5 Ways The Government Can "Save" Ageing HDB Flats in Singapore

Eugenia Liew
5 Ways The Government Can "Save" Ageing HDB Flats in Singapore
Did you know: about 90,000 out of 1 million HDB flats in Singapore are now more than 40 years old? This means they have less than 60 years remaining on their 99-year leases.
Compared to the newer HDB BTOs, these older flats tend to be located in mature estates that are more easily connected to the city centre and have better amenities. Older HDB flats also tend to be more spacious compared to BTOs of the same type.
With a larger living area and more nearby MRTs and dining and shopping options, those who opt to live in older resale flats seem to enjoy a higher quality of life. Yet, prospective buyers continue to be wary of older HDB resale flats, avoiding them due to the dwindling number of years left on the flat’s 99-year lease.

The issue of housing lease decay

A declining lease value is a huge concern for owners who envision selling their flats later on. As the lease reaches its tail end, resale value plummets. The investment value of older flats is thus questionable.
Young owners are also concerned that they might still be alive when the lease on their flat runs out, and that their homes will then be repossessed by the government, leaving them with no alternatives. An older HDB flat is also less useful to pass on to one’s children as an inheritance.

Previously, there were many financing restrictions for old HDB flats

Until recently, there were also restrictions on the amount of CPF funds that could be used to buy HDB flats with a lease of less than 60 remaining years. Some banks also mirror the CPF restrictions when determining the loan quantum to extend to a buyer, which made it even harder to find financing for older flats.
Last year, the CPF Board softened these restrictions on buyers of older flats, which caused the sale of flats of 40 years and older to shoot up by 40% over a one-year period (May, June 2019).
Although this did help stimulate more demand, older HDB flats are generally still seen as a poor investment. As ageing HDBs become inevitable, here are some further steps the government can take to make older HDB flats more attractive to buyers.

5 Ways We Think The Government May Be Able To “Save” Ageing HDB Flats

Of course, none of these are perfect solutions, but they may at least make ageing HDB flats a bit more attractive to buyers.

1. Shorter Minimum Occupation Period (MOP) for older flats

The standard Minimum Occupation Period (MOP) for both BTO and resale flats is five years. Until the MOP has run its course, owners are not allowed to sell their flats, nor are they allowed to rent out the entire flat, although renting of rooms is permitted so long as they continue to live in the flat.
The 5-year MOP makes up a more significant proportion of an older flat’s total remaining lease, and greatly reduces the financial utility new owners can get out of their flats. For instance, an HDB flat with 50 years remaining on its lease can only be sold when its existing lease is reduced by 10%, which will seriously affect its resale value.
Reducing the MOP for older flats can make buyers feel more comfortable about being able to sell them or monetise them by renting.

2. Extension the lease of older flats

The government has not definitively announced what will happen when the first HDB leases expire a few decades from now. But extending leases is one possibility to ensure the desirability of older HDB flats. Enabling residents to extend their leases can enable older Singaporeans to circumvent the problem of outliving their HDB flats.
The government has, however, highlighted the trade-offs of allowing lease extensions. As older HDB flats tend to be bigger and use land less intensively, extending their leases would mean that the land cannot be redeveloped in order to be populated more densely, which might be problematic given Singapore’s space constraints and rising population.
There is also the concern that maintenance costs for older flats might go up over time, which might in turn cost residents more.

3. Reduce minimum age of purchase for singles to buy ageing flats

Singles are prime candidates for the purchase of older HDB flats, as most do not have children and are thus less concerned about the value of their homes as an inheritance. Those who do not intend to start a family are also less likely to need to upgrade their flats due to lack of space.
Mature towns are also more attractive to singles who tend to be concerned about the connectivity of their homes to the CBD, and less attracted by factors such as schools and childcare centres, which tend to be key priorities in new estates.
Right now, singles can only purchase an HDB flat when they turn 35. Before their 35th birthday, some of these singles will have turned to the private housing market, while others might have gotten married and already purchased a flat as a couple.

4. Promote ageing HDB flats as transitional housing for those who hope to upgrade to condos

BTO flats are by far the most common type of first home purchase amongst young couples. Some of these will go on to upgrade to bigger flats or condo units later on when they can afford to do so.
Ageing HDB flats tend to be more affordably priced than newer flats of the same type in the same area. They can thus be seen as an affordable form of transitional housing for those with plans to upgrade to a new home in the future.
Thanks to the lower price of older flats, buyers are free to put their spare cash in higher yield investments so they can more quickly achieve their goal of upgrading. As an added bonus, they can keep the ageing HDB flat as a source of rental income after moving out.
In order to make this financially viable, the government might have to make some further adjustments such as lowering of the MOP so that couples can upgrade their preferred housing more quickly.

5. Add more floor area to existing units

Giving the value of older HDB flats a boost might make them more attractive to potential buyers. At present, older HDB flats already have the advantage of being slightly bigger than their newer counterparts. Increasing their floor area even more through renovations might make them more attractive to buyers who prize space, and more profitable to sellers.
HDB’s Main Upgrading Programme, which took place over 20 years until 2012, saw some flats getting retrofitted with a 65 square foot utility room. This increased the floor area of the flats by up to 10%, which in turn raised valuations.

Or maybe… The Government should do nothing.

When all is said and done, doing nothing is one option that might be for the best. Many of the suggested measures involve raising the demand for flats by making them more attractive to buyers.
However, this might lead to issues down the road, as an increase in demand right now will lead to a steeper decline in prices as the tail end of a lease approaches.
Ultimately, the government will need to decide what their short-term and longer-term goals are for older flats. Stimulating demand for older flats in the present day should not take place until the government has decided as to what steps to take when the flat leases actually expire.
Ageing HDB flats are a ticking time bomb that the government will have to deal with in the next few decades. While recent measures involving the use of CPF funds have helped to stimulate demand for older flats, more must be done to give flat owners a better idea of what will happen when their leases expire.
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