There has been a lot of debate on the status of our HDB flats, whether they are owned assets or are we actually just renting the flats from the government for 99 years.
During a public feedback forum organised by government feedback unit, REACH, on 21 August 2018, National Development Minister Lawrence Wong clarified that an HDB flat is an asset that will appreciate as the country prospers.
Let us examine whether your HDB flat should be classified as an asset.
Personal Balance Sheet
As a standard convention, property is usually classified as an asset on a company’s balance sheet, whether it is leasehold or freehold. It can be a residential, commercial or industrial property and can be income-generating or simply used as the premises of the company. The outstanding mortgage on the property is recorded as a liability. In the same way, your HDB flat should be an asset and the outstanding mortgage should be a liability, just that it is recorded on your personal balance sheet.
Another way to look at it is from the intrinsic value that the HDB flat brings to you and your descendants. Let’s assume that you bought an HDB flat for S$400,000 that fetches a monthly market rental of S$2,000 a month. This implies that if you or your descendants rented out the property for 20 years out of the 99 years, you will probably recover the full cost of your HDB flat. In the remaining 79 years, you or your descendants can either rent out the property for more passive income or live in it for “free” since the initial cost has been recouped. Any capital appreciation that occurs in the 99 years of ownership will be a bonus.
Some may claim that if you and your descendants live in the flat for the entire 99 years, you will not be able to experience the rental benefits mentioned above. On the flip side, if you and your descendants rented a comparable flat for 99 years at S$2k a month, it could cost S$2,376,000 which is much more than the outright purchase price of S$400,000 and mortgage interest. This “asset” that you own has the potential to save a tonne of money down the line.
One of the main concerns plaguing residents is the depreciating nature of the flats. Many of the properties bought in the 1970’s and 1980’s have probably experienced massive appreciation in the run up to the property boom in the late 1990s having been bought for less than S$100k. However, these properties may also have less than 60 years left on the lease now, making them hard to refinance or sell. If the government does not extend the lease or select the block for Selective En Bloc Redevelopment (SERS) at the end of the lease term, the hard truth is that there will not be any value left in the asset to the owner. Clearly, no one is going to be happy since your descendants could potentially inherit a seemingly worthless asset even before the entire 99 years are up. They could choose to rent it out but maintaining such an old flat could be expensive and cumbersome.
Demand and Supply
Property prices are simply a function of demand and supply. When demand for housing outstrips supply, property prices will go up, regardless of the number of years left on the lease. Today, the government could announce that they will halt all Government Land Sales (GLS) and stop building new HDB flats. This will almost guarantee that all leasehold flats will appreciate in value since there will be no more future supply.
What are repercussions to Singapore? Our newly-weds will struggle to buy a place of their own and it will lead to a property price bubble as property prices outstrip the earning capacity of people.
The key thing to appreciate is that the government has a fine line to tread to ensure enough supply such that prices do not spiral out of control but not so much as to cause property prices to fall, putting earlier property buyers at risk of negative property equity.
Leasehold properties are not something new since it is very common in China. In fact, their residential leases can be only 70 years. Having 99-year leasehold properties will allow the government to reclaim land for future development as the infrastructure and housing needs in the future could be very different. It can also sell the land under the GLS scheme, which is an important source of government revenue. Assuming that you buy your 99-year leasehold HDB flat at 21 years old, you will need to live to a ripe old age of 120 before your flat is taken back. This is highly unlikely since the oldest Singapore died at the age of 115.
To summarise, HDB flats are leasehold assets that can bring you much value but it is inevitable that they depreciate to zero at the end of the lease term without a lease term extension or redevelopment option. There is no easy solution for the government to ensure that the HDB flats will always appreciate without ensuring that supply is always less than demand. If future supply is restricted by converting leasehold sites to freehold sites or slowing down the construction of new HDB flats, prices may quickly spiral out of control, affecting the ability of Singaporeans to get on the property ladder. Furthermore, the government needs the revenue from the GLS scheme which relies on the state’s land bank being replenished periodically and recycled for other purposes. If there is a shortage in government revenue, they may need to increase taxes.
99-year leasehold HDB flats are not a magic bullet but they have helped us to achieve one of the highest home ownership rates in the world at 91%. At the very least, the government deserves some credit for this achievement.