Monday, October 2, 2017

Commentary: 99-year HDB flats a chance to review homeownership and retirement policies

With the impending lease expiry of private residences along Lorong 3 Geylang, Ng Kok Hoe explores the challenges of framing homeownership as an appreciating asset that provides a source of retirement income.

By Ng Kok Hoe

01 Oct 2017

SINGAPORE: In March, National Development Minister Lawrence Wong reminded the public that Housing and Development Board (HDB) flats must be returned to the state when their 99-year leases expire.

Therefore, flat buyers should not fork out large sums for old resale flats on the chance that they may profit from the Selective En-bloc Redevelopment Scheme, he emphasised.

There has been no test case for this policy position so far, as major construction of HDB flats began only in the 1960s, which means that the earliest leases will only expire after 2060.

But in June, the owners of private residences along Lorong 3 Geylang were given notice that when their land leases expire in 2020, their properties must be surrendered to the Singapore Land Authority with no compensation.

Although these were private residences on 60-year leases, and most have been rented out to foreign workers and temple operators instead of being owner-occupied, the episode served as a reality check for many HDB flat owners.


The public response has ranged from a mere shrug to disappointment and anxiety. Some people point out that the 99-year HDB lease is a known fact and that then-National Development Minister Khaw Boon Wan had already issued a similar statement in parliament in 2014 when responding to a question from Mr Gerald Giam.

But others feel wrong-footed by the announcement and argue that the state should provide compensation when flat leases run out.

Why would something so obvious come as such a surprise?

One reason is myopia, a recognised problem in public policy. People often do not plan adequately for the distant future, favouring what is beneficial in the short term instead. Ninety-nine years feel like a long time and many people do not expect to outlive their flat leases.

Many young flat owners also expect to sell their flats and move to something newer and better long before the lease runs out. Public housing policy has responded to as well as encouraged “upgrading” aspirations by increasing the proportion of larger flat types within the HDB housing stock.

These expectations of housing mobility draw attention away from the finiteness of a 99-year lease.

Policy communication that does not fully spell out the facts has played a role too. Public housing tends to be presented rather simplistically as an asset that will invariably grow in value. Homeownership is often described as a source of retirement income that can make up for low cash savings in one’s CPF account.

In fact, as Mr Wong recently clarified, HDB flats will only appreciate in value in the medium term. Mixed messages like these create uncertainty and anxiety.

Important policies are designed based on the same assumption that housing is an appreciating asset.

When policymakers switched from a model of public rental to public homeownership in the 1960s, they drew a sharp distinction between renting as current consumption and ownership as investment for retirement, and put in place policies to nudge the population to the latter.

The stock of 1- and 2-room HDB rental flats was cut from a peak of 135,000 units in 1982 to a low of just 46,000 units in 2008. These rental flats are reserved only for low-income households and have strict eligibility criteria.

In support of homeownership, CPF withdrawal rules were also gradually liberalised, such that housing now accounts for the largest use of Singaporeans’ CPF savings. In the 2000s, about half of all CPF withdrawals were for housing, compared to 20 per cent under the various retirement schemes.

Around 94 per cent of HDB flats today are owned.

In this asset-based approach to social policy, homeownership is a cornerstone not just of housing policy but also social security.

Considering the amount of personal savings that have been invested in housing with encouragement from various government policies, it is no wonder the notion of HDB flats expiring with zero value attracted such controversy.


Expiring HDB flat leases raise questions about homeownership and retirement.

First, several existing policies for releasing housing equity in old age may no longer be feasible. The Lease Buyback Scheme pays a cash bonus and CPF top-up to flat owners who sell the tail-end of the lease on their flat back to the HDB. But this is only allowed for flats with at least 20 years remaining on the lease.

Another option is for retirees to sell their flat and move to a smaller place. The problem is that flats with very short remaining leases will have little value. An even more serious concern is that the owners may not be able to find buyers at all for a depreciating property.

It does not help that potential buyers of older flats face restrictions in housing grants and loans under current rules. Either way, the flat owners’ retirement finances will be squeezed.

Second, it has been suggested that as ageing HDB flats diminish in value, they offer a more affordable ownership option for people with less financial means.

This proposal envisions a future public housing system that is divided into two tiers of ownership: Newer flats that can be sold off for a profit for people who can afford to pay more, and older flats with short leases and limited monetisation potential for people with less means.
Such a system may exacerbate inequality in Singapore society. If the purchases are funded by CPF savings, the practical effect is equivalent to paying higher interest to people with more CPF savings.

In some ways, this has already started. The Fresh Start Housing Scheme, introduced to help tenants in HDB rental flats to buy their own flats, offers subsidies for 2-room flats with leases of between 45 and 65 years. But it also imposes a minimum occupancy period of 20 years, instead of the usual five years for a HDB 2-room flat bought from HDB under other schemes or from the resale market.

The scheme introduces rigidity in return for affordability. Tenants who choose the shortest lease of 45 years face the prospect of having to sell a flat with just 25 years of lease remaining should they wish to move.

The 2-room Flexi Flat Scheme allows people aged 55 and above to purchase new flats with shorter leases of 15 to 45 years. But these flats cannot be sold on the open market.

The spirit of schemes like these is to aid those who need help. Like many HDB grants and housing subsidies, they are meant to offer affordable housing options to people with lower incomes.

But they also illustrate an inevitable trade-off: Cheaper housing options are also a poorer store of value. While there is nothing wrong with purchasing an affordable flat just to meet immediate housing needs, it detracts from the principle of asset-building and does little for retirement preparation.

This is not so much a problem of housing policy as a fundamental limitation of using housing as social security.

Third, current CPF contribution rates – among the highest in the world – anticipate the funding of long-term mortgage commitments that can eventually be reconverted into retirement income.

But is it right to channel CPF savings into older HDB flats that are not clear-cut investments for retirement? And as the supply of cheaper flats with short leases increases, would it still be necessary to retain large sums of money in one’s CPF?

A conundrum arises as to whether CPF will remain the right channel to fund one’s housing needs, if the model of homeownership also starts to change.

Singaporeans would have more disposable income and may be in a better position to make individual choices on how best to finance their housing, including by renting, if employee contribution rates are lowered and income is less tied up in CPF accounts.

After all, when someone buys a very old flat, runs down the short remaining lease, then returns the flat to the HDB, there is little practical difference from renting.

In fact, tenants who rent have more mobility. They can move out anytime if they experience life changes, whereas owners of depreciating flats may have difficulties attracting buyers.

So it seems that out of the debate in recent months, basic questions have emerged regarding the policy rules for older HDB flats and monetisation schemes in old age. But there are also far-reaching implications for longstanding policy principles about homeownership and retirement preparation that have defined the structure of Singapore’s social security system.

In the future, we should expect the traditional lines between investment and consumption, or ownership and renting, to become less pronounced. Housing may only be an asset to some people, some of the time.

As a result, we also need to reconsider the viability of housing as social security and asset-building as a broad-based strategy for social policy.

The recent public interest in the 99-year HDB lease should therefore be seized upon as an opportunity to initiate a wider discussion and review of current policies on housing and retirement adequacy.

Ng Kok Hoe is assistant professor at the Lee Kuan Yew School of Public Policy.

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