Facing the 99-Year Leasehold Chasm of Public Housing

2. Facing the 99-Year Leasehold Chasm of Public Housing on ly The article was co-authored with Soh Yun Yee, an undergraduate from the Department of Real Estate, National University of Singapore. Fo r vi ew in g A particular concern about the future of housing prices has recently raised eyebrows and sparked discussions in the mainstream media — it is about the expiring 99-year leases of HDB flats. It was started by an article published by Lianhe Zaobao on 15 March 2017. It highlighted the increasing number of old HDB flats that transacted at high prices over the last three years. It cited examples of flats of over 40 years of age that transacted at eye-popping prices: a threeroom HDB flat at $708,000 and five-room flats at nearly a million dollars. The discussion took traction when the Minister for National Development (MND), Mr Lawrence Wong, commented on it through a post on the MND blog on 24 March 2017. In particular, the Minister addressed the widely held opinion of buying a very old HDB flat in the hope of getting a windfall gain through the Selective En bloc Redevelopment Scheme (SERS). He reminded all HDB owners and prospective buyers: “Please do not assume that all old HDB flats are automatically eligible for SERS.”1 1 Source: https://mndsingapore.wordpress.com/2017/03/24/choosing-a-home-for-life/ 29 Figure 1: Number of HDB dwelling units constructed in each 10 year period between 1960 and 2020 (estimated). 350,000 309,007 300,000 256,913 241,343 250,000 Est.>200,000 for 2011-2020 200,000 150,000 117,225 100,000 1960s 1970s on 0 ly 50,000 1980s 1990s 2000s 2011-2015 *Includes DBSS Flats of 616 units for 2006–2010, and 8,034 units for 2011–2015. in g Source: HDB, IPA Fo r vi ew To put the numbers in perspective, we have about 70,000 flats which are more than 40 years old, and 280,000 flats which are between 30 and 40 years of age. Consider the number of old flats and the land required for building new flats to rehouse residents from these old flats. And then consider the financial commitment required for that rehousing exercise. Say for the above 350,000 old flats, we embarked on 20 years of SERS exercise starting from the year 2040 to the year 2060. We will need 17,500 additional flats per year for relocation. If the replacement of each old HDB flat and the residents’ relocation to a new flat cost the government $200,000, including construction costs and other grants, the budget required will be $3.5 billion a year for 20 years! No surprises then, that amongst the list of issues to consider, the Minister highlighted that SERS is possible only when the government has the financial resources to carry out such a program. Hence, buyers should not make hasty decisions, thinking that all old HDB flats will be redeveloped. The reality is that the value of the 30 PREPARING FOR A PROPERTY UPTURN flats will decline rapidly along with the depreciation near the end of the 99-year lease. Buyers of old flats gave other reasons for buying. These include the merit of living in a larger flat and the wish to live in close proximity to their parents. To enlighten the public on the depreciation of HDB flats’ value, an article in the Straits Times titled Will you still love your HDB flat when it’s over 64? appeared on 12 April 2017. We provided a visual illustration of the decline of HDB flats’ prices over a 56-year time horizon, using a high-priced old flat in Marine Parade as an example. How might old HDB lats depreciate in value? vi ew in g on ly In general, when considering the value of old HDB flats, we need to take into account: • the value of using the flat (also known as the utility value, which may be related to rental value), • the financing available for the flat (as it has a direct correlation to the number of people who can afford it), and • the CPF money that can be used to pay for it (as it affects the cashflow of the owners who have CPF funds). Fo r In the case of private residential properties, there is another consideration: replacement value, or the potential value of en bloc sales. But this is not applicable to HDB flats as “HDB owners” are merely long-term tenants. Property buyers will be able to fund their HDB flats with either a bank loan, a HDB loan, CPF money or cash. However, this is only applicable when the property is between 0 and 64 years old (i.e. remaining lease of between 99 to 35 years). When the remaining lease on the HDB flat is 65 years or less, the shorter bank loan tenures available to buyers of the resale flats begin to limit the number of buyers in the market who would consider these flats. We consider this the first tipping point. But this is obviously not a big deterrent given that so many old flats are still transacting at “high Facing the 99-Year Leasehold Chasm of Public Housing 31 32 Mature Estate HDB five-room flat price $900,000 $800,000 $100,000 $Source: IPA 40 years’ lease left, value $732,000 P+I per month: 80% bank loan 10 yrs >$5200/mth 90% HDB loan 20 yrs >$3500/mth With less than 20 years’ lease left: No loans available, residual value relates to utility value, i.e. future rental, BUT how many buyers will put down such a large sum of money to use the property for 20 years? ly $200,000 on $300,000 g 45 years’ lease left, value $770,000 P+I per month: $400,000 80% bank loan 15 yrs >$3700/mth 90% HDB loan 25 yrs >$2100/mth in $500,000 With less than 30 years’ lease left: CPF cannot be used for down payment nor HDB loan servicing, but HDB loan still available ew $600,000 With less than 35 years’ lease left: No bank loans (banks require minimum 5-year tenure), but CPF still applicable for down payment and mortgage servicing vi $700,000 56 years’ lease left (2017) $860,000 r Fo PREPARING FOR A PROPERTY UPTURN Figure 2 The value of HDB lats depreciates at a signiicantly faster pace as the age of the lat exceeds 40 years. 20 years’ lease left, $180,000 single payment in full cash 56 55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 39 38 37 36 35 34 33 32 32 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Fo r vi ew in g on ly prices”. However, as the remaining lease drops further, we see the other tipping points follow (see Figure 2). The value of HDB flats will shrink at a faster pace when left with 35 years of lease — this is the second tipping point of the downward ride in prices. This drop occurs because banks normally require a minimum loan tenure of five years and no loans will be available for properties with leftover leases of 30 years or less. This leaves the buyers with getting a HDB loan (a maximum of 15 years at this point), or to use CPF and/or cash for full payment. Banks are more inclined to provide loans if buyers are eligible to use their CPF funds for the loan repayments as it is deemed to be less risky to the lenders. The CPF Board determines if one is eligible “based on the sum of the age of the applicant and the remaining lease on the property”. For example, if the buyer is 35 years old and the property is left with 40 years of lease, the buyer will not be eligible. However, any sum of “the age of applicant and remaining lease” above 80 will be deemed eligible. In fact, the CPF policies restrict younger buyers from owning old properties that have a short remaining lease so that these buyers will not be holding properties that have leases expiring when they are still alive. The third tipping point comes when there is 30 years of lease remaining, CPF funds will no longer be allowed for down payment nor for HDB loan servicing. A HDB loan, serviced solely with cash will be the only financing option that remains. However, this loan will have to be repaid within 10 years and is also under the condition that the remaining lease of the property covers the buyer up to 80 years old or more. The monthly repayment of principal plus interest on the HDB loan over a short period means that the monthly cash outlay may be rather prohibitive, unless the flat was sold at a low price of say below $200,000. The fourth tipping point is when the remaining leases drop to 20 years and under. Buyers will not be eligible for any loans and CPF funds cannot be used for the purchase. All transactions must be fully paid with cash upfront. Consider this: how many families would Facing the 99-Year Leasehold Chasm of Public Housing 33 Fo r vi ew in g on ly have the ability to pay up a large sum of cash, say $100,000, in order to lease an old flat that will depreciate to zero value within 20 years? The number of potential buyers in this category will be small. Therefore prices should decline quickly from here on. Let us revisit the example illustrated in Figure 1. The buyer paid $860,000 for the 43-year-old five-room flat. 56 years left on the lease in 2017. Assuming that the flat is in good physical condition when he wants to sell it in the year 2033, with 40 years of lease left and its price falls at 1% a year, it would be valued at $732,000 then. If rules do not change, a buyer can only get a bank loan with a 10-year tenure to finance the flat, or an HDB loan with a 20year tenure. For a bank loan, the monthly mortgage payment will be $5,200 (for an 80% loan over 10 years) and $3,500 for an HDB loan (a 90% loan over 20 years). How many households would have sufficient income to qualify for a mortgage that requires a monthly repayment of $5,200? Furthermore, households can opt to purchase newer flats with longer leases and take loans with longer durations and lower monthly mortgages. This makes old resale flats even less attractive to purchase. In fact, we have been too optimistic about the slope of the decline in Figure 2. The small number of families willing to buy very old properties with say less than 35 years remaining lease and all the limited funding options that go with it, means that the drop at Tipping Point 2 should be more severe than what is depicted here. At every tipping point, there will be a decreasing pool of prospective buyers who possess the financial abilities to purchase. There will also be fewer buyers who will find the purchase worthwhile compared to paying monthly rentals over the long term. The Minister’s post on the MND Blog reminded Singaporeans that the value of HDB flats will go to zero if they were not picked for SERS. And that apparently caused a groundswell of concern. While keyboard warriors on social media did not seem to take much 34 PREPARING FOR A PROPERTY UPTURN Fo r vi ew in g on ly heed about this subject, journalists from several mainstream media followed up on the subject. On 12 April 2017, the Minister followed up on the discussion with a Facebook post, reassuring all that HDB flats remain a good store of asset value for future retirement needs2. He explained that with careful planning and considerations, it is still possible for HDB flat owners to encash their property. Methods include right-sizing and adopting the Lease Buyback Scheme (LBS). The latter will result in lesser cash but it will allow home owners to continue staying in it. Another Straits Times article titled To buy an old HDB flat or not, that is the question heaped praises of Mr Wong’s response and advice. The article further suggested that buyers who expect returns from the resale of the property should buy properties that are less than 20 years old and not those of 30 or 40 years of age. However, the Minister missed out the fact that the total number of old flats will only increase with time if existing policies remain unchanged. The hard truth that HDB flats will depreciate to an eventual zero value remains, and HDB owners must come to terms with it. Furthermore, the Minister began his Facebook post with the statement “HDB flats, like many private properties, are sold on a 99-year lease.” The public spotted two errors within this statement of 12 words: (1) that HDB flats are not sold, merely leased, and (2) the 99-year lease of a HDB flat is unlike the 99year lease of private properties. (Side note: it is interesting to read the comments below the Minister’s post to see what Singaporeans say about this topic.) The issues related to the lease decay of leasehold properties do not only affect HDB flats, other types of leasehold properties such as offices, retail shops, factories and private residences depreciate over time too. The problem is simply more acute for HDB flats as the 2 https://web.facebook.com/LawrenceWongST/photos/a.194878853886799.37834.19213 0117495006/1440467345994604/?type=3&theater Facing the 99-Year Leasehold Chasm of Public Housing 35 Fo r vi ew in g on ly owners only possess the right to use the flats and the property title and ownership remain with HDB. Owners do not have the autonomy to decide on what happens to their property as the leases run down. In contrast, owners of, for example, private residences, possess the strata title to their living space. Hence, they have a collective sales market wholly dependent on the decision of the majority of the property owners and the availability of developers willing to buy en bloc to redevelop. Various discussions in the mainstream and social media gave the public an awakening from their lofty dreams of endlessly profiting from the HDB flats they thought they owned. Having woken up to the possible monetary loss in reselling old flats with short leases, many individuals suggested ways to justify the value of old flats. An example, based on a calculation where the price per square foot and the remaining years of lease, was proposed in the Straits Times article How to figure out if an old HDB flat is worth its asking price on 8 April 2017. A Bukit Timah HDB flat was taken as an example. The flat of 1,345 sqft was sold for $950,000 in 2017 translating to a unit price of $706 per sqft. That flat was built in 1974 on a 99-year lease (i.e remaining 56 years on the lease) and hence, the price per sqft per annum remaining is $12.60. The author has suggested this as a simple method that allows for easy comparisons between other properties in the vicinity. In this case, the HDB flat is compared to a 1,271 sqft unit in High Oak condominium nearby that was sold in December 2016 for $995,000 or $783 per sqft. With 78 years left, it translates to $10 per sqft per annum. The author concluded that the condominium would be a better buy than the HDB flat as it is priced at a lower per sqft per annum amount, is newer and also comes with facilities. However, the above calculation only focuses on the depreciation of a property. An alternative calculation that compares the costs of ownership and the costs of use as a tenant if one were to rent instead of buy, would allow for a better decision. Let us use the flat 36 PREPARING FOR A PROPERTY UPTURN Fo r Other suggestions vi ew in g on ly mentioned in Figure 2 as an example and assume that it sells at $770,000 with 45 years lease remaining. The costs of ownership include the depreciation of the flat, loan interest expenses, service and conservancy charges (S&CC) and property taxes (yes, even though all HDB flats are owned by the HDB, flat “owners” need to pay property taxes). Buyers also fail to earn the CPF interests when CPF monies are withdrawn for upfront payments and monthly loan repayments for the purchase. For a start, depreciation of the flat can be assumed to be linear and hence, approximately $17,110 annually (or $1,425 monthly). The other costs can then be added up to the depreciation and the total compared to rental prices in the neighbourhood. If the flat can be rented at a lower price than the total costs of ownership, it would be more economical to rent. Furthermore, an advantage of renting would be that the large sum of upfront capital that would otherwise be spent in the HDB flat purchase can be invested wisely. The various long term costs involved in owning a flat may be opportunity costs to individuals as investing the money in other ways may result in positive returns as opposed to expenses down the drain. Some other solutions have been offered to alleviate the situation of HDB flats depreciating to zero value at the end of their lease. The most common suggestion is for the government to allow lease extensions. A Straits Times article titled HDB leases and what’s in store for retirement as society ages was published on 15 April 2017. It compiled several examples of how other countries deal with expiring land leases: China allows properties with 70-year leases to be renewed unconditionally; Hong Kong allows an extension of leases for 50 years without having to pay any additional lease extension charges; Britain allows eligible flat owners and landed house owners to extend leases by 90 years and 50 years respectively, at a cost pegged to market rates. Facing the 99-Year Leasehold Chasm of Public Housing 37 in g on ly Allowing for lease extensions would work if the government does not have alternative uses for the land. The quality of the HDB flats must be built to a standard that allows for leases to be extended. We do not think that these conditions exist for HDB flats. Furthermore, the cost of maintaining century-old flats may be significant as the physical obsolescence of a building is inevitable with age. Another suggestion to prevent prices from dropping too fast at Tipping Point 1 and Tipping Point 2 would be to allow CPF funds and loans to be used for flats with remaining leases of less than 30 years. The number of prospective flat buyers will be bigger and the decline in resale flat prices may be more gradual. However, this is merely kicking the can down the road. Allowing CPF funds and loans to be used for such old flats will result in even more losses for the families involved. For a retiree whose longevity might outlast the remaining lease of the HDB flat, his retirement fund will be wiped out when the lease hits the big zero. vi ew Figure 3: Most buyers think that HDB lat prices will surely go up in the foreseeable future. In that case, the price graph may follow the dashed line. But eventually, the value will still drop to zero. $800,000 $700,000 Fo r $900,000 Assuming resale prices increase due to strong economy and rising demand The price drop will be even steeper once we are left with less than 40 years’ lease $600,000 $500,000 $400,000 $300,000 $200,000 $100,000 $- 56 55 54 53 52 51 50 49 48 47 46 45 44 43 42 41 40 39 38 37 36 35 34 33 32 32 30 29 28 27 26 25 24 23 22 21 20 19 18 17 16 15 14 13 12 11 10 9 8 7 6 5 4 3 2 1 0 Source: IPA 38 PREPARING FOR A PROPERTY UPTURN Our proposal: To completely prevent HDB flat owners from shouldering the risk of losing their money on a depreciating asset, we suggest that HDB consider taking on the role of the “market maker” for public residential properties. HDB can fix the price-formula for buying back flats from lessees by basing the future value of the flats on lease depreciation, inflation rate, GDP growth rate, and household income growth rate. This way, a new HDB lessee buying a flat today will know the value of his HDB flat if he sells it in, say, the year 2040. The price can be fixed into a formula such as: on ly Price in 2040 = Today’s purchase price – depreciation of X% – Inflation factor + GDP growth factor + Household income growth factor Fo r vi ew in g By using the word “factor” we mean to say the cumulative inflation (or depreciation or GDP growth or household income growth/decline as the case may be) over the period from today till 2040. Although the price-formula is fixed at the time of entering into a contract with the HDB, the price-formula may be tweaked for buyers in 2018 or 2025 as and when the HDB feels that the formula needs to be adjusted. The adjusted formula will only apply forward, to new HDB lessees from that point onwards. In this scheme, prospective HDB owners will buy and sell properties directly with HDB. The buy-price and sell-price will be quoted in a transparent manner, with a spread that can cover the costs and profits for HDB. Thus, the HDB becomes the market maker. This is unlike the Lease Buyback Scheme (where a part of the lease is sold back to HDB) which, although allowing retirees to cash in on their homes earlier, creates an entirely different set of issues that have to be dealt with in future. In addition, with HDB as the market maker, SERS can also be eliminated. When the lease of a flat runs down and the flats’ physical Facing the 99-Year Leasehold Chasm of Public Housing 39 condition deteriorate, property owners may choose to sell it back to HDB and purchase a new flat or a resale flat from the HDB. In the interim, HDB can lease the units out until every flat lessee in the block had sold their flats back to HDB. Then the block is ready for redevelopment. In this case, there will not be a need to pay for the cost of SERS, in contrast to the current arrangement where residents are financially compensated for relocation and allocated a replacement flat that is brand new. This will certainly relieve the burden on taxpayers and the national budget in financing future SERS. Conclusion Fo r vi ew in g on ly The notion that HDB flats are good assets and the pride we feel for high home-ownership rates may soon be things of the past. Back when Singapore was a landscape dotted with slums and squatters, the policies of asset enhancement through the ownership of homes were necessary and good. We have seen how Singapore’s living condition improved by leaps and bounds to its current organised high-rise estates. However, having crossed 50 years of nation building, we now embark on a fresh new journey in a different era with different circumstances. Looking at the housing sector alone, we are already seeing new challenges. From Chapter 1, you would have come to an understanding that the ageing population may result in an oversupply of resale flats in 15 years’ time. That selling pressure will lead to a decline in housing prices and the decline will, unfortunately, be compounded with the depreciating 99-year leases. The ageing population and decaying HDB leases are challenges that we are facing for the first time. Changes in lifestyle trends such as home-sharing will impact demand for residential properties. It is imperative that we consider changing our housing policies in anticipation of these challenges so that our future generations will live better than we do. 40 PREPARING FOR A PROPERTY UPTURN