Rhetoric set aside, HDB flats are both owned and leased
Tue, Sep 04, 2018
THE debate over Housing & Development Board (HDB) flats has unfortunately been dominated by the rhetoric of whether the homes are owned or leased.
That either-or debate is misguided. Just as a tomato is not only either a fruit or a vegetable, but both; HDB flats do not behave as if they are assets that are only either owned or leased, but both.
Flat buyers obtain transferable equity in an asset, which means that, like owners, they are exposed to changes in the future value of the asset. But the asset also behaves like a long-term lease, because the right to that asset eventually runs out. This is not unlike other types of leasehold property, including private property on 99-year leases.
Those who argue that a flat is nothing but a long-term lease ignore the fact that, unlike most other residential tenancy agreements, the 99-year leasehold on a flat can be sold, with the seller pocketing any profits from the sale. Yes, there are restrictions on buying and renting out HDB flats, but there are always restrictions regardless of whether a property is freehold or leasehold. It is just a question of how many restrictions one has to deal with. Short-term rentals are disallowed in most freehold apartments, for example.
It is also untrue to argue that HDB flats confer no value. Even if the market price of the flat reaches zero after 99 years, the price that an owner-occupant paid for a new flat would represent subsidised rents. That is value, even if there is no capital gain from the asset.
But those who argue that a flat is purely ownership fail to sufficiently acknowledge the fact that, unlike typical freehold assets, there is a countdown clock that depreciates the value of the asset over time. The later that one acquires the flat, or the closer to the end of the leasehold, the less likely that a future appreciation in the residential property market can overcome the declining value of the leasehold.
It is important that the correct structure and mechanics are explained clearly to the public, especially as the older flats approach the end of their leaseholds. This will help to ensure that HDB flats are properly priced, especially in the resale market. Both flat owners and potential resale buyers must understand what will happen to the value of these assets with time.
Beyond the rhetoric, the public also needs more clarity on what to expect as the leaseholds run out. The recent announcement about the Voluntary Early Redevelopment Scheme (Vers) was a step in the right direction, but a fuller understanding will have to wait until details of the scheme are worked out.
At the same time, HDB must not neglect its core purpose, which is to provide affordable housing for Singaporeans. Putting affordable roofs over heads is not always aligned with providing a means to benefit from property market upswings. Schemes like Vers that help existing flat owners to profit from selling their flats can make new flats less affordable for first-time buyers if they set a higher floor for property prices. Left unchecked, this could result in increasingly burdensome subsidies for first-time buyers if affordability is to be preserved.
The fact that the HDB system skews towards ownership makes the issue of affordability particularly acute, because a large upfront lump sum payment to take equity is more burdensome for the occupant than paying smaller amounts of rent over time. Perhaps there is room to also examine options not just for those who want to be owners, but also for those who prefer to be renters, across the whole flat spectrum.