Rising property prices spark debate on shorter HDB leases in Singapore

Property prices in Singapore, especially HDB apartments, have grown dramatically in recent decades. This has spurred the government to implement a series of property cooling measures—at least 15 by our count since 2009, with an average of one per year. While these policies assist to regulate demand, the fact is that in a tiny, highly populated city-state like Singapore (population of 6.04 million as of June 2024), we can anticipate housing prices to stay high for as long as the economy thrives.

The impact of these cooling measures has been significant, yet not entirely effective in curbing the rising property prices. Despite the government's efforts, the demand for housing in Singapore continues to outpace supply, driven by factors such as population growth, increasing affluence, and the city-state's reputation as a global financial hub. This persistent demand has led to a situation where even with regulatory interventions, property prices have maintained an upward trajectory, albeit at a more controlled pace.

At the same time, most Singaporeans realize the value of homeownership. Owning a house not only develops a sense of connection to the country, but it also gives financial stability, since homeowners are insulated from growing rental expenses that may deplete their available income. In retirement, owning a completely paid-up property allows people to live without having to pay rent.

This emphasis on homeownership has deep roots in Singapore's social and economic policies. The government has long promoted the idea of a "home-owning democracy," viewing it as a way to give citizens a stake in the nation's success and foster social stability. This policy has been largely successful, with over 90% of Singaporeans owning their homes. However, the rising property prices have begun to strain this model, making it increasingly challenging for younger generations to achieve the same level of homeownership as their parents.

However, when property prices rise, some potential homeowners may believe that acquiring a HDB flat—directly from the government or the resale market—has become too expensive. They may be hesitant to purchase the HDB property they desire owing to exorbitant pricing, especially if the monthly mortgage exceeds their comfort level. At the same time, they may still have essential goals, such as purchasing a larger HDB flat for their growing family or residing in a desirable area. Telling them to temper their expectations is not the best solution.

Offering HDB apartments with shorter leases is one way to make homeownership more affordable without sacrificing size or location. Currently, most HDB apartments are sold on a 99-year lease. By adopting shorter lease alternatives, such as 70-year leases, HDB apartments might be sold at reduced prices via direct BTO sales or the resale market. This may encourage Singaporeans to continue purchasing homes while keeping housing prices affordable.

The concept of shorter leases is not entirely new in Singapore's property landscape. In recent years, the government has introduced various schemes that involve shorter lease periods, such as the Short Lease 2-Room Flexi flats for seniors. These initiatives have shown that there is a market for properties with non-standard lease terms, especially among specific demographic groups. Expanding this concept to a broader range of HDB flats could potentially address the affordability issues faced by many Singaporeans, particularly young families and first-time homebuyers.

How Much Cheaper Will HDB Flats Be?

With all other things being equal, a HDB flat with a shorter lease would be less expensive than one with a longer lease. But, how much cheaper would they be?

To investigate this, we examined the HDB resale market and BTO releases, citing an article by our friends at Stacked Homes. According to their findings, 4-room HDB apartments that are 0-9 years old cost an average of $676,377. In comparison, 4-room apartments that are 30-39 years old sell for an average of $523,132, which is almost 22% less.

While this is a rough estimate that does not take into account the exact location or the evolution of 4-room HDB flats over time, it demonstrates that the open market's general sentiment is to pay about 22% less for a flat with a remaining lease of 60-70 years than for one with 90-99 years left on its lease.

In the BTO market, where HDB sets prices, we may look at the cost of 2-room Flexi apartments. These apartments allow qualifying candidates to obtain a shorter lease at a lesser cost.

Looking at rates from a 2019 BTO launch, HDB offered 2-room apartments with a 45-year lease for 60% of what the same flat would cost with a 99-year lease, or around 40% less. If we compute the price difference using a straight-line relationship (40 percent less for 54 less years on the lease), a flat with a 70-year lease would sell for around 78% of its initial price, or about 22% less than a flat with a full 99-year lease.

We wish to emphasize that this is not an exact science, since market demand constantly influences price. If more purchasers are willing to buy flats with shorter leases, the 22% discount we computed for units with a 70-year remaining lease may drop.

Furthermore, we believe it is speculative to assume that HDB would price a 70-year lease apartment exactly 22% cheaper, based on the pricing model for 2-room flats with a 45-year lease.

In reality, when HDB held a Selective En bloc Redevelopment Scheme (SERS) exercise in 2022, it gave residents the option of purchasing a new replacement unit with a shorter 50-year lease rather than a new 99-year lease. Notably, the 50-year lease was priced at around 75% of the cost of a 99-year lease, or about 25% less.

This means that our estimate of a 22% reduction on a 70-year lease may be somewhat generous in contrast. However, for the time being, this preliminary estimate is the best comparison we can provide.

It's important to note that the potential savings from shorter lease HDB flats extend beyond the initial purchase price. Buyers of these units would likely face lower mortgage payments, potentially freeing up more of their monthly income for other expenses or savings. This could have a positive ripple effect on the overall financial well-being of Singaporean households. Additionally, the lower entry price could make it easier for more people to enter the property market, potentially leading to a more inclusive housing landscape.

Will HDB Policy Change?

While HDB presently exclusively offers 2-room Flexi flats with leases of less than 99 years, it is not unrealistic to anticipate that rules may alter in the future if situations allow. As previously stated, HDB has already given homeowners the option of purchasing a new unit with a 50-year lease during a SERS exercise, rather than the conventional 99-year lease.

Furthermore, HDB currently operates the Lease Buyback Scheme, which allows elderly Singaporeans to sell a portion of their flat's remaining lease back to the government in return for extra retirement income. Selling HDB apartments with shorter leases from the start isn't much different from this, as both require monetizing a portion of the flat lease.

Who Will Benefit from Shorter Leases?

Most HDB apartments now have a 99-year lease, which should last at least two generations. Even if someone buys a HDB property at 21, they will need to live until 120 to outlive the lease, which means the flat is virtually always passed down to the next generation.

However, for homeowners who are single or married and do not have children, leaving their house may not be a top concern. In these instances, a cheaper flat with a shorter lease may be more appealing. For example, a 30-year-old acquiring a 70-year lease flat will most certainly find it more than adequate for their lifetime.

Even for families with children, handing down a HDB apartment may not be worth much if future generations decide to buy their own properties. In these circumstances, inheriting an older flat with a declining lease would most likely end in it being sold as part of the estate, contributing little other than financial benefit.

Lower-income families may find it more enticing to buy a less expensive unit with a shorter lease. This would enable them to satisfy their home requirements without incurring the financial burden of a full 99-year lease. This might enable flexibility for people in a variety of situations, including those who prioritize affordability or do not have long-term generational housing plans.

While the introduction of shorter lease HDB flats could provide numerous benefits, it's crucial to consider potential challenges and long-term implications. One concern is the impact on the overall property market and wealth accumulation strategies of Singaporeans. HDB flats have traditionally been seen as assets that appreciate over time, contributing significantly to many families' wealth. A shift towards shorter leases could alter this dynamic, potentially affecting retirement planning and intergenerational wealth transfer. Additionally, there may be concerns about the creation of a 'two-tier' housing market, with potential social implications. Policymakers would need to carefully balance these factors to ensure that any changes to the lease system contribute positively to Singapore's housing landscape and social fabric.