HDB Info graphics
Quoting directly from HDB's website its example of LBS. This is what I get below.
Source: HDB Lease Buyback Scheme (as of 28 July 2017)
From the Info Graphic, we can infer two assumptions: i) a 65 year old flat is valued at $450,000 and ii) at the tail end of its 35 year lease, the HDB flat is valued at approximately $190,000. Let's delve into the two assumptions further.
Leasehold Valuation of Singapore Property
The Singapore Land Authority (SLA) has a leasehold table which shows how much value of your property is retained as the number of years on its lease runs down. The detailed breakdown of the leasehold table can be found here on page 3.
From the table, a property of 65 year lease remaining will retain 83% of its value; while a property with a remaining lease of 35 years will retain 64% of its value if we are to follow SLA's table. That means if you had bought a brand new 99 year HDB flat at $545,000; with 65 years left on its lease, the property should be valued at approximately $450,000 and when it has 35 years of its lease left, the valuation should be approximately $348,000.
Comparing HDB's illustrated example and following from SLA's valuation table, the difference in value of selling the tail end of your flat lease to HDB vs at the open market is about $148,000 (including the $10,000 LBS bonus which HDB gives on top of the $190,000). To summarize, you may be making a loss of $148,000 (in today's value) by signing to LBS compared to selling it in the open market in the future.
A few thoughts
The simple exercise has opened a few thoughts in my mind:
Does it mean that HDB valuers hold the view that should an influx of HDB owners decide to sell their 35 year lease remianing HDB flat, they would not be able to sell at the market predetermined value? If so, does it mean SLA's Leasehold Table does not apply to HDB's flat? And does it mean we should be depreciating our HDB flat's value at a faster rate?
In fact the appreciation of our HDB's flat value may not be as great as we think because depreciation at the front end of the lease is in fact higher than what we think; resulting in a much lower valuation at the tail end of the lease.
Conclusion
Based on HDB's illustrative example, it does not make much financial sense to take the LBS scheme unless you hold a very pessimistic outlook that prices of Singapore property market is set to fall by about 42.5% in real value during your lifetime. Contrary to what majority of the population is expecting.
Let's Gather Data
No doubt that the example HDB provides may be only illustrative by nature and they are in fact paying $340,000 to flat owners who are surrendering the tail end of their flat's 35 year lease under LBS.
However, all of these will require true data. For those who have signed for the LBS, You may comment below or email me at Cychan0913@gmail.com
Do Provide the following:
- No of years of lease sold under LBS;
- The total value all homeowners obtained from LBS;
- No of years left in your HDB's lease (include the years of lease sold to HDB under the LBS);
- Location of flat by stating which MRT Station it is closest to;
- Rough distance of how far the flat is from that particular MRT station [Please state in Km or if it is only 500 meter and below from the MRT station, just state 500 meters] (From there, I will be able to get a rough sensing of where the flat is and seek out its resale value by using HDB's resale flat price inquiry.)
Actually in the above example they give you higher than warranted if using cold hard market rates.
ReplyDeleteThey give you $190K becoz they applied a discount rate i.e. it is the PV of the value 30 years later when the flat is 64 yrs old.
From the SLA lease decay graph, the FV of the flat @ 64 yrs old is $348K.
That means they applied discount rate about 2.03% p.a. Which is panchan already (30-yr SGS yields currently 2.4+%).
Not sure if they will apply market discount rates in real life --- higher rates means lesser PV.
Hi Spur, Thanks for the highlight; in fact the discount rate under LBS might be higher than 2.04% because recipients of the scheme withdraw parts of the proceeds on a monthly basis via CPF life through their lifetime (from 65 years old to 95 years old) and not receive it as a lump sm amont of $190,000 at 65 years of age.
DeleteSecondly, from the SLA lease decay graph, you are assuming the current value of $348,000 will not increase 30 years into the future (due to inflation or ordinary asset inflation value).
Heheh, thanks.... For your 1st point, the elderly actually gains more as most of the payout is placed into CPF Life --- as long as the Life Fund achieves the targeted 3.75%-4.25% returns.
DeleteHence the elderly gains thru:
1. lower discount rate applied to calculate PV lumpsum.
2. CPF Life payout based on 3.75%-4.25% returns.
3. lifetime annuity even after full drawdown of lumpsum + earned interest returns.
The only problem I have is that the elderly needs to be confident of living till at least 85 to fully benefit. Otherwise he/she will be contributing a bit to other old folks who live longer. Hoho!!
For your 2nd point, I think the value of $348K for the flat at 64 yrs old (using your estimated figures) is already quite optimistic. That's the projected value, ceteris paribus, of the flat 30 years later just purely due to lease decay.
But in real life, definitely not ceteris paribus. For general inflation, that is more than compensated by the CPF Life 3.75%-4.25% being applied to the bulk of the PV payout.
For asset inflation itself, it will be a tough sell, even if there's a property bubble in the future. CPF monies will be heavily restricted & banned for many buyers to use for such old property. Banks will also be very hesitant to loan, maybe not more than 20%-25% of the valuation. In real life, very likely you will be forced to accept below valuation offers to move such old properties.
I'm not being pro-govt here, just stating the facts and/or calling it as I see it.