The Big Read: No easy answers to HDB lease decay issue, but public mindset has to change first

SINGAPORE: When the lease of his three-room flat in Lorong 4 Toa Payoh runs out in 2066, first aid and swimming coach Low Mong Seng, 34, expects the Government to give him “something in compensation”.

“Either another shelter over our heads, or a lower lump sum amount (compared to the value of the property) for us to get another flat to stay in,” said Mr Low, who inherited the unit from his mother who died in 1995.

But another homeowner, who gave her name only as Ms Kwok, has a different view.

There is “a misunderstanding (among the public) of what homeownership is”, she said.

“People think ‘ownership’ means a freehold ownership but if you buy a leasehold then obviously the limited lease is reflected,” added the 30-year-old lawyer. Three years ago, she bought a three-room flat in Tiong Bahru — completed in 1973 — with her husband.

The issue of the lease expiry of older Housing and Development Board (HDB) flats has seized many homeowners in Singapore, since a blog post in March last year by National Development Minister Lawrence Wong.

Mr Wong had cautioned that not all old flats will be automatically eligible for the Selective En bloc Redevelopment Scheme (SERSs) — amid media reports of buyers paying huge sums of money for ageing resale flats, in the hope that the flats would be identified for SERS.

As at Dec 31 last year, HDB manages a total of about one million flats. The vast majority of flats have more than 60 years of lease remaining, HDB said in response to queries.

About 9 per cent of flats (or 90,000) have leases that commenced more than 40 years ago, it added. The first batch of HDB flats with leases that will expire in about 50 years are located in Geylang and Queenstown.

“As the leases run down, especially towards the tail-end, the flat prices will come down correspondingly,” Mr Wong had said, adding:

So buyers need to do their due diligence and be realistic when buying flats with short leases. This is especially important for young couples, who have to plan for a much longer future.

The issue has received substantial airing in Parliament since, with Members of Parliament (MPs) raising concerns and suggestions.

Last month, Mr Wong said the Government is studying the issue, as he highlighted the complexities involved.

“It will be easy for me to give you a politically expedient answer now and try to wave away the problem. But there are serious trade-offs and ramifications to consider,” he said, adding:

Ultimately, the Government must grapple with these difficult questions, study the matter, and do the responsible thing.

READ: Singapore’s public housing policy has done its job splendidly, but it’s time for a makeover, a commentary.

READ: 99-year HDB leases a chance to review home ownership and retirement policies, a commentary.

Meanwhile, some owners of ageing flats have been spooked, amid a tepid HDB resale market which has seen prices fall for six consecutive quarters.

A homeowner at Block 117 Lorong 1 Toa Payoh, who declined to be named, said he put up his 50-year-old three-room flat for sale about six months ago, out of concern that its value will fall following Mr Wong’s comments.

There have been no takers yet, even though several prospective buyers have viewed the unit — and even though he has priced it under S$290,000, while other comparable flats in the area sold for as high as S$340,000, said the man in his mid-70s who is the flat’s second owner, having bought it more than 30 years ago at S$10,000.

Similarly, Mr Calvin Loh, 38, a hardware goods showroom manager, said he is also getting anxious about the value of his Commonwealth Close flat, which has 47 years of lease left.

He noted how a former neighbour sold his three-room unit for S$400,000 four years ago, but a similar unit in the same block changed hands for just S$280,000 a few months ago.

To these long-time homeowners, it does not matter that in absolute terms, the price which they can get for their ageing flat will be many times higher than what they bought it for.

What weighs on their mind is the worry that they are not getting a high enough price, relative to what they could have gotten when the flat was younger or the cost of an alternative home on the market today.

High-profile million dollar sales of old resale flats in good locations, which have been highlighted by some sections of the media, further skews the market and raises the expectation of sellers.

‘UNREALISTIC EXPECTATION’

This is, however, an unrealistic expectation, experts stressed.

“Owners of leasehold properties need to realise that the value of their properties is indeed the value of the remaining lease,” said ERA Realty key executive officer Eugene Lim who added:

When the remaining lease is depleting, it is not realistic to expect the prices to remain high.

Among other factors, flats with less than 60 years’ lease may start to depreciate as prospective buyers would have limited use of their Central Provident Funds to help finance the purchase of the flat. As the flats get even older, financing options from HDB or banks also become more limited.

“When that happens, flat owners may have to accept that their older flats may not be able to command as high a price anymore, and may be more difficult to sell in the open market,” Mr Lim said.

Mr Ku Swee Yong, chief executive officer of International Property Advisor, noted that the situation has been made worse by buyers overpaying for ageing resale flats in recent years, and price decline going forward is “inevitable”.

“(The) prices of well-located old flats have reached high levels not commensurate with their future cash flow value (from a rental perspective),” he said.

While lease expiry is a challenging issue faced by policymakers in all countries with public housing programmes including China and the United Kingdom for example, it is a political hot potato especially in Singapore, where more than 80 per cent of the resident population live in HDB flats.

Moreover, homeownership is “far more popular than renting in Singapore and, arguably, an intrinsic part of the social compact”, said Singapore Management University (SMU) law don Eugene Tan. “Relying on a contractual understanding of the leases is legally appropriate (for the Government) but politically limiting and divisive,” he noted.

Pointing out that the HDB flat is the “most valuable asset” for vast majority of Singaporeans, Assoc Prof Tan added:

We have reached a stage where the emerging narrative for more and more flats is one of their depreciating value, rather than the dominant narrative of it being an appreciating asset. There is much at stake for all … the HDB flat also represents for many Singaporeans an important form of retirement security.

At the heart of the debate is a very Singaporean view of public housing flats as “sure-win” investments — a mindset that the Government is partly responsible for shaping, experts pointed out.

National University of Singapore (NUS) sociologist Tan Ern Ser said: “I reckon the years of experiencing asset enhancement and social upgrading have been deeply ingrained in the Singaporean psyche.  Moreover, they also believe that at some point, the expiring lease would be reset via en bloc.”

Mr Ku added: “The idea is already ingrained in us, so much so that many permanent residents (on top of Singaporeans) also buy into the idea that HDB flats are certain to make profits.”

Still, experts were divided on whether the narrative of HDB flats as assets remains valid today and in future: It is true that unless buyers overpaid for a resale flat, chances are high that they can still sell it off for a profit.

For most homeowners, the value of their flat has, without a doubt, increased exponentially compared to the price which they had paid for it years back. 

However, it is also clear that the value of a flat cannot be perpetually rising and there will come a point in time — at least a decade from now even for the oldest flats — when it drops dramatically, as its remaining lease falls under 30 years.

READ: A bold vision of housing for seniors, a commentary.

THE ‘ASSET ENHANCEMENT’ NARRATIVE

The People’s Action Party (PAP) Government has long held up homeownership as a way to give citizens a direct stake in the country. Over time, its “asset enhancement policy” became a buzz phrase for public housing.

Since the 1990s, it has drummed in the idea of an HDB flat as both a home and an asset, providing Singaporeans an important form of retirement security.

Former Prime Ministers — Mr Lee Kuan Yew and Mr Goh Chok Tong — made bold pitches for asset enhancement, while in the last decade or so, government leaders continued to refer to an HDB flat as a “key investment asset”.

At a dinner for the International Housing Conference held in 2010 by HDB, Prime Minister Lee Hsien Loong linked the value of HDB flats to the strength of the economy: “Provided Singapore continues to do well, our flats will maintain their value, and Singaporeans can enjoy an appreciating asset.”

In 2011, then-National Development Minister Mah Bow Tan also reiterated the importance of the policy as he rebutted a suggestion by the Workers’ Party to peg the prices of new flats to the incomes of qualifying households instead of resale market prices.

Mr Mah had added: “I want to say we are proud of the asset enhancement policy. The policy is what has given almost all Singaporeans a home of their own, a home that also an asset (which) grows in value over time.”

However, in 2013, then-National Development Minister Khaw Boon Wan broached the issue of diminishing market value of HDB resale flats in Parliament: “Looking ahead, as we may no longer get the same kind of returns from re-selling an HDB flat as in the past, how will its role as an asset be affected? If it is likely to diminish, how should we make the adjustments?”

Mr Khaw’s comments came after the first million-dollar flat changed hands in July 2012, at Block 149 Mei Ling Street in Queenstown. But it appears that Mr Khaw’s warning was not enough to deter buyers from dishing out big bucks for HDB resale flats.

Since the first million-dollar HDB flat transaction in Queenstown, at least 89 flats have been sold for S$1 million or more, according to public data. 

The trend called for a starker warning, and Mr Wong duly delivered it in his blog post in March last year.

A month later, he responded to strong public reactions to his blog post, as some questioned how the asset-enhancement policy for public housing would apply when HDB flats have to be returned to the Government upon expiry of their lease.

Mr Wong reiterated that HDB flats provide a “good store of asset value, so long as you plan ahead and make prudent housing decisions”. 

He cited a hypothetical example of a 30-year-old couple, with a combined monthly income of S$5,000, looking for a resale flat in Woodlands near their parents. “They can get up to S$75,000 in grants off the resale flat price, and should easily afford a flat with a reasonably long lease of 90 years,” he said.

“Thirty-five years later, the couple will be 65 and the remaining lease of the flat will be 55 years. They still have an asset which can be monetised for retirement.”

Experts noted that the Singapore public has lapped up the “asset enhancement” message so much that it is inconceivable for many homeowners today that the value of their flats would head south towards the tail-end of the lease.

“One entire generation has already made their profits. Those who are left holding their flats today are disappointed that they did not downsize or sell out to extract their profits (earlier)” Mr Ku said.

But Mr Alan Cheong, senior director of research and consultancy at Savills, warned that there could be profound consequences — such as worsening social inequality — if HDB flats were to be treated as “depreciating assets”.

OUTLOOK FOR RESALE PRICES OF AGEING FLATS

Speaking in Parliament last month, Mr Wong acknowledged concerns about the impact of lease expiry on resale prices. But he stressed that there is still value in older HDB flats, which can be unlocked for retirement.

Citing transaction data over the past year, he noted that an older four-room flat with less than 60 years remaining would sell for around S$300,000 and a five-room flat would sell for around S$400,000 in non-mature estates. For flats in more popular locations, prices can be significantly higher – more than double the price, Mr Wong said.

Apart from the length of the remaining lease, transacted prices depend on other attributes such as location, the storey height, and the condition of the flat, he added.

The sales proceeds from older flats “would be more than sufficient to purchase a smaller flat for retirement”, he said. Those who prefer to stay in the same place can also use the Lease Buyback Scheme, where they can sell part of the remaining lease to HDB or have the option of renting out a bedroom.

Mr Wong reiterated that existing monetisation schemes are working. Nevertheless, the Government will continue to review and enhance them, he said.

However, in a commentary, NUS Institute of Real Estate Studies director Sing Tien Foo wrote that there is a “significant negative relationship between HDB resale prices and age”.

His analysis was based on a large sample of public resale flat transactions from 1997 to 2017, and after controlling for the quality of transacted resale flats — such as the flat attributes (unit area and floor height), and distance to schools and MRT stations. 

Using resale flats of less than 10 years as the reference, the discounts are estimated at 8.3 per cent and 9.5 per cent for resale flats of 40 to 50 years and those between 50 and 60 years old, respectively, Assoc Prof Sing said.

Without a doubt, a homeowner who bought his flat in the late ‘60s for example can easily sell it today at a price more than 40 times compared to what he had paid, analysts noted.

Even for those who bought their flats some years back, it is likely that they can sell it for a profit.

It may be a different story, however, for ageing flats which were bought recently — and this is how it should be, analysts said.

An effective property market should reflect flats’ decaying lease and these units should be sold accordingly, in terms of pricing.

As to the residual value for such flats, the analysts reiterated that even this will plunge dramatically when the units have less than 30 years of lease left.

Applying a common industry forecasting template that correlates the value of land with respect to its remaining lease, Mr Ku predicts that a flat which was completed in 1975 — and priced at S$860,000 today — would fetch only S$180,000 in 2054, when it has 20 years of lease left.

When the time comes, “how many buyers will put down such a large sum of money to use a property for 20 years”, he questioned.

Public data on HDB resale transactions in the last three years showed that older flats — those with half of their 99-year lease remaining or less — were fetching lower amounts, and underperforming compared to the rest of the HDB resale market.

While experts noted that the sample size was too small to draw any conclusion, they observed some anxiety creeping into the HDB resale segment.

Mr Colin Tan, director of research and consultancy at Suntec Real Estate Consultants, said the priority for now should be to “quell any panic”.

OrangeTee & Tie managing director Steven Tan, for one, believes that the market for older HDB flats will be stirred back to life in the short to medium term, notwithstanding the longer term price trajectory. 

“As the overall market sentiment improves, led by the recovery in the private residential market, HDB resale prices is expected to bottom out in the foreseeable future,” he said.

HDB noted that flats with a shorter lease may appeal to certain groups: For example, elderly homeowners looking to right-size their home, families who are not yet ready to commit to a longer lease, and buyers looking for a home in more central locations with established amenities.

“There continues to be healthy demand for such flats in the market, and there is value in these flats that can be unlocked for retirement,” HDB reiterated.

In terms of prices, HDB noted that its resale price index has fallen by 2.3 per cent in the first quarter of this year, compared to the same period in 2016, “following the earlier property cooling measures”.

“As the (index) shows the general market price trend, it follows that the transaction prices of all flats, regardless of age, would generally experience a slight dip within this period,” HDB said.

Noting that the attractiveness of an HDB flat is “dependent on many factors, not just the length of the lease”, HDB stressed that it would be “inaccurate” to look at price changes alone to determine whether prices for older flats have fallen more, “as such a comparison does not take into account differences in other flat attributes, especially location”.

MPS’ SUGGESTIONS AND TRADE-OFFS

For many owners of old flats, SERS is the best-case scenario.

Residents of blocks of flats identified for SERS will get the opportunity to move to a new home with a fresh 99-year lease, and continue living close to their current neighbours. They will also be given compensation and rehousing benefits.

Among the suggestions brought up during last month’s debate on the President’s Address, Marsiling-Yew Tee GRC MP Alex Yam proposed that the Government consider applying SERS to all HDB flats when their lease runs under 40 years.

Mr Yam said this will allow the use of parcels of land to be intensified with topped-up leases, while easing the country’s reliance on “constant piecemeal upgrading” in old estates, which he felt was “not the most cost-efficient”.

But such a proposal will put a huge financial strain on the Government, experts said.

Mr Ku estimates that it will cost the Government S$3.5 billion annually from 2030.

Similarly, Assoc Prof Sing felt there is no urgent need to increase the pace of SERS, which could “significantly increase” the Government’s expenditure.

“The current approach of SERS is an appropriate one, while allowing some older housing stocks to be replaced, redeveloped and intensified into newer housing blocks,” he added.

In his parliamentary speech last month, Mr Wong also pointed out that the authorities cannot assume that everyone wants a lease extension.

More maintenance will be needed for older flats, and this will be costly for residents, he said.

Also, if all 99-year leases were to be automatically renewed for extended periods, there will not be sufficient land to provide affordable housing for future generations of Singaporeans, HDB said.

Apart from adding to Government expenditure, Mr Cheong said that extending the leases of older flats will also impede urban renewal, with the older estates affecting the aesthetics of nearby newer ones.

However, Mr Tan Kok Keong, co-founder of FundPlaces which develops blockchain platforms for the real estate industry, felt it would be a palatable option for many owners of ageing flats.

“A lease top-up at minimal cost. Why wouldn’t I not want it? Even if I don’t want (to continue living in the flat), I can sell and get better money,” he said.

There has also been a suggestion for private developers to come into the picture.

Fengshan MP Cheryl Chan has proposed a “modified form of SERS”, which would involve private developers compensating flat owners and buying over the land from the Government, so they can top up its lease for private development.

She has also suggested changing the valuation method for ageing flats so that it is based on their remaining lease and right-sizing potential, extending the lease for flats in selected mature towns, and reassessing the property loan structure for prospective buyers.

She said she felt that her “modified SERS” proposal could also result in better social mixing, with private estates better interspersed among HDB blocks. 

Both Mr Tan, from FundPlaces, and SMU’s Assoc Prof Tan said it was a sound idea, as it could be a win-win situation for all parties — residents, developers and the Government — and also enable the lower-income group to benefit from the en bloc fever sweeping through private residential developments. 

Mr Tan agreed that the construction of condominiums in older HDB estates would encourage greater social mixing. However, if this was done a large scale, it could risk HDB neighbourhoods losing their character, he noted.

Mr Ku felt that the idea was not feasible administratively, given that a parcel of land typically has to be cleared first, then demarcated before being sold to private developers. “You cannot put a piece of land up for tender if you cannot define the site boundaries,” he added.

Ms Chan acknowledged that the issue was complex, and said that her idea cannot be adopted in isolation.

“You can’t just use one single lever and expect it to work because this is a free market after all, which is why I am suggesting certain things that the Ministry (of National Development) should start looking into so that we can start testing with a pool of flats and gradually make changes as we move along,” she said.

Indeed, experts believe there is no single solution to the conundrum. It may entail a mix of different policy options, on a case-by-case basis.

But of more pressing need is for buyers and sellers to adjust their mindset, to befit reality.

“This issue of ‘decaying leases’ is likely to be a circle that cannot be squared,” said SMU’s Assoc Prof Tan.

However, some like Mr Ku from International Property Advisor felt that the mindset could be already shifting among the younger generation who are “less smitten with homeownership” — as in the case of Ms Kwok.

She and her husband bought their three-room Tiong Bahru flat, which had 57 years left on its lease, for about S$650,000.

She said they did it “with two eyes open”, knowing that it will depreciate down to zero when its lease expires. “I suppose it is good that (people are discussing about this now) … (But) it is a strange conversation … The leasehold is what it is. You have a lease,” she said.  

Her husband added: “If you think about it, 99 years (covers) two generations, so if (homeowners) were concerned about inheritance, the second generation is enjoying that… The kids of our neighbours are already around 40 years old. They have children. They probably have their own flats as well.”

As far as Mr Ang Hong King, 72, is concerned, his three-room flat which he bought for S$6,000 in 1970, has served its purpose — providing a roof over his family’s head for almost five decades and counting.

The semi-retired driver and his wife raised their three daughters in the unit at Block 65 Circuit Road. Their children have since moved out, and gotten flats of their own.

Having no plans to move out, Mr Ang shrugged off the prospect of his flat — which is worth about S$250,000 now — losing its value in the future. “Price drop also never mind,” he said.