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What is Lease Buyback and how does it work?

Posted on 2 Oct 2014 | Comments Off

The Lease Buyback Scheme is just another way of how our government intends to transfer wealth to help low-income elderly achieve a certain level of financial independence in their retirement years.

During the recent National Day Rally, Prime Minister Lee Hsien Loong mentioned that the Lease Buyback Scheme (LBS) would be extended to 4-room HDB flats. When you buy a flat in your twenties and thirties, we doubt that you plan to live throughout the full 99-year period. Hence, this announcement by PM Lee was timely and shows that the government has listened to the concerns of Singaporeans.

So how does the LBS work and what are its effects on Singaporeans?

Assumptions:
•   The couple officially holds the keys to the HDB at age 34
•   Currently, both husband and wife are 63 years old
•   Remainder of 70-year lease
•   Average 4-room HDB worth $471,359
•   Retains 30-year lease and selling the remainder 40-year lease to HDB

Results:
•   Obtains $201,386 as payment selling the remainder 40-year lease
•   Lease Buyback bonus of $20,000
•   A total of $221,386
•   Remainder 30-year lease left to stay in the same HDB

Methodology:
•   Couple holds keys at 34, meaning they made their BTO purchase at 29 years old
•   Lived in the HDB for 29 years
•   Average 4-room HDB value is the average of the 4-room median resale value from HDB
•   $201,386 is calculated by using HDB’s example on 3-room flat lease proportion equating to 42.7 percent of the median resale value

a) Will we get over $220,000 in cash by selling the remaining 40-year lease?

This depends on whether you have met the minimum sum (MS) in your retirement account (RA). If you and your spouse have not met the MS of $161,000 from 2015, then the amount will be used to top up your RA first before receiving the remainder in cash. The minimum amount of cash you will receive is the $20,000 LBS bonus.

b) I have sufficient amount in my RA to meet the minimum sum, so how?

You would then receive it entirely in cash. However, we would like to ask you, then why do you want to apply for LBS? You would be better off just holding your HDB and allow its price to appreciate over time or rent it out. You will have better yield for the property.

c) So what would you recommend to Singaporeans who can achieve MS?

We would recommend to Singaporeans who are able to meet the MS to never apply for the LBS programme for these reasons:
1.   You only hold 30-years lease of your property
2.   You can only sell the property back to HDB and not to the open market
3.   Your property will only depreciate from then on and not appreciate despite increasing property prices
4.   You will only get 1x payment from HDB. If you were to rent out your property, given 70 years left, you will have a high probability of making a much greater yield on your property

d) Then why did the government create such a scheme?

As mentioned in the first paragraph, this scheme is to help low-income elderly achieve a certain level of financial independence. That can be achieved by topping up sufficient amount into the RA account to make a CPF Life purchase.

Conclusion

The LBS was created to aid lower income Singaporeans, as an option to provide security when they get older and are unable to generate income for simple survivability.

Hence, we would not recommend average Singaporeans to participate in such a scheme because it will be detrimental to your overall wealth accumulation in the long run.

Special mention

Singapore has been growing rapidly and this is even more visible in recent times. As a country, we should always look out for our countrymen who are lagging behind. A scheme such as LBS is one such method of looking out for Singaporeans after retirement. In addition, NTUC looks out for Singaporeans during the course of active working years by lobbying for the increment of CPF contribution rates by employers.

Article contributed by Marcus Luke Chua, a finance professional with experience in venture capital as well as one of the top three largest international credit rating agencies. He is also a writer for dollarsandsense.sg. Through the website, he wishes to convey the importance of financial literacy and the benefits it will bring in the long run.

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Posted in HDB

Tagged HDB, LBS, Lease Buyback Scheme

Cooling resale market: Not time to boost demand

Posted on 25 Jul 2014 | Comments Off

THE cooling demand for resale Housing Board flats has put some sellers in a quandary.

These sellers are those who have already got, or will soon get, their keys to newly completed Build-To-Order (BTO) flats or executive condominiums.

They have to sell their existing Housing Board (HDB) flats within six months of getting their new homes. But with buyers thin on the ground, some can’t find buyers within that time frame. So far, the HDB has been flexible and given them more time to sell their flats.

But how tenable is this situation, and should more be done?

Anecdotally, a handful of sellers are asking to collect their keys later, or for an extension of the deadline to sell their flats. These will give them more time to find a buyer for their unit.

The issue was raised by MP Lee Bee Wah on her Facebook page recently.

In the first half of this year, the HDB got 18 requests a month to delay the collection of keys.

But is this a matter of sellers holding out for high prices?

One expert thought so. “I think most HDB resale flat sellers are finding it difficult to sell their flat because the price that is offered is too low for their consideration,” says R’ST Research director Ong Kah Seng.

But some sellers have said there were no viewers, let alone offers, for their flats.

How did this situation come about, of people being unable to sell their flats to gain possession of a new one?

It’s partly due to government property cooling measures.

Soaring HDB resale prices caused unhappiness during the 2011 General Election. Since then, a flood of new flats has been built. Home loan curbs have lowered demand, meaning lower prices and fewer flats sold.

As of June, the Singapore Real Estate Exchange’s HDB resale price index has fallen by 6.8 per cent from its peak in April 2013.

Last month, 1,315 flats changed hands, down from 2011’s average of more than 2,000. In this weak market, the difficulty some BTO buyers face in disposing of their existing flats may be an unintended consequence, but is also an unsurprising one.

The Government arguably bears some responsibility for their plight. But what should it do?

If the problem is a lack of buyers, the obvious solution might be to boost demand.

One reader wrote to me with the suggestion that property curbs be eased on the resale market, so that the market can pick up again.

Another reader had a specific tweak in mind: Allow private property owners to buy resale HDB flats, as was the case until 2010. Current rules require them to give up their private home if they want a resale flat. If this is relaxed, they could form a pool of ready buyers, said the reader.

But when posed this question by The Straits Times, some property experts dismissed this idea.

Any attempt to boost demand has wide-ranging effects, as this very problem demonstrates. The point of cooling measures was to reduce demand and bring prices down. Raising demand would risk raising prices again.

More to the point, it would be a very blunt solution for what is essentially a niche problem.

Most new flat owners don’t have an existing HDB flat to sell. Only “second-timers” do and they are a minority of BTO buyers. They form no more than 30 per cent of those buying two- and three-room flats, and 15 per cent for larger flats in non-mature estates.

For mature estates, a mere 5 per cent of the BTO supply is reserved for them. Of these, only a tiny number has problems disposing of the existing flat.

The 18 requests for delayed key collection each month in the first half of this year is a smaller proportion of all keys handed over than the 11 requests a month in the second half of last year.

Over the last one year, such requests represent less than 1 per cent of all flats to be handed over.

Mr Ong adds: “It may be better to grant such sellers a longer period to dispose of their flat, instead of introducing new types of buyers for resale flats, which might affect the dynamics and pricing equilibrium that the recent cooling measures have painstakingly hoped to better.”

The HDB has essentially been doing this, by considering and often granting deadline extensions. This may not seem like a long-term solution. But in the context of an ever-changing property market, it might well suffice.

OrangeTee head of research Christine Li thinks that HDB resale transaction volumes could bottom out this year.

Admittedly, things could also worsen. This year will see over 28,000 completed BTO flats and 17,000 private residential units.

This could mean a flood of people trying to offload their flats, making it harder to do so.

If the situation indeed worsens and more needs to be done, then targeted measures may be needed. For now, it is worth waiting to see if changing market conditions can do the trick.