HDB started back in 1960. The objective of HDB is to provide affordable public housing for the general public and the purchase can be financed through Central Provident Fund.
Because of the scheme, Singapore has one of the highest home ownerships of around 91% in the world. About 78.7% of the population stay in HDB homes.
In the early days of development, the value of their humble HDB homes have increased significantly with owners reaping handsome profits.
Many HDB owners would thus deem that HDB homes are their greatest assets.
Sadly, situation has changed because of
1. Cooling Measures affecting HDB in 2013
2. Ample Supply of Built to order (BTO) flats
3. Accrued Interest Payable to CPF account of 2.5%
Cooling Measures in 2013
Back in 2005, the property market started to recover from the property doldrum. The HDB property prices gradually picked up momentum and soon began to rise.
Demand was strong, and was undeterred by the financial collapse of the Lehman’s Brothers that brought about the global financial crisis in 2008.
Market sentiments continued to be bullish and the prices of HDB houses rose relentlessly until 2013. From 2005 to 2013, the HDB price increase was 106.67% .
To curb the overheated HDB market, the government introduced a few cooling measures as to maintain affordable public housing.
They were :
1. The Monthly Servicing Ratio was reduced from 35% to 30%.
2. The maximum tenor for HDB loan was reduced to 25years.
3. A permanent resident couple will have to wait for 3 years before they can commit to buying a HDB property.
4. The restriction of CPF and the loan available to purchase a HDB unit that has less than 60 years’ of lease.
The cooling measures were indeed a game changer. They were so effective that it rewrote a new chapter for HDB prices.
Since then, HDB price went down hill and has declined 9.48% from 2013 till to date . It did not to return to its hey days in 2013.
Monthly Servicing Ratio reduced from 35% to 30%
Monthly Servicing ratio (MSR) measures the percentage of your monthly income that is channelled to repay your home loan.
MSR is Monthly mortgage payment/ Monthly income x 100%
The lower the ratio, the fewer the qualified buyers to buy high HDB prices. This in turn caps the price increase for HDB.
Reduction of HDB loan to 25 years
The monthly mortgage instalment is increased because HDB loan is spread over a shorter period for repayment.
The higher instalment also limits the loan available for the house purchase.
Waiting Period of 3 years for PR to buy houses
There were fewer buyers as some PR buyers either resorted to rent houses or buy private houses.
Restricted CPF Usage and Loan Borrowing
The policy restricted the buyers on the CPF usage and loan borrowing for houses that have less than 60 years of their lease remaining.
The harsh reality of lease decay has set in and it awoke the HDB owners.
Gone are the days, where HDB prices increases over time through HDB asset enhancement scheme.
HDB asset enhancement scheme is an initiative that involves the improvement of the interior of the HDB houses and the exterior façade of the neighbourhood as the HDB estate becomes older.
When the HDB house turned 60years, the price began to fall.
On 24 Mar 2017, National Development Minister Lawrence Wong reminded the people not to assume that older HDB houses will be en bloc.
Only about 4% of the HDB flats would be identified for Selective Enbloc Redevelopment Scheme (SERS).
Some may go through VERS, which will be a voluntary scheme offered to selected precincts when they are aged 70 years or older. The details of the scheme were not given.
HDB houses have expiry date. When the lease expires, the value is zero and it will be returned to the States.
Such is the case for Geylang Lorong 3. Click on Freehold condominium or Leasehold, which is better? to know more on this matter.
The above chart shows a HDB flat that decays after 56 years.
The lease value of a HDB at a certain age can be determined by the Bala’s Table. Click on Freehold condominium or Leasehold, which is better? to know more on this matter.
The lower the remaining lease, the lower the value of the house.
With less than 35 years remaining lease, no bank loan is available. If the lease is less than 30 years, CPF cannot be used for downpayment nor HDB loan can be available.
HDB loan, however, is available to a buyer if the lease can cover the buyer up to the age of at least 80years.
So arising from the restricted use of CPF and bank loan, the sales of HDB houses of less than 60years were badly affected. Viewings and offers were hard to come by.
The policy was later adjusted on 10th May 2019 to ease the sales of such properties.
The amount of CPF that can be used to purchase a HDB property will depend on the extent the remaining lease of the property, that can cover the youngest buyer to the age of 95.
For example, 2 buyers who are 25 years old, would like to purchase a HDB unit of remaining lease of 65 years old.
The above table determines the percentage of the CPF funds that can be used to pay a HDB house.
For a remaining lease of 65years on the vertical scale and for the buyers who are 25 years' old on the horizontal scale, the intersection is 90%.
This means they can only utilise 90% of the CPF funds to pay their house. The rest will have to be in cash.
HDB can provide a maximum of 90% of the loan to value. The above table determines the percentage of the maximum HDB loan-to value.
For a remaining lease of 65years on the vertical scale and for the buyers who are 25 years' old on the horizontal scale, the intersection is 81%.
This means they can only utilise 81% of the maximum HDB loan-to-value to finance their house. The rest will have to be in cash.
Ample Supply of Built to order (BTO) flats
On 31 Jan 2013, the National Development Minister then , Khaw Boon Wan, maintained that Build To Order(BTO) flats will remain affordable.
He would delink BTO from HDB resale price.
There were many BTO completed and it was about 25,000 annually from 2014 to 2018.
Once, the owners have met their Minimum Occupation Period of 5years, there will be many new BTOs competing with existing resale HDB units for sales.
The competition will be keen. This is also in line with the government policy of keeping HDB flats affordable. The upside for a big potential price increase is low.
Accrued Interest Payable to CPF account of 2.5%
Our CPF earns us a 2.5% per annum for funds kept in our Ordinary Account. Once we utilise the CPF for house purchase, no interest is earned.
The accrued interest pertained to the interest that we would have earned in the CPF account instead of using it for house repayment.
If we sell our HDB houses, the proceeds will have to first pay off the mortgage, then our CPF account for the CPF utilised and accrued interest and finally the balance will be returned to us in cash.
The accrued interest can snowball to a huge sum because of the compounding interest.
The longer we hold a HDB flat, the higher the compounded interest will erode our sales proceeds when we sell our house especially for old HDB house.
We may have zero or even negative sales proceeds and this is worsened when we paid off our HDB house early, thinking that we are being wise so as not to incur interest.
Take, for example, this young couple, who are also my friends and client.
They bought their house at the peak price of 2013. In order not to ensure that interest rates do not pile up, they paid off their loan as quickly as possible.
Later on, they needed to relocate their home for the purpose of their children’s education. By the time they made the decision to sell, the lease remaining on their HDB house was already less than 60years.
Unfortunately, they experienced the full impact that HDB is not an asset.
It was a painful experience as, if they stay on in the HDB house, the lease will get shorter and the value will continue to fall.
The accrued interest kept accumulating.
At the time they sold their house it was for $500,000 which was above valuation. The CPF and accrued interest was $550,000 since they did not have any outstanding mortgage. The negative sales was $50,000($500,000 - $550,000).
Badly affected financially, they have since moved on and now sitting on paper gain on their new property purchase.
Conclusion
HDB housing is for our home and no longer an asset.
The government is adamant to keep HDB prices affordable. It is clearly demonstrated by the cooling measures in 2013 that dampened the HDB market sentiments.
History was rewritten and HDB prices have not seen huge price increases since then.
The HDB policy also discourage young buyers to buy older houses through restricted use of CPF and loan which reinforces that HDB house has a lease decay issue.
The government is also adding on more BTOs , which expand the HDB supply to keep price affordable.
Moreover, the compounding accrued interest also discourage the HDB owners to hold on to their HDB property for a long time.
They should unlock their profits early rather than risk a lease decay when the house is kept for too long.
In the light of affordability of HDB housing on a long term basis, lease decay and a compounding interest, HDB is no longer an asset. The longer you keep the HDB house, the lower the value.
With rising cost of living stemming from the expansionary money policy to stimulate economy against the backdrop of Covid 19, inflation can be expected.
It is really time to reflect and take action, knowing that we cannot beat inflation, national policy to keep HDB price affordable and compounding CPF accrued interest.
Please feel free to drop me a text or give me a call, lets have a coffee/tea chat over it.
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I am Ruth Chia, a Senior Sales Director with Orangetee and Tie Pte Ltd.
Prior to joining the real estate industry, I was in the finance and accounting department of a corporation which engaged in the consultancy works for real estate owners.
I switched my career to assist others to achieve financial freedom through real estate.
Being financially trained has enabled me to value add to my clients to give them a balanced perspective in making their real estate decisions.
My greatest reward is to have meaning relationship established through servicing my clients.
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