Some 17 out of every 20 Singaporeans you see on the streets are likely to live in HDB flats. These public housing flats have a 99-year lease.

So, what is this 99-year time bomb that some Singaporeans are sitting on?

(Editor's note on Feb. 19, 2016: We have added the word "some" in the sentence above for clarity. Several readers have mistaken that all Singaporeans are sitting on a time bomb which this article is talking about. It is not the case. The article's title "The 99-year time bomb some Singaporeans are sitting on" has not been changed since its publication in April 2014.)

(Editor's note on March 28, 2017: National Development Minister Lawrence Wong has shared in a blog post that not all old flats will be eligible for the Selective En bloc Redevelopment Scheme (Sers) and so far only 4 percent of flats have undergone Sers.)

Isn't a 99-year lease simple to understand?

The land is leased and once the lease is up, it has to be returned. Quite simple, is it not?

In fact in January this year, NCMP Gerald Giam clarified HDB's lease with National Development Minister Khaw Boon Wan. The gist of it as what Minister Khaw said:

"Like all leasehold properties, HDB flats will revert to HDB, the landowner, upon expiry of their leases. HDB will in turn surrender the land to the State."

Your flat will be taken from you once the lease is up. Is that news to you?

Up until recently, it is fair to say that many Singaporeans may be unaware, or perhaps in denial that their flats would be taken back by the authorities once its lease is up.

A read-through of this Hardwarezone Forum thread reveals that many think that they will not be homeless if their flat's lease is up.

This phenomenon may be due to the fact that no 99-year lease residential property has yet to be claimed back by the authorities in our collective consciousness, as well as the fact that many HDB estates that are three to four decades old have come under the Selective En bloc Redevelopment Scheme (SERS).

There seems to be an air of confidence that the government would not leave people in the lurch when lease runs out. There are people who think that the party will go on and the HDB will roll along when the time is appropriate to relocate you and redevelop old estates. There is no guarantee of that.

The problem is that there are very optimistic people buying old flats at premium prices

With property prices rising much faster than the growth in wages in the last three decades, our housing loans have become larger and longer.

The 99-year time bomb hurts a select group of people the most -- those that paid a hefty premium for old flats in Queenstown, Tiong Bahru and Bishan, or those who bought old condominiums like the Pearl Bank Apartments.

Their CPF Ordinary Account will be drained for the down-payment and their monthly CPF contribution into the OA will go straight to their home loans for up to 35 years.

Using a hipster young Tiong Bahru couple as an example

For young couples who paid top dollar for old flats such as those in Tiong Bahru, which leases have only 57-years left, they will have to unload their flats sooner rather than later if they want to have sufficient money in their CPF accounts for retirement.

While some optimistic people are willing to pay S$700,000 for a Tiong Bahru flat (there is one on sale now on Propertyguru) today, will that optimism carry on 30 years down the road when they try to sell that same flat on the open market? Only this time, the flat has only 27 years left on its lease. Without even talking about property appreciation, would anyone pay S$700,000 for that same flat in 2044?

Source: PropertyGuru

Let's assume that property prices grow at 4 percent year-on-year, a S$700,000 flat in 2044 with 27-year lease would cost S$215,000 in today's dollar-value. Would you buy a flat today at S$215,000 with 27 years left? If you would, that money will be the seller's retirement plan.

The young Tiong Bahru couple of today will be banking on another young couple in 30 years' time to buy their flat for $700,000 so that they will have their retirement plan. If that couple can't find any willing buyers, they would be S$700,000 poorer in their CPF accounts having channelled their CPF for loan payments and will have to rely on their cash savings, if they had any.

They could sell their flat at a much, much lower price to entice someone to buy a flat with 27 years left on it.

If you got the drift, you will stay away from old flats, right? 

If you bought the argument that no one in their right minds should be paying for premium prices for flats which are 40-year-old, you'd go for BTOs right?

That's all fine and well - until you have to retire yourself. Much of your CPF has been locked in paying the mortgage on your BTO flat. You will have to sell it if you want to ensure sufficient funds in your CPF.

So the question is - will you be able to sell your 40-year-old flat in the future to fund your retirement?

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Are our retirement plans blown to bits by the 99-year time bomb?

Minister Khaw has said that HDB is studying the possibility of the Lease Buyback scheme being made available to people living in 4- and 5-room flats.

That is one way to deal with this problem where the Government bails out HDB flat owners when the market decides that buying an old flat at premium prices is not such a good idea after all.

Another possible solution is the lease can be extended by the Government to ensure that flats can be sold at acceptable prices to fund retirements. Will this happen? We will only find out when the first of the 99-year time bombs start to blow.

Moral of the story

But if you insist on relying on unlocking the cash value of your property as part of your retirement plan, here are some things you have to consider:

1) There is no guarantee that the Government will extend your lease or put your estate up for SERS;

2) There is no guarantee that the market will value your property in your favour when your retirement comes;

3) Cash in hand will always be more liquid than a property;

Until then, perhaps relying solely on your CPF for your retirement is not such a smart thing to do. Start saving for your retirement today and stop living like you're a rock star.

Top photo from TZA