MND may try to avoid that issue but it is what drives the amount of money HDB owners can get out of their “good store of value”. ” – Chris Kuan

Most older owners of HDB flats have now come to accept that the value of their 99-year-leasehold property is not going to keep on increasing forever and ever

There are several government policy restrictions which suppresses the attractiveness of older HDB flats for buyers.

These are some restrictions:

  • From 1 July 2013, CPF (Central Provident Fund) usage and HDB loan was restricted for purchase of flats with remaining lease less than 60 years.
  • For flats that are 64 years old, banks are unwilling to extend loans to finance the purchase of these flats.
  • For flats which are 69 years old (or less than 30 years of lease remaining), CPF money cannot be used for down payment or to service the monthly mortgage.
  • From the 79th year onwards, the property has to be paid for in cash.

Years ago, Singapore’s first Prime Minister Lee Kuan Yew urged Singaporeans not to sell their flats, and assured them that they assets that would grow in value; but the reality is, flat owners with less than 60 years left in their leasehold, will find it hard for them to sell their flats if they decide to cash out. This predicament has made some to call for lease top up for such flats which don’t qualify for Sers.

Mr Kuan however warns that Sers or even lease top-ups are not without their downsides.

“…over time HDB are neither asset enhancements nor stores of value. If you are fortunate enough to benefit from HDB being either one of those things, it means someone else is gonna be faced with a sharply depreciating asset. Even if you think the (government) will bail you out with SERS or whatever, that comes at a price too.”

If you need expert help for financing the purchase of a HDB flat CONTACT US NOW.

Written by Ravi Chandran


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