HDB owner or lessee and takeaways arising from National Day Rally 2018 for HDB owners

I read the article on Straits Times on 14 August 2018 “Outdated ideas on home ownership and land shortage are crippling us” by Ku Swee Yong with great interest.

As a real estate professional, it took me some time to digest the contents of the article and I would like to share my views on the write up which is close to the hearts for most Singaporeans.

I agree with the author on various fronts which buyers must consider before committing the purchase of an HDB such as decaying leases of older HDB flats, potential supply pipeline coming through and unfavourable demand demographics as the population of older Singaporeans start to outstrip younger Singaporeans.

HDB Owners or HDB Lessee?
I would like to respectfully disagree the author’s point that since the contract signed between a ‘buyer’ of an HDB and HDB is that of a lessee and a lessor, hdb flat ‘owners’ do not own their flat but are actually lessee of their hdb unit for the period of lease. The author might be technically correct but I am not sure why the article failed to discuss a key difference between a typical leasing arrangement and a typical sale arrangement.

The key difference between a tenant and an owner is that a typical owner bears the risk and reward of ownership in the form of capital appreciation or depreciation. In a typical leasing arrangement, lessee neither enjoy any capital upside nor suffer any downside risk. Additionally, a typical leasing arrangement certainly are not entered for a period of 99 years as the lessor is effectively giving up the economic rights they have over the asset for the whole period. Hence, if I were to look at the whole commercial arrangement of a HDB purchase transaction, Singaporeans are really owners of their HDB because they will ultimately bear the consequence of their purchase decision. One could suffer capital loss if you buy an aged HDB at sky high prices believing government will bail you out of the remaining lease term through Selective En Bloc Redevelopment Scheme. On the other hand, an HDB could potentially be your retirement nest egg if you make your purchase decision prudently and monetise your HDB through avenues such as selling the HDB for capital gain or obtaining income by renting out spare rooms.

HDB – primarily a home
Before we discuss common grouse over HDB, we must remember the primary purpose HDB serve is to provide Singaporeans an affordable and quality housing option. Hence, a lot of restriction are placed on HDB owners to maintain allow HDB to meet its social goal and to prevent excessive speculation which will reduce its affordability (e.g. restriction on who can purchase, restrictions on ability to refinance, minimum occupancy period, racial quota etc.). Having these restrictions is not tantamount to you not owning your HDB. What this means is simply the demand side of the equation is reduced.

Having witnessed days of high cash over valuation period ($40k is a norm) in the late 2000s as a newlywed whereby HDB ownership policy were more liberal towards permanent residence, I am thankful we have such policies to curb excessive speculation on HDB (despite being a HDB owner myself). This will provide young Singaporeans a headstart by getting their HDB at a relatively cheaper price.

HDB – secondarily an asset
The growth real estate price (HDB included) largely mirror that of the prosperity of the country. Hence, it is fair to say that the value of your asset will grow with the country. This is notwithstanding the lease could turn zero 99 years later. This is also why you always hear story of your father buying a HDB for $15,000 and the real driver of the price growth is because Singapore has transformed itself to a first world country since independence.

So, why are Singaporeans complaining
1. HDB is not an asset to most Singaporeans
The crux of the issue typical Singaporeans faced is that HDB was never their asset to begin with. The reason is because an HDB will never turn into your asset if you never monetise them as an owner. As mentioned above, HDB can only be an asset to an owner if it is being sold for a capital gain or rented out for income.

2. Most Singaporeans use CPF to finance their HDB purchase and the crippling effect of accrued interest
Most Singaporeans were being taught to gauge whether they can finance their property purchase by assessing if the CPF contribution is able to finance the loan repayment of their HDB. Since CPF is something you can see but cannot touch, might as well use it all to buy house. But do not be mistaken. CPF is still your money.

As a result, most Singaporeans have limited savings in their CPF OA. However, by doing so, you are doing yourself a disservice as this will eat into your retirement fund as CPF OA form part of your minimum sum consideration when you hit 55.

Secondly, the compounding impact on CPF accrued interest will also eat into the capital gain you make for the eventual sale you make on your HDB. Hence, I view using CPF payment as an added interest on loan. Assuming you took a HDB loan of 2.6%, you are actually taking up an effective interest of 5.1% (2.6% interest + 2.5% accrued interest). This amount is extremely high especially taken into consideration the period of low interest rate environment since GFC.

3. The value of HDB after 99 years
Lastly and the more damaging part is that after pouring all your CPF OA at an effective interest of 5.1% for your working life to serve the loan, that HDB has not turn into an asset but in fact faced the prospect of turning into zero after 99 years. This point will especially be obvious to Singaporeans who bought an old resale HDB which means they have a chance to outlive the HDB when they need the value most.

What should Singaporeans do – practice prudent
Bite on what you can chew – BTO preferred
Buying a house is probably the most expensive item most person will buy in his/her lifetime. It is good if one could practice prudence and buy below your means. If one can wait, it will also be a good idea to buy a relative cheaper BTO flat compared to a resale HDB as there will be an added margin of safety. What’s more, you get a fresh 99 lease if you buy a BTO and probably do not have to worry about it turning into zero.

Mode of financing
If your family finance circumstance allow, try to finance your monthly instalment of your HDB using cash instead of CPF. This will enable your CPF to compound over your period of working life such that it can be your retirement nest egg.

Update from NDR 2018 – VERS a stabiliser to the HDB resale market
The government has basically come up to tell us that they will give Singaporeans a rehousing option when your flat turn 70. This should give Singaporeans a peace of mind on whether they will have a roof above their head beyond the 99 years lease and should have a stabilising effect on the capital value of HDB which has been falling over the past 5 to 6 years.

As the details have not been shared with the public, I would like to highlight that based on the Bala’s table (google this for more information) which calculate the percentage of freehold value based on the leasehold period remaining for 15 years leasehold property is 40% of freehold value while a 60 year lease and 99 year lease is 80% and 96% of freehold value. Hence, in simple terms if Singaporeans were subject to VERS when their property has 15 years remaining, they will be able to get compensation which should allow them to pay 50% of a similar property with 60 years remaining or potentially downgrade to a smaller housing option without forking out additional cash.

Plan for your house is key to a comfortable retirement
The VERS initiative announced in NDR 2018 has demonstrated the government commitment to ensure Singaporeans will continue to have a housing option as their HDB lease runs out. However, upfront planning (i.e. BTO or resale) or mode of financing (e.g. CPF or cash) plays a key role in determining how much funds how have for retirement. Personally, I am fortunate that I took the BTO option after deciding to not partake in the HDB buying frenzy in late 2000s and also blessed that I am able to service my loan largely using cash after settling down in marriage. The waiting time for the flat also helped me saved up in preparation for the house of my own.

The Singapore housing policy is something that Singaporeans should be proud of as it provides all citizens an affordable and quality housing option. But like all purchases, it will be wise to weigh all options and go in with your eyes open before committing that purchase.

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