What’s the Value of my Leasehold HDB (3)? Dealing with HDB Lease Decay

What’s the Value of my Leasehold HDB (3)? Dealing with HDB Lease Decay

The Housing and Development Board (HDB) is one of the keystones of Singapore’s success. Since 1960, it has built more than 1.2 million flats and housed more than 80% of the population. While most of us have only seen HDB flat prices rise in our lifetimes, more recently, the concern has been about HDB lease decay. Put differently, this is about how the prices of the 99-year leasehold HDB flats will fall to zero as the lease runs out.

What is HDB Lease Decay?

All HDB flats built have a 99-year or shorter leasehold. Between 1960 and 1990, the HDB built a total of more than 665,000 flats in Singapore. Some of these HDB flats have been sold, at prices higher than they were purchased from the HDB, thanks to the relentless rise in HDB resale prices.

HDB resale price index

HDB resale price index

But the rapid pace of building in the early years means that over the next 5 years to 2025, there will be more than 665,000 HDB flats aged 35 years or more. n other words, they will have less than 65 years left on their lease. From our analysis here, we can project that HDB flats on a 99-year leasehold may see their values start falling as early as from the 45th year onwards, or when there is 54 years of the lease remaining.

99-year Leasehold Decay assuming 1% growth in Freehold prices

HDB lease decay

99-year Leasehold Decay assuming 2% growth in Freehold prices

HDB lease decay

Others have speculated that the value of the HDB flats may decay even faster than what the theoretical models predict. An example of a projected lease decay model is the one by local property expert Ku Swee Yong.

Market forecast of HDB lease decay

HDB lease decay

Regardless of the model used, the prices of leasehold HDB flats are unlikely to continue rising after about 50 years. And from about 65 years, they will drop sharply towards zero.

Why is HDB Lease Decay a Problem?

You don’t need to be a mathematician to know that 99-year leasehold HDB flats are worth zero after 99 years. And all HDB homeowners know that too. So what is the issue?

The concern arises because the rise in HDB flat prices over the years has outstripped the growth in wages by a long way. The result of this is that the average Singaporean has 50% of his/her net worth on average tied up in the HDB flat. For lower income Singaporeans, this can be as high as 90% of their net worth. As many Singaporeans use their Central Provident Fund (CPF) savings to pay for their flats, much of their retirement savings are also locked up in the HDB flat. Hence, HDB lease decay implies a huge loss of these Singaporean’s savings and retirement funds as the lease runs down.

Using the chart of the market forecast of HDB lease decay as a guide, suppose a couple aged 40 bought a 40-year old HDB flat for $860,000 in 2017 to raise their family. They may continue living in the HDB flat after they retire and the children have grown up and moved away. By the time they pass on, say at the age of 75, or 35 years after the purchase of the HDB flat, the HDB flat might only be worth $300,000! Hence, of the $860,000 they put into the purchase of their HDB flat, $560,000 has been lost through lease decay. And this is just the nominal amount. $860,000 put in fixed deposits at a lowly 2% interest a year will compound to $1,720,000 after 35 years!

So HDB lease decay has a double whammy. Not only are Singaporeans putting a lot of their savings into their HDB flats, which cannot be easily monetised to pay for their expenses in retirement, but the savings put into the HDB flat also dwindles away over time, leaving little for their children to inherit. Hardly the characteristics of a good investment asset!

What can we do about HDB lease decay?

Ever since the Minister for National Development reiterated in Parliament that the Government will not offer the Selective Enbloc Redevelopment Scheme (SERS) to all HDB flat owners, much ink has been spilt on the issue of HDB lease decay.

At one extreme, some have argued that HDB homeowners have known all along that the flats would be returned to the HDB after the 99-year lease is up. Others have argued that the tremendous impact of this on retirement adequacy and social mobility requires a national solution. Some proposals include allowing homeowners to renew their lease after 99-years in return for a “ground rent”. This is much like the practice in the UK and Hong Kong for leasehold properties. Other proposals include mandatory redevelopment of the HDB flats and renewing the lease every 50 years.

Even the Government has felt the need to act, proposing a Voluntary Early Redevelopment Scheme (VERS). The one common thread and potential shortcoming of these schemes is that the State and the taxpayer will foot a large part of the bill, but they still fail to address the problem of what if not every resident in the block or estate agrees to take up these plans? You cannot renew the lease for half the flats in a block, or demolish half a block of flats.

A solution for HDB lease decay

But what is most surprising is that a solution for the problem of HDB lease decay already exists. And it ensures that HDB flat owners don’t lose any of the money they have put into their flats! Too good to be true?

The solution is none other than the HDB’s Lease Buyback Scheme (LBS). Rather than to put down in writing how it works, let me just show HDB’s graphic to explain it.

HDB lease buyback scheme

In short, the 65-year old HDB homeowners can sell the last 35 years of the lease back to the HDB. They also get to live in their own HDB flat for the next 30 years without rent. In the example, assuming that their 34-year old HDB flat is worth $520,00 today, they get a payment of $219,300 plus other bonuses which can amount to $5,000.

Not so fast, you might say. The HDB homeowners are only getting $219,300, which is way below the current valuation of $520,000! Yes, but the sum of $219,300 is paid today, for the sale of the flat in 30 years’ time. And since the money will be first paid into the HDB homeowners’ CPF Retirement Account, which pays interest of 4% to 6%, this means that the amount is really worth $759,000 in 30 years’ time!

Under LBS, HDB buys back your flat in the future at a higher price than what it is today!

How is this possible? Is the HDB knowingly overpaying for old HDB flats, i.e. wasting taxpayers’ money? Well, no. As noted earlier, the Singapore Land Authority (SLA) uses Bala’s Table to determine the value of leasehold property relative to freehold. Using the values in Bala’s Table, and assuming freehold property increases in value at a rate of 2.1% a year (which is the historical average), we see below that a 34-year old HDB flat worth $520,000 will be valued at $759,000 when it is 64-years old.

HDB lease buyback scheme

While we may have our own opinions whether the value assigned to the old HDB flats by the SLA and HDB are accurate, they are entirely consistent with the official valuation of land in Singapore.

But where will the money to pay for all these old HDB flats come from? Nobody knows for sure, but it can come from the Singapore’s Reserves, part of which are accumulated from the Government Land Sales to the HDB for building HDB flats. Since a large part of the price we pay for new HDB flats is for the cost of the land, it is not surprising if the value of the reserves far exceed the purchasing price of the HDB flat under LBS. As an example, suppose a new Built-To-Order (BTO) HDB flat costs $250,000, of which $100,000 is the cost of the land it stands on. Investing $100,000 at a 5% return over 34 years amounts to more than $525,000. So paying the HDB homeowner $219,300 for his/her HDB flat is less than half of this amount.

But isn’t this raiding the Reserves? Actually, no. The Reserves cannot be used for spending or consumption, for sure. However, the Government can use them to acquire an asset, i.e. converting it from financial assets to real estate assets. It is not 100% logical though, since the SLA actually owns the freehold land underlying the 99-year leasehold HDB. So, in effect the Government is buying back something it already owns. But the legal basis is sound.

Why aren’t people jumping on the Lease Buyback Scheme?

This is possibly the most illogical part of all. Ten years after its introduction, only 3,100 households have taken up the Lease Buyback Scheme. Out of around 550,000 eligible HDB flats which are 35 years or older. Perhaps:

  • The amount offered by the HDB appears low. (But that is what the power of compounding and discounting is about)
  • There are restrictions on how the proceeds can be used. (The proceeds are used to top up CPF Retirement Accounts and enroll in CPF Life)
  • Homeowners worry they will live past the age of 95, and will have no place to stay. (Unlikely, but since the HDB needs to utilise the old HDB flats acquired, they can rent it back to you)
  • The communication of the benefits of the LBS has been poor

Regardless, much of the agonising over the HDB lease decay issue is unwarranted, as there are already solutions to it.

Can the Government afford the Lease Buyback Scheme?

A final concern may be the total bill to the Government of the Lease Buyback Scheme. Can we really afford it? As discussed above, it is certainly feasible on an individual HDB flat basis.

Suppose over the next 5 years, the owners of 100,000 eligible HDB flats per year sell their flats to the HDB under the LBS, with an average payout of $200,000 per flat. This amounts to $20 billion a year. By comparison, Government expenditure in the 2019 Budget was $22.7 billion.

But this is still small compared to the Reserves which have been accumulated over the years from land sales. However, if there is any doubt about whether the LBS will continue in its present form, then there is all the more reason for HDB homeowners to act fast!

Concluding Thoughts

Ever since the revelation that only 5% of all HDB flats undergo SERS, there has been concern about HDB lease decay. Part of this is because HDB, unlike private 99-year leasehold condominiums, cannot undergo an enbloc sale. For private leasehold condominiums, an enbloc sale allows homeowners to exit a lease which is running down. However, part of the concern about HDB lease decay has been due to a lack of understanding about what tools are available to deal with it.

The Lease Buyback Scheme is currently the best, and perhaps only, realistic solution for the issue of HDB lease decay

Unfortunately, the lack of understanding and communication, and possibly also the overly restrictive conditions on the LBS has resulted in this solution being underused. In fact the LBS allows HDB owners much more flexibility in terms of how they can use the cash value of their HDB flat, e.g. for retirement spending, or for a bequest. Perhaps it is time to go back to the HDB to better understand how they can help!


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12 thoughts on “What’s the Value of my Leasehold HDB (3)? Dealing with HDB Lease Decay

  1. “And since the money will be first paid into the HDB homeowners’ CPF Retirement Account, which pays interest of 4% to 6%, this means that the amount is really worth $759,000 in 30 years’ time!”

    Not so fast … the discounted amount of $219K won’t smell $759K becoz it will be drawn down immediately. At most people can delay for 5 years till 70 yr old. Annual payouts from RA (whether thru RSS or CPF Life) is >4% & will lead to capital decay.

    BTW, this $219.3K is based on the Bala Table of the projected value of the flat 30 years later at $404.7K (with 35 yrs lease left) …. discounted 30 years to the present at 2.06% discount rate — close to the historical 2.1% land price appreciation.

    As long as Reserves can be managed to compound at higher than 2.1%, the Reserves can cover the cost outlay.

    In effect, govt applied double discount on the LBS amount — (1) lease decay based on Bala’s Table, and (2) land price discount rate. The 2nd discount applied is rather fishy as Bala’s Table already gives the projected values in today’s dollars.

    While most people may not be able to calculate the exactness of the LBS payout, instinctively they know that it is on the low side. Hence till now, LBS is mainly for last resort …. much like borrowing from loansharks is a last resort. LOL!

    1. Thank you for your interest and for your comments! I have a slightly different point of view on a couple of the points you make, so just for discussion’s sake:

      the discounted amount of $219K won’t smell $759K becoz it will be drawn down immediately“. Unfortunately, the old adage that you can bring a horse to the water but you cannot make it drink is true here. What we can do is to show that such a mechanism for countering HDB lease decay exists, but it is up to the homeowners to use it.

      In effect, govt applied double discount on the LBS amount — (1) lease decay based on Bala’s Table, and (2) land price discount rate. The 2nd discount applied is rather fishy as Bala’s Table already gives the projected values in today’s dollars“. Bala’s Table shows the value of a 64-year old property at the 64th year – there should not be a further discounting of this back to the 1st year in the table.

      But once again, thanks for reading and your comments!

  2. Hi Sir / Madam,

    Thank you for your well written article.
    Can I ask, in the event of SERS, what happens to a flat in the SERS estate that has been LBS-ed?

    Thank you,
    HGN

    1. Thanks for reading my blog!

      I do not know what will happen in the case you highlighted, but given that only 4% of all HDB flats have been picked for SERS, and most of the critical infrastructure work for the future like MRT stations have been planned for already, it seems quite unlikely that the scale of SERS will expand in the future.

  3. Great article! I agree the lease buyback scheme is a good deal. Here’s another way to think about it:

    If the owner does nothing and his family continues to live in the flat, the $520k (today’s market price) will decay to zero over 35 years, i.e. the implied rent is 520,000/35/12 = $1,238/month (in current dollars).

    If the owner sells it to HDB for $219,300, or a discount of $300,700 to the market price of $520,000, he or his family can still live in the flat for the next 35 years, so the implied rent is only 300,700/35/12 = $716/month (in current dollars). Meanwhile, the owner and his family can invest the $219,300 at a minimum CPF return of 2.5% p.a. so they’d have $520,444 (future dollars) in 35 years.

    The difference in effective rent is simply $219,300/35/12 = 1238 – 716 = $522/month! (This comes directly from the government’s coffers)

    Finally, the owner can also choose to sell the flat for $520k, invest the proceeds and pay market rate rent for a similar unit in the same neighborhood. Given property rental yields at ~3% today, the flat would likely command a market rent of 0.03*520k/12mths = $1,300/month today, but they’d have to face rising rents due to inflation and the possibility that their landlord could refuse to renew their lease anytime during the next 35 years.

    Of the three scenarios above, the lease buyback is most the attractive because:

    a) It would lower their effective rent for the next 35 years in the same flat they’re living in,
    b) They’d have a strong legal right to live there for the next 35 years without worry, and
    c) They’d freed up $219,300 that could grow to $520,444 (albeit in future dollars) in 35 years.

    Clearly, the lease buyback is a better deal because the government is transferring value to the owner. How much value? $219,300.

    However, with that said, the HDB lease buyback scheme might not be a good solution to the HDB lease decay problem for several reasons, but the main one is:

    It creates a significant financial burden on the government. It’s clear from the above example that it would cost HDB $219,300 to buyback the lease AND fulfill its promise to the owner’s family to live in the flat for 35 years.

    1. Hi CWC!

      Thanks for reading my blog! And thanks for offering an alternative way to look at why the lease buyback scheme is actually a pretty good solution to the lease decay problem. Of course, the issue now is that it is only offered to a small subset of the population (must be age 65 and above). If I understand the LBS rules correctly, the sales proceeds actually go into the CPF RA first. If the couple already have met their Full Retirement Sum earlier, it becomes their money to withdraw anytime, or they can leave it in the RA to continue to grow at 4%! So in terms of the gains from the LBS, it can be even higher than what you have computed conservatively, using a 2.5% interest rate.

      My view is also that LBS does not constitute a burden to the government. This is because when the HDB flat is sold to the public initially, what happens is a land asset is converted into a financial asset for the government, and this financial asset is then invested as part of the reserves to grow over time. However, when the HDB flat finally reaches 99 years, the land goes back to the government, and this is the point when the government ends up with a surplus of assets – the HDB land plus the financial assets which have grown over 99 years – so suddenly at 99 years, the government ends up with twice the amount of assets (in real terms) it started off with 99 years ago! How accounting can deal with this “windfall” is not known (at least to me). So to me, the LBS is not onerous to the government at all, since it merely converts a portion of the financial asset back into the land asset for the government (instead of paying a zero price at the end of 99 years).

      1. Thanks for the response! You’re right – the lease buyback scheme is offered only to those aged 65 and up.

        You are also correct that the proceeds from government land sales are funneled into Singapore’s Reserves, which are then invested by MAS/GIC/Temasek (mostly in financial assets).

        However, it’s still not clear to me that the scheme is a good solution to the HDB lease decay problem. In the above example, it would cost the government $219k to buy back the lease and fulfill its promise to allow the owner’s family to live in the flat until the end of the lease.

        The $219k must come from the Reserves, right? And the government still cannot take back the flat for another 35 years….which means HDB cannot demolish the flat and re-sell (monetize) the land it sits on for another 35 years.

        For the sake of clarity, let’s put it another way. MAS/GIC/Temasek would need to sell $219k in financial assets, drain this amount from Reserves to pay the HDB owner, then wait 35 years before HDB could sell the land to future Singaporeans/PRs and replenish the Reserves. (By the way, the Reserves underpin the international value of the Singapore Dollar…).

        So if *all* HDB owners take up this scheme when they turn 65 years old (you know, because they read this blog and everyone realized it really is a good deal), this would create a huge drain on Reserves.

        Astute observers would notice the weird logic of the lease buyback scheme (or the 99-year lease concept itself): The government still owns the land in a 99-year leasehold, and they’ve also collected the monies from “selling” the flat to the HDB owner. Yup, the government already has a “surplus of assets” (using your words) today!!

        The 99-year leasehold effectively concept allows the government to “have its cake and eat it”. It’s double-dipping.

        The lease buyback scheme is a good deal for the HDB owner precisely because HDB has NO obligation to give the HDB owner any money if he or his family continues to live in the flat until the end of the lease. The $219k is a effectively a windfall (in my opinion, because the restrictions of the LBS are minor when compared to the $219k).

        1. Haha, I think we agree that it is really very attractive for the government to sell 99-year leasehold HDBs, and wait for 99 years for the land to revert to the government, to be resold after rebuilding another block of HDB on it. “Have its cake and eat it” is really a apt description!

          So while the Lease Buyback Scheme appears to be advantageous to the HDB owner who takes it up, and somewhat disadvantageous to the government, the reality is that the government has already gotten most of the gains from it already, and the only difference is whether the government has effective sold a 99-year lease to the HDB owner, or a 70-year lease (if the HDB owner sells back the last 30 years of the lease). Which is also why I have only focused on whether the LBS is a good solution for the HDB owner.

  4. We should note one very important caveat about the attractiveness of the LBS for HDB owners….

    TL;DR LBS is a good deal if the owner has children who can/are willing to live in the flat until the 99-yr lease runs out. If not, then LBS is not a slam dunk.

    It’s important to note that the owner/spouse (who must be 65+ years old) are very unlikely to live for another 35 years (in the above example). According to this SingStat life expectancy projection (https://www.singstat.gov.sg/find-data/search-by-theme/population/death-and-life-expectancy/visualising-data/lifeexpectancy), there is only a 3-6% chance that a 65 year old today will live to 100…

    So whether the owner should take the LBS depends on one key question: Does he/she have children who are willing/able to live in the flat till the end of the 99-year lease? If the answer is yes, then the calculation above looks correct, i.e. the family will be able to live in the flat till the end of the lease, thereby deriving the maximum value from it, i.e. the low “effective rent” of $716/mth is locked in for the full 35 years of the remaining lease.

    If the owner has no children, then under LBS, HDB will take back the flat when the owner/spouse pass away. Since the owner(s) would probably have no one to inherit the flat, LBS still makes perfect sense because he/she can take the $219k to spend it on themselves while continuing to live in the same flat till they both pass away. HDB is effectively betting that the owners will die well before the 99-year lease runs out (i.e. for the childless population who are most likely to elect LBS).

    If the owner has children but they are unwilling/unable to live in the flat until the lease ends (e.g. they are overseas), then the calculus needs to take into account the final value of the HDB flat when the owner/spouse pass away. Under the LBS, the flat will be returned to HDB i.e. there is no residual value. If the owner did NOT elect the LBS, then the children would inherit the flat and its value at that time would be a straightforward net present value calculation.

    Example: If the owner/spouse pass away 20 years after the LBS, then the $219k would have grown to $359k (future dollars) @ 2.5% p.a. (more if we use 4% p.a.). If the owner did not elect LBS, then the flat is worth the sum of the present value of future rents (net of expenses) discounted back over the next 15 years, i.e. the children who inherit the flat should be indifferent between selling it at NPV or collecting rent for the next 15 years.

    If the NPV is less than $359k, then the LBS is the better deal…. but only by the difference between the two so it’s not a slam dunk. This is an acturial calculation where the key variables are a) When the owner/spouse will pass away, and b) Prevailing rents and the relevant discount rate when they pass. (My guess is HDB crunched the acturial calculations and figured that very few children of existing HDB owners will want to live in the old flat until the end of the lease, and the amount of cash HDB offers to the owner under the LBS will roughly grow to match the future NPV of the flat when the owners die). Makes sense?

    As for the HDB lease decay issue, we are probably in agreement that the LBS won’t work for all HDB owners. I’m keen to analyze it in-depth because it’s one of maybe only a handful of issues that has very long-term consequences for all future Singaporeans (and for the future of the state). Do you have any links or recommendations on where we go deep on this discourse? Thanks!

    1. Hi CWC! Thanks for your thought-provoking comments! You have certainly given this issue quite a bit of thought.

      I think one of the issues with the Lease Buyback Scheme right now is that there is no clarity as to what happens if the owners pass away before, or after the remaining lease they have in the HDB flat runs out. HDB has not been clear on this point, and I can see why, since none of the few thousand households on LBS is near that stage yet. My own sense is that HDB will neither takeover the lease immediately upon the death of the last occupant, nor kick out the occupants if they survive beyond the remaining lease. I would guess that if the homeowners pass away before their share of the lease runs out, the HDB will first pass to their heirs, and HDB will either wait until the lease runs out before taking over the flat, or offer the heirs a price to buy over the remaining years on the lease which they do not have. I don’t think the HDB will offer the heirs an option to buy back the remaining lease form the HDB though. Alternatively, if the homeowners live beyond the lease that they possess, I would guess that HDB will take over the flat, but then rent it back to them of they want to stay on. But these are just my guesses.

      The price which HDB will buy over the remaining lease if the homeowners pass away earlier will probably be based on the prevailing HDB values, and crunched through the Bala’s Table model which the SLA uses. This model assumes freehold land will appreciate forever by 3% per year. If the true rate of appreciation is higher or lower, then, as what you have indicated, the pricing of the remaining lease could change. But that is usually also the point when the value of the leasehold HDB starts turning downwards towards zero, so in all likelihood, HDB will be paying for the present value of the rent for those years of the lease which it does not yet own. BTW, my own calculations seem to point to the interest rate for growing the initial $219K buyback price is 4% (interest for the CPF RA), so the assumption is that it would be worth more than $359K then. Moreover, even if freehold land appreciates by more than 3% a year (as in Bala’s Table), remember that leasehold properties go up by a lesser rate due to the lease decay effect. So I believe that there is a higher chance that the LBS will be better in most scenarios.

      There is an online forum at (https://www.futureofsingapore.org/) where some of these issues have been discussed, although the idea of using the Lease Buyback Scheme to counter HDB lease decay has not been brought up there. Rather it is something which has been discussed in the Worker’s Party white paper on the same issue (https://wpsg.s3-ap-southeast-1.amazonaws.com/perspectives/WP-Working-Paper-on-HDB-Resale-Prices.pdf)

  5. Thanks for the response and the links! It looks like the Worker’s Party white paper is a good place to start digging…

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