Sunday, August 26, 2018

What the new housing announcements mean for the HDB resale market

By Christine Li

23 August, 2018


The multi-pronged approach that the Government outlined this past week to resolve issues regarding the dwindling leases of HDB flats has by and large been well received by Singaporeans.

The new announcements by Prime Minister Lee Hsien Loong at the National Day Rally (NDR) could not have been more timely. Concerns over depleting leases have plagued the HDB resale market, with demand for ageing flats with leases of less than 60 years almost grounding to a halt. In some cases, home owners have had to reduce prices significantly before securing viewings.

In fact, over the last five years, the price gap between HDB resale flats and private properties has widened.

Based on the Housing Development Board (HDB) Resale Index and the Urban Redevelopment Authority Private Property Index, the gap between the two stands at 13.1 per cent in the second quarter of 2018.

This is much higher than the average gap of 5.4 per cent in the last five years and substantially above the smallest gap of 1.9 per cent in the fourth quarter of 2016.

The diverging performance in private properties and HDB resale market could be in part due to the lingering concerns over the value of ageing leasehold flats. 

[Assumptions, damn assumptions. It is not clear that the difference between the HDB Resale Index and the URA Private Property Index is due solely, mainly, or even significantly to the fall in prices of old flats with short leases. In fact she notes (or asserts) that "demand for ageing flats with leases of less than 60 years almost grounding to a halt". If sales of ageing flats are low or non-existent, then their drag on the index should be minimal. This is a hand wave analysis at best.]

Now that the Government has cleared the air about the fate of the HDB flats and sent an important signal that it is addressing the concerns of Singaporeans, this could well soon change.

[Most observers, cynically note that this may simply be an attempt to assuage the concerns of voters. Which is probably correct. ]

For owners who are worried about monetising their ageing HDB flats in their twilight years, there is now the Voluntary Early Redevelopment Scheme (VERS) to fall back on.

Owners will have the option of cashing out when these flats reach 70 years or beyond, and use the sales proceeds to fund the next purchase, probably at a subsidised rate.

[VERS is not guaranteed. The option may not arise. Owners will have to vote for VERS. It is NOT guaranteed that there will be sufficient votes to carry that option. What is the percentage required for the VERS option to be accepted? 75%? That has not been decided. But there is HIP2...]

There is also interim Home Improvement Programme (HIP and HIP 2) for home owners who do not intend to sell their flats and go through the hassle of moving, with the Government upkeeping the flats to make them conducive to live in until the end of the 99-year lease. 

[Right. They can swap the hassle of moving with the inconvenience and cost of "home improvements". HIP2 is intended to work in tandem with VERS. Specifically, it is to nudge the owners into voting for VERS. Owners of 70+ year old flats will be offered 3 options:

1) HIP 2. This will cost money. Even subsidised, elderly tenants with no income may be asked to foot a small part of the bill. For a flat with "decaying" value. You will also suffer the inconvenience of improvement works.
2) Voluntary Early Redevelopment Scheme (VERS). This will give owners some cash.
3) Do nothing, and run out the lease. No costs. No benefit.

Option 1 is to "motivate" owners to choose option 2.

So faced with the three options, what would you choose?

Option 1?

I don't think so.]

In addition, the Government is also looking into ways to let buyers of shorter-lease flats use more of their Central Provident Funds (CPF) for their purchases without compromising their retirement savings. 

[That would be compounding the original mistake.]

All of these new initiatives will help prospective HDB buyers to look at the resale market differently.

Liquidity could improve as confidence is restored since there are additional and more attractive options to monetise the flats.

[Love her optimism. Oh wait. She's a glorified property agent. Optimism is her default setting. I wouldn't describe the options as "attractive". But then I'm a curmudgeonly old man... or getting there. "Attractive" would be "oh wow! we should get an old flat! There are SO MANY advantages!"]

In short, the announcements are expected to uplift sentiments in the HDB resale market in the coming months or quarters. 

[Yes it is. And no more than that.]

With VERS and the possible relaxation of CPF usage, flat buyers could also become less sensitive to the declining HDB leases.

[That is NOT what the govt wants.]

This could spur demand for older flats in matured estates, which tend to be centrally-located and well-served by amenities and transport networks.

Sellers of these ageing flats are now in a stronger position to hold on to their asking prices. This could help to stem price declines in the ageing flats. 

[See above comment on "Optimism". I'm upgrading her to "giddy Optimism". ]

But as is always the case, the devil is in the details, which could take months before they are announced.

Furthermore, the newly announced initiatives will not be implemented at least until a decade later.

They also raise some questions. 

[Yes. I have some too. But I think my questions are different from yours.]

First up is the issue of funding such an ambitious redevelopment and upgrading programme. Where is the money going to come from? Is it too much for taxpayers to bear? Is the Government raising more taxes?

Second, even if the Government is able to find means to fund the projects, what could the compensation be like for VERS?

As we all know, for private en bloc process, owners set a minimum reserve price based on the highest potential the land plot could yield, along with the consideration of buying a replacement home.

To put it simply, if the outcome of en bloc does not guarantee a replacement unit, it is unlikely to take off.

[This may not be very clear. I believe what she means is that if you sell your VERS flat for $200k, but the cheapest 3-rm flat is $300k, would you sell? Which is a good point. 

If you are looking for a replacement flat. 

She's thinking like a property agent. Not thinking like an old person.

Maybe the aged owners don't need a replacement flat with 99 yr lease. Maybe they just want to monetise their "asset" and then stay with their grown-up children. Maybe they just want a smaller studio apartment with just 30 yr lease and elder-friendly features.]

In the instance of VERS, PM Lee has made it clear that the payout is likely to be less generous than the Selective En Bloc Redevelopment Scheme (SERS).

This is not surprising given the shorter remaining leases of VERS flats and also because SERS flats have “high development value” through intensified land use.

So what would be the benchmark for VERS and what is considered reasonable?

The Government will probably benchmark the payout against the future potential of the sites returning to the state, meaning the compensation package will not be hefty unless the redevelopment could significantly intensify the usage of the land.

It is also not feasible for the Government to take back public housing land and tender it out as commercial or private residential parcel in the name of optimising land use, as it goes against the original intent of the HDB to provide affordable public housing to the masses.

[True. Unless HDB's role and strategic goals change.]

In my view, the currently suspended Design Build Sell Scheme (DBSS) where flats are designed, built and sold by private developers could play a part.

Given the large scale of the redevelopment plans to regenerate ageing HDB towns, the Government could let private developers participate in the redevelopment process.

It could speed up the pace of regeneration as well as achieve a higher potential for public housing land.

[All the above? Property Developer's wet dream.]

This will in turn result in higher payout for owners who opt for VERS as the land value of these public housing sites is enhanced, while the previous residents will be moved to new estates developed by HDB.

The current DBSS will however have to be tweaked in order to make future DBSS flats more affordable for first-time home buyers.

Overall, the value proposition of HDB flats has improved with the latest announcements.

This however does not mean that HDB buyers no longer need to exercise prudence and can start paying top dollars for ageing assets. The exact payout for VERS is still unclear.

There is no need to speculate by rushing into the market now.

The best way to ensure that all flat owners are not negatively impacted by ageing leases is to encourage them not to worry about leaving a bequest for their offspring.

As PM Lee said, 99 years is a long time. It will definitely be able to last one to two generations.

Every Singaporean from each generation should have his or her fair chance of enjoying the fruits of the country's growth and prosperity by purchasing his or her own HDB flat, given that affordable public housing is likely to remain a long-term government policy priority.


Christine Li is senior director and head of research at property consultancy Cushman & Wakefield Singapore.

[For some other solutions (better ones (I think), see this blogpost (link). One simple solution is to allow AirBnB for lease-decayed flats. Read for details.]

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