Heartland Boy had previously explained that there are various reasons why young couples may choose a HDB resale flat over a HDB Build To Order (‘BTO’) flat. For instance, they may require a bigger space found only in the previous generation of HDB flats. For some young couples, they might place a premium on unique features such as an executive HDB flat or a HDB terraced flat which are both no longer available in newer generations of public houses. Unfortunately, the shorter leases attached to such HDB resale flats often do not cross their minds. As Lawrence Wong, Minister for National Development, commented in his blog post, “I was concerned by the suggestion that some buyers are forking out high prices for older flats in anticipation of the benefits of SERS.”
Heartland Boy agrees wholeheartedly. For those young couples who are eligible to buy a resale flat in Singapore, they often neglect the importance of the lease on their dream HDB resale flats. In this article, Heartland Boy would like to highlight why it is important to be aware of the lease on your dream HDB resale flat.
1. Owners Of Public Homes Have Less Control Over Their Leases
While a private apartment (condominium) and a public apartment (HDB) may both share a common 99-year lease period, the owners have varying degrees of control over the renewal of their leases.
To get started on this point, it is important to understand the concept of leasehold. For a HDB flat with a 99-year leasehold, this means that ownership of the asset will be returned to HDB and the State when the lease expires. At that point, the asset will depreciate to zero value. This is in contrast to freehold assets whereby the owners get to hold the assets in perpetuity.
For owners of public housing, whether they are Singapore Citizens or Singapore Permanent Residents, they cannot proactively initiate any collective sale to renew the lease of their properties. Instead, they can only hope that their public houses are selected for Selective En Bloc Redevelopment Scheme (SERS) by the government. Under this scenario, their public houses are taken away by the government. In return, home-owners are compensated for their losses based on prevailing market valuation and a guaranteed opportunity to select a new flat at another site. Unfortunately, owing to stringent selection criteria, only 4% of HDB flats have been selected for SERS since 1995. Therefore, young couples may find the value of their dream HDB resale flats depreciate to zero should them not be selected for SERS. This is probably why the Minister’s article has startled so many because, for the majority of the population, a HDB flat is their greatest store of wealth.
In contrast, owners of private property can proactively apply to top up the lease back to 99 years as long as Singapore Land Authority (‘SLA’) grants approval and the appraised premium has been paid. Approval is typically granted if it involves land-use intensification or urban renewal. This is the rationale why real estate developers are prepared to pay off homeowners of private property in an en-bloc sale.
The difference could not be starker since there is only one “buyer” (government) for public housing whereas there are more “buyers” (private developers) for private housing. Therefore, there is less control for home owners of public housing over the destiny of the leases.
2. Limited Pool of Buyers In The Future
While buyers of older HDB resale flats may argue that they are not necessarily chasing after the SERS jackpot, they might not realise that the pool of potential buyers shrink every day that their property ages.
For instance, prospective home-buyers are only allowed to use CPF savings to finance properties (both public and private) that have a minimum remaining lease of 30 years. As for properties with a remaining lease of between 30 to 60 years, the buyer’s age and the lease must total at least 80 years. As an illustration, only buyers aged above 45 years are able to buy a property that has a remaining lease of 35 years.
As CPF savings are commonly used to finance real estate purchases, those who cannot access them will simply look for alternative choices such as a property with at least 61 years of lease left. Therefore, as the remaining lease runs down, the pool of potential buyers will shrink gradually.
In addition, it will be difficult to secure bank loans from financial institutions. If you are unsure, you can use PropertyGuru’s Smart Refinancing tool to check for free.
3. You May Outlive The Lease On Your Dream HDB Resale Flat
Heartland Boy has come across peers who remarked, “I do not need to worry about the potential pool of buyers because I am never going to sell this dream home since I will be living here forever.”
In Heartland Boy’s opinion, that is always a very poor school of thought for a variety of reasons. That is because circumstances change all the time. You may find yourself having to sell that dream HDB resale flat owing to financial, marital reasons etc. Even then, as real estate is a very illiquid asset class, the exit options available warrant even greater thinking.
As Lawrence Wong recommended in the same article, “one possible guide is to buy a flat that covers you and your spouse to age 95.” Therefore, for a young couple who is buying a HDB resale flat that is older than them, there is a strong possibility that they will outlive the expiry of the lease on their dream HDB resale flat. That is really an unsavory situation to land yourself in, especially at a juncture of your life where you would not want to worry about getting a roof over your head.
Be Aware Of The Lease On Your Dream HDB Resale Flat
Having explained some of the pitfalls of a short lease, Heartland Boy hopes that future home buyers would sign the Option Agreement with heightened awareness of the leasehold concept. Do not let emotions dominate your decision making process, for it is certainly unrealistic to overpay for an ageing asset with the expectation to strike the SERS jackpot.
After you have purchased and renovated your flat, get a Home Contents insurance plan to complement your compulsory fire insurance plan. This ensures that you have complete coverage (structure, renovation, personal belongings) for your cherished home.
HDB introduced the Re-Offer Of Balance Flats in the second half of 2017. Read this article to find out how you may potentially benefit from it.
Old Bird says
In legal terms, HDB leasehold is NOT the same as private strata-title 99-yr leasehold. HDB’s lease is similar to the type of leases that tenants sign for office space or shops, except that HDB offers for ultra-long 99 years. If you examine HDB’s lease carefully, it basically gives you the right to use & enjoy the internal area of the flat itself, plus the ability to transfer (i.e. sell) the lease to other Singaporean residents subject to restrictions. That’s it, no more & no less. You actually have no right even to the external wall surfaces of your HDB flat (especially those along common corridors).
Strata-title leasehold on the other hand, gives the buyer a percentage right over the land parcel itself. Hence in theory, if enough residents agree, they can even tear down their condos & rebuilt new taller buildings on it & sell the extra units to new residents. Of course in reality, people don’t have such money or the ability to borrow money & act like property developer themselves. So the common method is for condo residents to have enbloc sale to attract commercial developers to bite. Owners of private leasehold properties are very aware of the price decay of their 99-yr lease. That’s why you don’t see much major condos or private apartments older than 50 years hanging around. By hook or by crook, the owners will try to enbloc, or if unsuccessful many will simply sell off on resale market.
In legal terms, both HDB lease & private strata-title lease will go to ZERO at the end of the lease. Just that private strata-title lease have many more options to exit, and to exit at a profit.
One other important thing to note also is that for leasehold properties with less than 60 yrs left on their lease, CPF has a formula to calculate the maximum percentage that can be covered by CPF monies i.e. you cannot use CPF to pay 100% of the property or mortgage. This is something that many news articles (even Straits Times) fail to inform. It’s not just the age of youngest buyer + remaining lease >= 80.
Thank you for your information. They further distinguish the subtleties between the leasehold on public and private housing. The point that I am emphasizing is that all leasehold properties depreciate to zero value. The difference is that owners of private properties have more options to exit, which is a massive game changer.
Yes, I believe you are referring to the valuation limit. I did not put the formula in as I fear that there’s too much information overload.
Thanks for highlighting all the above.I am sure my readers have benefited from this just like myself.
Old Bird says
Nope, it’s not the valuation limit. Valuation limit (VL) and Withdrawal limit (WL) are always applicable for all properties EXCEPT for new flats purchased directly from HDB and using HDB loans. If you use bank loans for new flats, VL & WL are still applicable.
What I’m referring to is another CPF rule for properties with less than 60 years lease left. Essentially all HDB flats and 99-yr private properties older than 40 yrs.
Not many people know this. But looking at the prices of old HDB flats over the last 2-3 years, I think more & more people are realizing this when they get schooled by CPF.
Hi Old Bird,
Mind sharing with the audience which CPF rule that you are referring to?
Difference between private condo and HDB’s 99 year lease.
HDB lease: HDB owners just own their airspace. Not even the common areas such as corridors, lobbies and void decks. Not even the land their blocks built on. But HDB flats benefitted through many governmental schemes of gentrifications and rejuvenations such as upgradings, neighborhood and home improvements, lift upgrading etc. These schemes have invariably help to maintain the values of HDB flats despite their old age.
Condos: in most instances; beside owning their own units, all owners collectively or jointly own the common areas, Carparks, amenities and the land area that the development sits on esp. within the condo fencing. Their ownership is via a share value system which will then determine their maintenance cost and maybe in the future, enbloc sale of their development.
Which is better? I know of some HUDC estates refusing to privatise fearing that once it is privatised means being ‘divorced’ from Govt subsidies to help maintain their estates. A salient point is the lift upgrading. The private walk-up apartments are deprived of lifts whereas almost all HDB flats, old and new have lifts to every floor even low rise apartments. That includes those flats purchased initially without lifts but the Govt through lift upgrading build for them. For these divorced HUDC estates, their only recourse is enbloc sale.
As for VL and WL, it is CPF money being used to finance the properties. All HDB flats through Public Housing Scheme(PHS), can use CPF OA to pay for their flats,i.e lump sum upfront and monthly mortgage. Once the 100% valuation or purchase price(whichever is lesser) is reached, one can continue to use up to 120% under withdrawal limit(WL) provided one set aside Basic Retirement Sum(BRS) first. However not many people have that BRS to set aside after paying their monthly mortgages.
The timeframe for that 100%,being reach is about 16 to 22 years of monthly mortgage payments despite their loan tenure maybe 25 years or more. The reason is the payment of accruing interest on top of the principal that one is paying while the 100% of valuation limit or purchase price excludes interest component. Six months or more, before reaching this VL, CPF will write to owners advising them of this 100% VL limit, and advise them to ready the cash payments when owners do not have the BRS to set aside.
One way to circumvent this is to sell their flats and buy another. Haha….sounds crazy? I know of neighbours exchanging (buying each other flats )because of this reason. When one buys another flat, the new valuation and CPF usage start again. The main reason agents or HDB staff do not inform buyers of the ‘trap’ is nobody is around 16 to 22 years later.
Once again, very very valuable insights from your years of experience. I wanted to differentiate the 99-year leasehold between private and public housing in my article. However, I felt that the content could be too “heavy”. Therefore, I simply emphasise the exit options between the two and that is ultimately the main point of my article.
Thank you for your clarification on Valuation Limit and Withdrawal Limit. I hope this helps the rest to understand the limits of their CPF OA!
Paul Sharp says
The public home owners are always finding them in hot water as long as the terms of lease are not read with due attention before signing them up. Getting help from a real estate agent is not a bad idea either because this will ensure a better awareness or you will know the consequences and benefits together.
>“I do not need to worry about the potential pool of buyers because I am never going to sell this dream home since I will be living here forever.”
Ha… those are some famous last words, or something like that.
Totally agree. One will never stay in one house forever. Always plan ahead