By Joe Wang
Minister for Transport Khaw Boon Wan said recently at a dialogue session with young people that Singaporeans who buy a 50-year-old Housing Board (HDB) flat today can expect prices to continue to appreciate over the next 10 years.
“If you buy a 70-year-old flat, there is still appreciation potential especially because this Government is prepared to continue to invest in it through Home Improvement Programme (HIP) II and the Voluntary Early Redevelopment Scheme (Vers),” Mr Khaw said.
While it is difficult to ascertain if his statement is true as no HDB flats have reached the 70 year mark yet, we can examine if it is possible to secure a bank loan and to use CPF to purchase the flat.
For the purpose of illustration, let’s use a recent transaction at Ang Mo Kio:
A Singaporean couple paid $470,000 for a 3 room flat with a balance lease of 93 years. The prices of resale HDB flats have declined by 1.5% in 2017. Assuming Singapore’s economy continue to grow at the present rate of 2.0 to 3.0% annually and the prices of resale HDB flats grow at a conservative rate of between 0.5 to 1.0% annually, the market value of the flat should reach $680,000 based on a growth rate of 0.51% after 73 years.
The couple may probably pass on by then and sell the flat to another owner or pass down to their children. Now the new owner want to sell the flat with a lease of 20 years left at $680,000, will any prospective buyer be able to buy?
According to International Property Advisor chief executive Ku Swee Yong, when leases drop to 20 years and below, the prospective buyers will not be able to get HDB loans, bank loans or use CPF for the purchase. Everything has to be paid in cash in one go.
In fact, with less than 35 years of lease left, banks are unwilling to extend loans to finance the purchase of these flats. That applies to flats that are at least 64 years old.
CPF money cannot be used for down payment or to service the monthly mortgage for HDB flats with a lease of less than 30 years.
For the purpose of illustration, you can use the CPF calculator to determine your eligibility and the maximum amount of CPF that you can use to buy a property with remaining lease of less than 60 years, but at least 30 years.
If you key in a lease of less than 30 years, CPF cannot be used to pay for the property regardless of the age of the buyers:
Source: CPF website
Our next buyer of this three room HDB flat in Ang Mo Kio will have to fork out $680,000 in cash in full to buy the flat and hence it is highly improbable or impossible for the seller to find a buyer in the market.
The question is: with a severely limited pool of buyers in the market for such old resale flats, can their value still hold up even with two rounds of upgrading offered by the government?
Furthermore, there will be glut of flats reaching the 70 year old mark in twenty years’ time with the oldest flats in Bukit Merah and Toa Payoh already more than 50 years old leading to a possible oversupply of resale flats in the market and coupled with lukewarm demand from home-buyers, it is unlikely that prices will appreciate further.
As a matter of fact, you should avoid buying any HDB flat with a lease of less than 60 years not only because you have to fork out more in cash in order to finance the purchase, but the potential for future appreciation in price is very low not to mention the opportunity cost as the money for the down-payment can be invested in a better property.
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About the Author
Joe is a property enthusiast who bought his first property in Singapore at the age of 26 in 2005. From 2005 to 2015, he built a portfolio of 6 private properties in Singapore and has since sold three of them realizing a net profit of between 60 to 100 percent. He made his first million dollars in property investing at the age of 30 and has now amassed a property portfolio in Singapore, Australia and Malaysia worth more than $10 million dollars.
Joe is a conservative long-term property investor who believes in life-long learning and education in property investing. He does not claim to be a property expert or guru, but rather an adventurer who is in the middle of a self discovery journey to achieve financial freedom from his property investments.
Email Joe at: firstname.lastname@example.org