Friday, April 20, 2018

The expiring HDB lease

How can we deal with the problem caused by the expiring lease on HDB flats?

We have to recognize that there are many parts to this problem. Let me list two of them:

a) First, some owners who need to sell their old HDB flat with a lease of less than 60 years has found it difficult to find a buyer. The buyer, who is likely to be a young person, is not able to get bank financing to buy the old flat.

b) Second, owners now fear that they have to vacate the flat on expiry of the lease and will not get any compensation. Their total investment in the flat will vanish into thin air.

The first problem is more urgent. Some owners need to sell their flats now to realize cash to downgrade to a smaller flat or to cover their living expenses.

This problem can be solved by allowing the buyer to use CPF to pay the mortgage for leases of between 30 to 60 years. 30 years is a long time for the new owner.

We need to overcome a mental block. Some people, including the government leaders, think that it is all right for people to buy a 60 year lease because it is long enough to quality as an "investment".

A shorter lease will expire during the lifetime and is "consumption".

This distinction is not valid. All properties have a large component for consumption. It is a matter of degree.

The buyer has to pay a much higher price for a long lease property. Let's say, $300,000. If the same property has a shorter lease, it comes at a lower price, say $200,000.

In both cases, the consumption is $200,000 over the term of the short lease. For the long lease, the consumption is also $200,000 and the investment is $100,000.

The $100,000 that is invested in the property will appreciate over the years. But the same $100,000 invested in equities (or stock market shares) will also get the same return.

My point is that there is no difference in the consumption component between the long and short lease.

I also want to give a warning to all property owners. The property bubble in Singapore has grown too big. It cannot continue to inflate because the earnings of working people cannot sustain a bigger bubble.

The government will be able, hopefully, to stop the bubble from bursting, but you should not count on it growing further. The days of easy money are over!

I will now deal with the second problem - the owner has to give up the HDB flat on expiry of the lease.

This problem is not so urgent. It will come in another 40 years time when many leases will expire. Some of the short leases will expiry earlier, but the number is small and the problem is manageable.

When the time comes and large numbers of leases are expiring, the government of the day can offer an extension of the lease by 5 or 10 years at a time.

This can be done, if the flats are still in habitable condition and there are no redevelopment plans.

A premium has to be paid for the extension of the lease. This will not be cheap, but it wil be less costly than buying a new flat - because you do not have to pay for the building.

Furthermore, it can be justified that the premium for lease extension can be kept at a "moderate" price. After all, these are people who bought and paid for the original property.

This is similar to buy a Certificate of Entitlement (COE) for the use of a car for 10 years or to extend it buy 5 or 10 years by paying a premium.

The HDB scheme has been successful for the past five decades. It has allowed many owners to make a good capital gain on the sale of their flats which they used to buy a bigger flat or a private property.

This huge appreciation was also made possible on the back of a rising property market, which has become a bubble.

We are now at the watershed. With the leases reaching the magical 60 year mark, many owners find it difficult to sell their flats. There is small demand for the old flats with less than 60 years due to lack of financing.

The problem affects large number of people. The fear that the property bubble may burst adds to the panic. It can be quite catatrophic.

It is urgent for the government to act and address this problem. As a first step, they should reduce qualifying period for use of CPF savings. Currently, the requirement is that the remaining lease should be 60 years. The government needs to revise it to 30 years.

Tan Kin Lian


Unknown said...

Govt will reply that cpf can already be used to pay for lease between 30 & 60 yrs ... But subject to 2 conditions that you've discovered recently:

1. Age of youngest buyer & remaining lease > 80.

2. Formula to calculate prorated % of cpf that can be used.

Not forgetting cpf also has Withdrawal Limit & Additional Housing Limit based on original property valuation and cpf retirement sum amount.

I think easier to reduce employee cpf & disallow cpf for property, and do away with all this complicated policies since 99% of people end up using most of their cpf for property anyway.

Retirement money is retirement money ... Property money is property money ... Keep them separate.

Just like for insurance vs savings vs investment.

Yujuan said...

Folks here are this politically immature. They just believe what the Govt says, being not conditioned to think further.

When LKY said years ago that HDB flats are an asset, dun sell yours away, and they believe.

HDB flats is not an investment asset, just a place to bring up your family, because they have a expiry date, after which, revert back to Govt, and if your flat has 50 or less years left, it would depreciate very quickly, right before your eyes.
Unless, your aging block is about 5 mins walk to MRT stations, and next to rental blocks, then worth the chance to punt that yours fall within the SERS scheme. Why? Very obvious, such locations are far too valuable to stay as rental flats for long, Govt just take them back and pack off renters to far away locations, dun need to pay compensations. Then sell these valuable land to private developers to make money. If selling price is cheap, why not consider such fast aging flats, treat it as paying rent.
Solution is simple. For flats running out of time, if you bought them in the 70s and 80s, dun be greedy, grab any offer price that comes your way quickly, else selling price would just slide down the ladder, then stay with children/relatives. Money talks well in Singapore, with cash in hand, children/relatives would take you in, but hold on to your cash tightly, it's your security blanket.
Solution two, ballot for new BTO and EC flats, all subsidized by Govt, and you have the luxury of waiting out your asset to appreciate with a brand new 99 years lease. Now everywhere you could find MRT stations, ulu places so what. Rule here, dun buy aging resale HDB flats, would fast depreciate like your motor vehicles, unless the location is too good as stated above.

Yujuan said...

The White Paper Govt's aspiration to have 6.9m people.
With tech's steady progress in AI, Robotic and Automation advances, now Govt is having second thoughts, that we dun really need that much engineers and specialized personnel from abroad, we dun really need to attain this 6.9m target.
Lawrence's warnings on HDB owners hoping to profit from SERS, and State mouthpiece SPH's wide coverage on the Geylang property lease expiring and reverting back to Govt are hints we should take note.
In future no need to build more public flats as population growth has reached optimal requirement level already. So dun expect your new HDB flats to appreciate like in the past, your flat is not an asset, so treat it a consumer product like your car.

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