What if HDB flats actually cannot fund retirement? Oh no?

Homes for retirement? Who pays?

Jonathan Lim | May 22, 2018, 11:58 AM

The HDB 99-year lease is under the spotlight again.

In response to calls for automatic lease extensions for older public flats, National Development Minister Lawrence Wong said in Parliament that it was not a "straightforward matter" to extend the lease, as it involves serious trade-offs and ramifications given Singapore's space constraints.

Wong's been tempering expectations since 2017

In March 2017, Wong warned in a blog post that the Selective En bloc Redevelopment Scheme (Sers) applied only to selected flats.

In fact, only about 4 percent of HDB flats have been selected for Sers since 1995 -- a minority.

Wong wrote the post in light of news reports then of high prices of several short-lease HDB flats in the resale market.

"Sers-potential" and "high rental yield" are key words used by property agents to hype up mature flats with short leases to serve as siren songs for potential buyers.

His message on the reality of a leasehold HDB flat was, in a way, to cut through the marketing speak of property agents: "... leases will eventually run out, and the flats will be returned to HDB, who will in turn have to surrender the land to the State."

Unlocking retirement funds in old flats

Though Wong's comments in 2017 were made to temper the hype of million-dollar resale HDB flats, it also highlighted the reality that leasehold flats have an expiry date.

This was news to some optimist Singaporeans.

For the longest time, many Singaporeans have bought into the narrative that a HDB flat provided its inhabitants a stake in the country and that public housing offered an opportunity for asset appreciation.

And more importantly, some Singaporeans believed that Sers would bail them out when their flats were reaching the end of its lease.

The Straits Times, in a recent article, Owners worry older HDB flats a depreciating asset, highlighted the plight of owners with old flats who are having trouble selling their flats.

It interviewed property agents who said that buyers were "becoming sensitive to the ageing lease issue".

In the same recent speech in Parliament, Wong said that older flats still had value to be unlocked.

He cited how five-room flats with less than 60 years left on their lease in popular locations still commanding prices of S$800,000.

The question is, will the people buying that old five-room flat for S$800,000 be banking on it to fund their retirement?

Difficult for future owners of really old flats to unlock retirement funds

There will be some insurmountable hurdles for owners of old resale flats to cross should they want to retire in 30 years.

First, potential buyers will not be able to use CPF to pay for a flat with less than 30 years on its lease.

Potential buyers will also have a tough time getting a housing loan.

Next, if inflation still holds, the owners will need to sell the flat for more than S$800,000.

These hurdles will limit their pool of potential buyers, and this will likely drive prices down.

Lastly, if they cannot find a buyer, they are not eligible for the Lease Buyback Scheme as five-room flats are not eligible for the scheme.

So, while Wong allays the fears of old-flat owners of today that "whatever the price you get from the sale of the flat today, the sales proceeds would be more than sufficient to purchase a smaller flat for retirement", the problem is actually passed on to the S$800,000 old-resale flat buyers.

To be fair to Wong, he did advise young couples to buy houses "that covers you and your spouse to age 95".

But his advice may not be as seductive as the marketing speak from property agents or the long-running notion that a HDB flat is an appreciating asset, which fuels the optimism.

Will their optimism turn to dust?

Sing Tien Foo, Director of the Institute of Real Estate Studies, in an opinion piece published in Today, said: "... it is only natural that a flat with remaining lease of 40 years will be priced more than a similar one with 30 years’ lease left, and so on".

This means a flat naturally depreciates the closer it is to the end of its lease.

He observed the phenomenon was already happening with landed properties in Bukit Timah.

Economist Donald Low, in a Facebook post, also wondered why HDB prices do not depreciate from day one.

Low asked why prices of HDB flats "should rise for many years before falling gradually as the flat nears the 40-year mark".

He added that the "idea of HDB flats as an appreciating asset is premised on people’s myopia and/or speculative herding".

So, the real question is: Will Singapore have an army of home buyers ready to buy 30-year-old flats knowing full well the flats may become depreciating assets in order to fund the retirement of sellers of 30-year-old flats?

Another question is: How will the government of tomorrow price future land sales or BTO launches to prop up property values to keep the optimism-fueled market from imploding?

Stay tuned.