 Old HDB flats. (Photo: Dollars and Sense) National Development Minister Lawrence Wong ignited a discussion last week when he mentioned that Singaporeans should not assume that all older flats would automatically be eligible for Selective En bloc Redevelopment Scheme (SERS). His comment was in response to a Lianhe Zaobao article that highlighted how some older HDB resale flats are still being sold at high prices. |
Why Are Singaporeans Willing To Pay High Price For Old Flats?
HDB flats have always been sold with 99-year lease, be it for flats that are built and sold today or those during our grandparents’ generation. After 99 years, ownership of the flat will return to the landowner, the HDB.
HDB flats have been built since the 1960s. Hence, the oldest flats today could be more than 50 years old with a remaining lease that is less than 50 years, and counting down. Think of it as buying a car that has 5 years left on its COE.
Some older HDB flats have managed to retain very good value. For example, there are a few HDB two-storey terraced houses at Jalan Bahagia which were built in the 1970s. Due to their rarity, these terrace homes can command prices in excess of $800,000 or even $900,000 despite having a remaining lease that could be less than 60 years.
Even older flats found in non-central locations can fetch high prices. Just last year, it was reported that an Executive Flat in Bedok sold for $935,000. The flat, which was built in 1989, would have a remaining lease of about 72 years at the point of transaction.
Generally speaking, older flats that are able to retain good value tend to have some factors that allow them to differentiate themselves from other flats. These could include a rare flat type or flats in really good location. The lack of supply in the market allows these flats to command a high premium.
Old Policy, New Discussion
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“The logic of overpaying for an older flat with the idea that it will enjoy en-bloc in the future is flawed. There has never been any guarantee that all older flats will enjoy en-bloc.” - Timothy Ho |
While all homebuyers prefer to buy a home with a fresh 99-year lease, older flats with shorter leases tend to be overlooked by Singaporeans in their search for their dream home.
This could be because many homebuyers may see little difference between owning a flat with a 70-year lease against one with a fresh 99-year lease. If you are 30 and buy a flat with a 70-year lease left, chances are that you would not be able to outlive your flat.
Why Pay High Price For Old Flats?
However from a long-term value standpoint, there are causes for future concern. Here is why.
While it’s possible that an older HDB flat with a remaining lease of 70 years may not be viewed differently from one with a fresh 99 year lease today, the same cannot be said for how future buyers will perceive the value of the flats.
In 20 years time, the same flat will have a remaining lease of 50 years. The seller then (buyer today) would be faced with the very real possibility that buyers in the future may not be willing to pay a high price for a flat that could run out its lease during their lifetime, or have very low resale value in another 20 years time.
As a young nation, Singapore has not reached the point when our first generation of HDB flats reaches the end of its lease period. However, we will get there one day. Only time will tell what would happen then.
More Restrictions For Buyers Of Older Flats
As investors, we want to invest in stocks that are resilient. We want the companies to fare well during both good and bad times, and not only when times are good.
| Remaining Lease of HDB Flat | Use of CPF funds | HDB Housing Loan |
| 60 years or older | Allowed based on current policy, i.e. status quo. | Allowed based on current policy^, i.e. status quo. |
| 30 to 59 years | Allowed, except for buyers for whom the remaining lease cannot cover them to the age of at least 80. The total CPF usage by the household will be the prorated Valuation Limit (VL)# based on the ratio of the remaining lease when the youngest buyer who can use CPF turns 55 years old, to the lease at point of purchase. |
Allowed, if remaining lease can cover the buyer* to the age of at least 80. Loan tenure will be the shortest of: 30 years; 65 years minus average age of buyers; and balance lease at the point of purchase minus 20 years. |
| 20 to 29 years | Not allowed. | Allowed, if remaining lease can cover the buyer* up to the age of at least 80. Loan tenure will be the shortest of: 30 years; 65 minus average age of buyers; and balance lease at the point of purchase minus 20 years. |
| Less than 20 years old | Not allowed. | No HDB housing loan. |
# Valuation limit is defined as the lower of current property value or purchase price.
* Based on the average age if there is more than one buyer to a flat.
^ Mortgage Servicing Ratio limit at 35%
Source: MND
The simple analysis is that when HDB flats reach certain lease period (i.e. less than 60 years and less than 30 years), their market valuation may take a hit as some willing buyers will have to deal with the restrictions.
For example, a 25-year old buyer will not be able to use his or her CPF funds to buy a resale HDB flat with a 50 year lease remaining because the lease does not over him or her till the age of 80. As the flat continues to mature, the restrictions will only get tighter.
En-Bloc Potential Is What It Is…Potential
In recent years, the government have been selecting some older blocks for the Selective En bloc Redevelopment Scheme (SERS). Because of that, there is a misconception that older flats are worth paying high premiums for due to their en-bloc potential. That is true. Yet buyers must remember that potential also means there is no guarantee that En bloc will happen.
More likely than not, most older HDB flats will undergo upgrading work instead. That’s when the government will make improvements to the existing infrastructure such as adding lift landing at every floor.
For a selected few however, the government may choose to en-bloc the flats. The usually includes a payout from the government for homeowners based on the market valuation of the flat, and a guaranteed opportunity to select a new flat at HDB designated replacement site at a lower price. In other words, homeowners are guaranteed a newer and cheaper flat though location may vary.
Yet the logic of overpaying for an older flat with the idea that it will enjoy en-bloc in the future is flawed. There has never been any guarantee that all older flats will enjoy en-bloc. Furthermore, it’s likely that such an option, even if the authorities were willing, would be an unsustainable cost for the country to bear. We can’t just demolish every old flat we see around us and replace them with newer flats for their owners to purchase at a lower cost.
So if there is an old HDB resale flat with a rustic charm that somehow appeals to you, by all means, go ahead and pay for what you think is right. But don’t purchase it with the expectation that it will en-bloc, or that its value will definitely increase in the future. You may very well find yourself disappointed.
This article is republished with permission. All opinions expressed in this article are the independent views of DollarsAndSense.sg