Tuesday, June 27, 2017

Your House Is Not Really Your Asset - How a HDB flat might depreciate over time?

Recently, a particular news shocked many people in Singapore. For the first time, the government has confirmed to take back 191 plots of land in Geylang Lorong 3 when their 60-year lease expires in 2020. For a long while, many people do not believe their housing price will go to zero when the lease expires. This is a confirmation of what is to happen in decades to come for the other housing estates which will have their leases expire in the future.

SLA has said no compensation will be given and no extensions are allowed. Unlike land acquisition by the Government, where compensation is given for the remaining lease, Geylang Lorong 3 residents will not get any since the lease will have run out in 2020, said the Law Ministry's deputy secretary Han Kok Juan.

Your House Is Not Your Asset In Singapore

This is quite scary for many Singaporeans who thought their house is their asset and they can cash out of it when they are old. This can only happen if your house still has a long lease left. To put the matter into perspective, let's see what happens to the value of your house as the lease gets lesser and lesser.

Adapted from The Straits times
Click to enlarge

The Straits times has a very good chart to show the value of a HDB flat depreciating as the lease expires. There are a few critical points before the value of the flat goes to zero. If your HDB flat or any leasehold property has 45 years or less lease currently or reaching the 45 years mark, its time to take note of what is going to happen should you still decide to hold it.

1. No Bank loans with less than 35 years lease left

Banks do not lend out for properties with less than 35 years lease left. This means if your property is less than 35 years lease now, a person who buys your property cannot loan from the bank. This is a very big restriction for any buyers of your property and if they do not have cash to pay for your property, they can't buy it as well. This makes it very difficult for you to sell your property to potential buyers. As such, at the 35 years lease mark, the value of the property greatly depreciates.

2. With less than 30 years lease left

At the 30 years lease mark, the property value greatly depreciates again. This is due to the fact that CPF cannot be used for any downpayment and mortgage servicing. On the other hand, HDB loan is still available if remaining lease covers the buyer up to age 80.

3. With less than 20 years lease left

With less than 20 years lease left, both bank loans and HDB loans are not available. It is almost impossible to sell your property at a high price now as buyers can't get any loan financing from anywhere in Singapore. If a buyer wants to buy your house, they will have to pay all in cash.

Flats with leases expiring in Singapore

National development minister Lawrence Wong said in a blogpost in March cautioning people that "As the leases run down, especially towards the tail-end, the flat prices will come down correspondingly, 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." He said.

For young people, it is especially important to plan ahead when buying a house especially if you're considering a resale flat. If you buy a BTO, it won't be a cause of concern as BTOs start with 99 year lease.

There are many old estates in Singapore which are in prominent locations around Singapore. These are especially popular for young people because of the location. But, the lease expiry is a concern now as confirmed by the news of the flats being taken back by the government at Geylang Lorong 3 and also how the value of the HDB flat depreciates over time.

To check the leases of HDB flats in Singapore, you can refer to HDB website here. I will list down some of the areas that has lesser leases in Singapore.

1. Toa Payoh (Lor 4) - 50 years lease left

Some flats in Toa Payoh has about 50 years lease left. If a buyer buys a flat here and takes a bank loan, he can only get a loan tenure of up to 20 years (to 30 years lease). In 15 years, no buyers can take a bank loan for the properties here anymore.
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2. Queenstown (Stirling Road) - 50 years lease left

Another estate with 50 years lease left is Queenstown. This is similar to Toa Payoh.
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3. Geylang (Kallang Bahru) - 55 years lease left

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4. Serangoon (Lor Liew Lian) - 59 years lease left

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The above are some of the estates with HDB flats less than 60 years lease. In Singapore, out of about 1 Million HDB flats, 70,000 are more than 40 years old and about 280,000 are 30 years to 40 years old. This puts their remaining lease at about 69 years or less remaining. As a young person, if I want to stay in the house for the next 30 years, I better not buy a HDB flat that has less than 65-70 years lease. It will be very difficult to sell the flat at that time and the property price will depreciate greatly as well.

What about the Selective En bloc Redevelopment Scheme (Sers)?

Most people are still willing to pay a high price for a low lease flat because of the hope that their old flats will be redeveloped under the SERS scheme. If you're hoping your old flat will go under this scheme, it is timely to take note that it may not happen.

Since the Sers was launched in 1995, only 4% of HDB flats have been identified for Sers and the government will continue to maintain the strict selection criteria for blocks eligible for Sers. This is reiterated by Minister Lawrence Wong in his blog post in March 2017. You can read it here.

Which HDB flat should a young couple buy?

With all the above information, as a guide, a 30 year old couple should consider a HDB flat with more than 65-70 years remaining lease. This would ensure we do not meet into problems at later stages of our life.

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  1. Where in HDB website can I find the leases of HDB flats? I click on the HDB website link you provide in this article, but I couldn't find the lease details? Neither could I find lease details after navigating the whole HDB website. Appreciate your help please. Thanks.

  2. Please ignore my query re looking for the lease details. I finally found it from playing around with your link. Thanks very much for your article and sorry about my earlier query.

  3. Good post on reminding people that anything can happen when the lease on a leasehold property runs out. We might only view this problem more seriously in the next 50 years as the first generation of leasehold properties' 99 year leases run out!

    1. Hi Finance Smith,

      Yes it will happen. We have to prepare for it and plan ahead