How to figure out if an old HDB flat is worth its asking price

Chua Mui Hoong

Opinion Editor

APR 8, 2017

Those looking to buy old resale Housing Board (HDB) flats would have cause for hesitation following comments by National Development Minister Lawrence Wong last month.

Perturbed by reports that Singaporeans were forking out big sums to buy old HDB flats, he said buyers should not assume that all old HDB flats will be eligible for the Selective En bloc Redevelopment Scheme (Sers).

Under this hugely popular programme, the Government compensates HDB flat owners for their old flats and acquires the blocks for redevelopment. Home owners can buy flats in the new developments.

Some savvy owner-investors are known to peruse maps of HDB towns to identify potential Sers hot spots and buy into them in anticipation of Sers. Precincts near MRT stations, built to low-density (think low-rise blocks with large surface carparks) that are 40 years and above, are possible candidates.



The Sers gamble looked like a good bet for years, as the Government encouraged Singaporeans to view their HDB home as assets with values that enhance over time.

The expectation was that the responsible, far-sighted Singapore Government would underwrite the value of HDB leases, even as they near their 99-year expiry date.

Mr Wong's warning will put a halt to such expectations. As he pointed out, Sers is a highly selective programme. Only 4 per cent of HDB flats have been identified for Sers since it was launched in 1995.

I think Mr Wong - and the Government - is right in putting out such a stark warning. What was true in the 1990s, when the Government marketed its asset enhancement programme for HDB estates, no longer holds today.

Many things have changed since then. For one thing, the Government's fiscal position is tighter. As the population ages, the Government has had to dip into interest income from past reserves to finance its social spending.

Second, both economic and population growth have slowed. From around 5 to 8 per cent growth a year in the 1990s, the economy has slowed to about 1 to 3 per cent growth a year. This reduces the pace of increase of asset prices. If growth slows further, it may even lead to stagnant or falling asset prices. Population growth has also slowed from policy choice, as the Government tightened labour imports.

Third, with politics changing with each election, it is anyone's guess which party will be in power when your lease expires - and what its stand will be towards HDB leases.

Taken together, these mean that it is unrealistic to expect HDB flat prices to go up as they age. HDB flats will become "normal" assets with values that should reflect their balance leases.

Yet flat buyers' behaviour does not seem to reflect what we might expect from rational buyers.

A chart from DREA and HDB, published in The Straits Times on March 29, showed that the prices of low-floor flats in Geylang, Toa Payoh and Queenstown plateaued once the flats hit 30 years of age.

This is unusual, as you would expect prices of older flats to continue to decline, as they creep nearer the end of their 99-year lease.

What accounts for this price robustness as flats hit 40 and 50 years of age?

One, buyers don't care whether they can recoup their money, and expect to live in the flat and consume it; or if they sell it, they are fine with making big losses from the sale. (In this view, the old HDB flat is just a consumption item, or a depreciating asset, and the buyer is fine with that.)

Two, buyers are confident they can sell their flats to future buyers at a good price without taking a big financial hit. (This is due to the expectation that another optimist will pay big bucks for the ageing flat).

[The greater fool theory or strategy.]

Three, buyers think the Government will be the buyer of last resort and will give a good price for the flat. (This is the expectation that the Government will take care of HDB flat owners, by its Sers programme or creating some other scheme to support asset values.)

Those hoping for No. 2 - who expect another buyer to fork out large sums for their ageing flat - need to recalibrate. Right now, 7 per cent of HDB flats are above 40 years old. One third are older than 30 years old.

While buyers may have been somewhat naive in the past, Mr Wong's statement - which has been widely reported in mainstream and online media, and will become the subject of countless conversations in homes and between property agents and clients - serves as a vital reality check for buyers.

As ERA Realty key executive officer Eugene Lim has said: "It is going to be a lot more difficult to find buyers for older resale HDB flats. Prices for these flats may even take a big hit due to lack of demand. From now on, it is quite likely home buyers will view older 99-year flats differently."

I agree with Mr Lim that buyers will view older HDB flats differently.

That leaves high-priced buyers with the third hope - of the Government stepping in to underwrite ageing HDB flats and leases in some way. With Sers being discounted, Singaporeans are nevertheless hoping that some other way can be found to let HDB owners renew their lease, or unlock the remaining value from their asset.

For those who may outlive their leases, some people have suggested letting people renew HDB leases for a reasonable fee, say, 3 per cent of its value per year. For a flat worth $500,000, that is $15,000 a year.

This is a reasonable suggestion, striking a balance between fairness to today's home owners by preserving some value in their HDB flat as it nears 99 years, and fairness to future generations who gain from redevelopment of old HDB flats.

If people become more rational and stop bidding up prices of old HDB flats, the Government can be more creative and persuasive in getting more HDB owners to sign up for the Lease Buyback scheme. This allows HDB flat owners to live in the flat, and sell the tail end years of lease back to HDB.

As for buyers shopping for a resale flat now, I have a simple word of advice: Don't be seduced by the spacious layouts and convenient amenities of old resale flats into paying too much for them.

How do you know what is too much? You can try a simple formula. Many property transactions are already priced with a psf measure: price per square foot.

Add another indicator: number of years of lease remaining.

Take the example of a Bukit Timah flat of 1,345 sq ft that sold for $950,000, reported in The Straits Times recently. That is $706 psf.

That flat was built in 1974 on a 99-year lease. It thus has 56 years of lease remaining. The price psf on a per annum of balance lease basis is $12.60.

Is that a good price?

Valuers will say that a lease does not depreciate in a straight line. They are of course right. A property's value also depends on factors such as location and its condition. But the advantage of a simple, crude measure like psf per annum is that it allows for simple comparison.

You can use that measure to compare prices with 99-year condos in the vicinity, or with newer HDB flats. (Property portals like SRX and PropertyGuru can do all house hunters a favour and add this new indicator.)

At High Oak condo nearby, a 1,271 sq ft unit sold in December for $995,000 or $783 psf. With 78 years left, that's $10 psf pa.

Arguably, the condo is a better buy than the HDB flat, at a lower psfpa amount, and for a newer development that comes with facilities.

Whether you want to use this method to do your sums, or if your purchase is driven by other emotional and lifestyle considerations, the key is to take on board Mr Wong's message.

Don't buy an old HDB flat expecting Sers - or expecting the Government to guarantee its value.

It likely won't happen.