I’ve been thinking about my next steps with property. Currently, we are still under the minimum occupation period (MOP) for our HDB, which will be up in about 2 years time. We have the ability to upgrade, and it led me to thinking about the difference between freehold and leasehold.
I wanted to talk about the 99 year leasehold that exists for all Singapore HDBs, and what will happen once the lease is up.
What is fairly clear to me is that the value of a HDB will eventually go to zero.
First of all, the building itself cannot survive 100 years. The steel, pipes, and wiring will all deteriorate fall ahead of 100 years. Some materials can be replaced, but some cannot, and it will become unlivable without substantial additional costs. Frankly some HDB flats already look terrible past 20 years old, and I can’t imagine young families moving in.
Secondly, land sales are a very significant portion of government revenue. With all the costs of COVID and other social costs e.g. ageing population, it is unsustainable to give away land for free. It is also unfair for the younger generation to buy over such old flats.
It is simply impossible that the government can renew or extend the lease, or build up a new flat to compensate, like what some people are expecting. Sure, there is VERS (Voluntary Early Redevelopment Scheme), but I suspect it is more of a consolation prize, rather than compensation at market prices.
Despite the government’s repeated reminders, most people haven’t woken up to the idea that their HDB will go to zero eventually. The government knows it and tells people. The banks know it because they have age limits on their loans. But many sellers don’t, and they are still pricing their flats relatively highly.
This might seem like a far off problem, as the first flats in Singapore were built around the 1960s. That means that there is still about 40 years away from the first leases expiring.
But as mentioned, people will realise the price will go to zero much earlier than that. My guess is about 20-30 years.
When that happens, I think the premium on freehold properties will go up. People will realise that leasehold does expire, property prices do not increase blindly, and I expect most will start flocking to freehold. This will become harder and harder to do as the government is not likely to create more freehold properties. So a low and declining supply, coupled with increasing demand.
The inverse is likely to happen with old HDB flats, with a high and growing supply and increasing desperate attempts to pass the hot potato. Banks and government will have to change the rules to allow the elderly to cash out.
This is a fairly unique Singapore problem as most other countries don’t have this leasehold concept. You own the house AND the land. But it is what it is. There are also implications on many people’s retirement. No easy answers there, but I’m sure our government will not leave retirees homeless.
This same return to zero logic doesn’t just apply to HDBs, it applies to leasehold condos too. The value will go to zero. There is probably more flexibility to en-bloc, but that doesn’t escape the fact that land costs have to be renewed. The lease isn’t renewed for free, and developers pay to extend the land lease. Someone always pays.
While I still have plenty of time, it does give me a lot of reason to buy freehold for my next home. New 99 year old condos and HDBs probably won’t be affected too much, it won’t be a problem for the first generation of owners.
At the same time, I don’t need to create inter-generational wealth. My kid can and should buy his own house. If I can find a large and suitable place that can last the rest of my life, why not take the short lease? It can make sense as long as the price is right. Who knows, I might help a senior cash out.
Still plenty of time to think about it.