Should I be buying an old HDB flat?
Given that Singapore as a city state is less than 60 years old, we have not really encountered the issue first-hand of many HDB flats reaching their lease expiry of 99 years. However, this is an issue worth mulling over as we consider the larger property landscape of Singapore moving forward. It becomes an even more pressing issue when we take into account the fact that within 10 years, there will be more than 500,000 HDB flats that are more than 40 years old, and this is set against the backdrop of a rapidly ageing population.
With an ageing population, when the older generation passes on, their flats are likely to be inherited by their children, by which time, most of their children would already have HDB flats or private properties of their own. They are unlikely to be able to hold on to the older flats their parents have left them with, and would most probably have to sell them. So would older flats still be in demand then, given the deluge we would have of them in the open market 10-20 years from now?
Sure, older HDB flats have their appeal. They tend to be bigger in size, and are hence more liveable, especially with bigger families. They are usually found in mature estates, with well-established amenities and transportation networks all within a stone’s throw. It’s no wonder that older flats in Tiong Bahru, Queenstown and Bishan are still highly sought after, given their more central locations too. And because older flats have shorter remaining leases, many of them do sell for cheaper and are easier on the pocket for the layman. However, would these flats be able to still retain their current market value in say, 20 or 30 years’ time, when their leases may soon be expiring? If you buy a flat that is more than 40 years old, would the price of your flat depreciate to zero when the lease is up?
In the past, many people had the misconception that with older flats, the government would choose to do a collective sale of these flats, and the HDB dwellers would get to move into brand new HDB flats if their block goes en bloc. However, the Selective En Bloc Redevelopment Scheme (SERS) is currently applied to less than 5% of all HDB flats, and then National Development Minister Lawrence Wong had also clarified in March 2017 that SERS was offered only to HDB blocks located in sites with high redevelopment potential, and that for most HDB flats, their leases would eventually expire and the flats returned to the HDB. He was in fact cautioning people against paying high prices for older flats, in anticipation of the benefits of SERS. So, the SERS bubble has been burst with a dose of reality given from the horse’s (or HDB’s) mouth.
There is an alternative new scheme called the Voluntary Early Redevelopment Scheme (VERS) that was announced in August 2018, that could be applied to flats over 70 years old, where they could be sold back to HDB en bloc at prevailing market rates, provided the minimum mandate for such an en bloc sale was met. But this scheme is of course less attractive than SERS, given that older flats with such short leases would command a lower market price.
Also, when younger singles or couples want to buy an older flat, they have to ensure that the remaining lease of the property at the point of purchase is at least 20 years old and can cover the youngest buyer till the age of 95. If not, they would not be able to use their CPF to pay for the property up to the valuation limit. Furthermore, banks are less willing to process loans for flats with shorter leases, or give the maximum 75% loan for such flats. This has a direct impact on whether potential buyers have the cash reserves to buy such old flats, since they have to fork out more cash as less of their CPF Ordinary Account monies can be used and they also have to take a smaller bank loan (less than 75%) for such flats. Such considerations can in fact price out many younger individuals, as they cannot afford to fork out large sums of cash to buy an old HDB flat, and thus old HDB flats would have a smaller demand. A smaller demand for such flats inevitably means that the value (and the resale price) of such flats would further depreciate in the long run.
In short, when you consider buying an older flat, you have to take into account the future market price of your flat, and whether you are willing to live with possibly making a capital loss the longer you retain an older HDB flat. If you are only concerned with the convenience of a location, no matter the lease of the flat, then perhaps making a profit or loss would be irrelevant to you. But my guess is most of us would still prefer to buy a property that is an asset, and not a liability, in the future. That is also the reason why many, if they can afford to, would rather buy a private residential property, if it is within their means. Generally, private property prices appreciate more than HDB flat prices in the long run, and are hence a better asset for capital appreciation. More capital appreciation would aid you in building up your retirement nest egg, or for you to use the cash proceeds earned to finance your children’s tertiary education needs etc.
However, if buying a private property remains beyond the bounds for you, i think it makes practical sense to buy a relatively newer HDB flat, Yes, you would probably have to fork out more money for a newer flat with a longer lease, but there is still the possibility of you selling the flat in the future with some capital gained. Always buy a property with the future in mind, not only with your current needs in mind. You may tell yourself you would never sell your flat, but who really knows what the future holds? So it’s best never to get stuck with a property that could make a capital loss, if you ever have to sell it.
That’s my long answer to the question of whether you should be buying an old HDB flat. My short answer? It’s a no. 😄
Are there any other topics you would like me to write about? Or do you have any questions?
