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A question of time: The great HDB lease decay

debate
Is it just math, or is there merit in studying the data? How much does quantitative
research add to the issues at hand?

SAT, APR 06, 2019 - 5:50 AM

LEE MEIXIAN leemx@sph.com.sg @LeeMeixianBT

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07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

A QUESTION OF TIME: What can the data tell us about the great HDB lease decay debate? BT ILLUSTRATION:
CHNG CHOON HIONG & SIMON ANG

Key events

What the studies show

Old ats - once the storehouse of wealth for owners should their homes be chosen for
en-bloc redevelopment - have become a source of anxiety for residents after the
government two years ago cautioned against speculation of state buyouts of these
assets. The idea that the value of one's home can eventually run down to zero is a
terrifying thought, one which increasingly more researchers are studying in an attempt
to quantify the relationship between dwindling leases and Housing & Development
Board (HDB) resale prices. Crudely put, the studies so far have pointed to a unanimous
nding - that the decline of resale prices is certain as the length of lease decreases,
especially as limits on nancing kick in.

If home owners here have found themselves still able to sell their ats at a pro t, it is
because the decline of the ats' theoretical value has been more than o set by rapid
economic and property market growth since the 1960s.

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07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

Recent moves by the government to introduce the new Home Improvement Programme
(HIP) II for units at the 60- to 70-year mark, and Voluntary Early Redevelopment Scheme
(Vers) to allow at owners to vote if they want the authorities to take back their
apartments for redevelopment at the 70-year mark of their lease, appear to be some
ways the state is trying to ease concerns.

And just last month, the government said that it is looking into relaxing Central
Provident Fund (CPF) loan rules on the purchase of older resale ats. Currently, a home
owner can only use his CPF money for his at purchase if his age plus the number of
years left on the remaining lease of the property is at least 80 years, but even this
remains subject to restrictions. For ats whose remaining lease is less than 30 years, no
CPF money can be used at all.

Is there value to research?

SEE ALSO: HDB resale volume jumps 26.1% in March, prices inch up 0.2%: SRX

ADVERTISING

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07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

In recent months, studies looking into the e ect of dwindling leases have been met with
equal opposing forces of interest and dismissal from within the circle of government
o cials, academia, and property consultants.

Some consider it "mere math" that is not grounded in reality, especially when the price
trend for HDB resale ats has been an upward one for most part of the property cycle.

Others recognise that amid the barrage of qualitative commentary, some truth can be
gleaned from the objectivity of numbers.

It goes without saying, however, that every study comes with limitations. One real
limitation is the scarcity of old ats in the market to make up a robust sample size to
prove a trend.

But Michael Cho, founder of UrbanZoom, a homegrown arti cial-intelligence-enabled

research portal, believes that limitations do not diminish the value of such study.

ADVERTISING

A self-professed data geek, he says: "This topic is a highly quanti able one and given the
amount of data we have in Singapore, there's no reason why we shouldn't take
advantage of this to anchor our discussions based on observable evidence."

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07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

He rst thought of undertaking the study because he owns a HDB at that is turning 40
soon. "So this is something that I'm dying to nd out myself too. This is after all the
biggest nancial asset of my family, so I de nitely want to know if this is truly an asset
that can hold its value over the years, and therefore whether it is worth passing on to
the next generation."

Associate Professor Sing Tien Foo, Dean's Chair and director of the National University
of Singapore (NUS) Institute of Real Estate and Urban Studies, says that empirical
studies - as such studies usually are - are useful not just to show a trend but also to give
important insight to explain why things happens a certain way.

"It's very di erent from 'crystal balling', where you try to see what will happen in the
market in the next ve to 10 years, because this is dependent on a lot of moving parts
and conditions.

"This is not some theoretical argument of prices declining because of certain reasons,
but we observe and quantify this impact, and the next challenge is to explain what
causes these results.

For instance, we may understand that HDB ats survive depreciation e ects better than
private property beyond a certain age, but why?"

Asked to comment on the ndings of a recent unpublished SRX Property study, HDB
appears to still prefer caution in its approach to such studies, saying that "reports on
housing data are market sensitive in nature" and that "such data should be published
with due diligence, and any analysis done be fair, robust and properly contextualised".

SRX Property study

A recent study done by SRX Property, a subsidiary of Singapore Press Holdings which
publishes The Business Times, found that from 2006 to 2018, the majority of the HDB
ats sold made a pro t.

This may not come as a surprise,given that the o cial HDB resale index has increased
more than ve times since 1990.

But SRX's study showed that even in the post-2013 bearish years, transacted ats still
enjoyed capital gains, albeit lesser.
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07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

During that period, at owners tended to hold their ats for a longer time, seemingly
not in a hurry to sell unless a price match came along.

That said, over the entire 2006-2018 period, there was a distinct drop in capital gains for
ats in the 46-55 year old category. They made average capital gains of 17.7 per cent,
lower than the 30-40 per cent capital gains generated by the other age categories.

Their annualised appreciation rate (the yearly rate of return over the holding period)
was also signi cantly lower at 1.7 per cent, compared to 5-7 per cent in the other age
categories.

Such ats also seemed to have higher chances (four in 10) of making losses in absolute
terms, versus a frequency of one in 10 for other age categories, although their quantum
losses in absolute terms did not di er much from the rest of the age categories.

All in all, it seems that amid a rising market, very old ats don't appreciate nearly as
much as their younger counterparts, and are in fact four times more likely to be sold at
a loss compared with newer ats, while the value of ats that are 40 years old and
newer don't seem to be a ected much by age.

The limitations of the study include the sample size of 403 for transactions of older
resale ats aged 46-55 years, which is signi cantly smaller than that for ats of other
age groups, HDB points out.

"This is because the ats only came into this age group from this decade onwards.
Hence, the analysis for ats in this age group would not be comparable with that for
those in the other age groups."

Other industry watchers also noted the possibility of "selection bias", because the
samples comprise only of units that were transacted, and home sellers tend to only
want to sell at a pro t. The data thus does not cover "unrealised losses" of ats whose
value continues to depreciate but which has not been realised because they have not
been transacted.

NUS study

https://www.businesstimes.com.sg/brunch/a-question-of-time-the-great-hdb-lease-decay-debate?Echobox=1554566491&fbclid=IwAR0es7Q33zC8n17dUTb2t… 6/12
07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

A study by NUS that published its ndings in February this year also found that HDB
ats survive depreciation better than private condominiums when they are 30 years and
above.

It surmised that this was largely due to government e orts to upkeep old ats, which
helps to preserve their value, whereas a lack of similar maintenance for ageing private
properties leads them to depreciate more quickly in value.

Prof Sing, who was one of the authors of the study, says: "The problem seems more
serious for leasehold private property owners who face both aging and lease-decaying
e ects, as ageing can hasten economic obsoleteness of older buildings."

Aside from this, the study also believes that subsidy grants of up to S$50,000 for rst-
time buyers of resale ats further mitigate the price depreciation for HDB ats as the
properties age.

The study mapped age-related depreciation rates against transaction prices of resale
properties using data obtained from the Urban Redevelopment Authority and HDB. The
team studied the depreciation rates of resale homes from 1997 to 2017 using historical
resale transaction prices of HDB ats and private condominiums.

These transacted properties were divided into three housing types: HDB ats, 99-year
leasehold non-landed homes and freehold non-landed homes. The data was controlled
for non-age-related factors such as housing size, housing type, distance to the nearest
MRT station and to the Central Business District.

The study found that di erences in depreciation among freehold and leasehold private
homes and HDB ats appeared only after 10 years. Prices for all three housing types
showed decline as the property aged. After 10 years, private freehold homes
depreciated at a slower rate relative to private leasehold homes and HDB ats. In fact,
private leasehold homes and HDB ats depreciated at similar rates for up to two
decades. At the 21-year mark,the depreciation rate for HDB ats was about 3 per cent
while freehold private homes prices depreciated by more than 10 per cent. Leasehold
private home prices depreciated by more than 30 per cent when they reached the same
age.

The ndings also showed that the price declined at a much slower rate for HDB ats
aged 30 years and above, compared to private homes.
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07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

But Prof Sing admits that there is inevitable selection bias in the study, which only
included completed transactions. Had some of the older units in more run-down
buildings been sold, the depreciation e ect measured could have been even greater.
The other constrainthe identi ed was the researchers' inability to observe whether the
owner of a unit had carried out renovation before the transaction, which would
arti cially reduce the depreciation e ect and increase the value of the home.

UrbanZoom study

A study by UrbanZoom last year also found that HDB ats would depreciate, on average,
0.67 per cent per year across the rst four decades as their leases run down, assuming a
stagnant economy and property market with zero growth.

UrbanZoom combed through all completed HDB transactions from 1967 to 2013 to
identify pairs of adjacent blocks that are within 100 metres of each other, and
segmented them into buckets based on the di erence in the lease commencement year
between the corresponding pair.

What UrbanZoom found was that in the 10-25 year bracket, older HDB ats displayed a
"non-trivial" median discount of 12 per cent compared to their newer neighbours. The
di erence in value deepens with more years of di erence in the length of lease,
culminating in a median discount pushing close to 30 per cent for pairs of units that are
at least 38 years apart in age.

Again, one natural limitation was that there were not many observable transactions
beyond the 38-year range, given that HDB's public housing programme only started in
the 1970s. UrbanZoom also pointed toother factors that a ected sales, such as changes
in the borrowing limit and CPF usage limit for purchases of HDB ats when they cross
the 40-year mark.

HDB also gave its feedback on the study, noting limitations such as a lack of control for
location, storey height, oor area, extent of renovation, market conditions, and the
economic growth of the nation.

What's clear from the studies so far, is that HDB property, like all leasehold property, will
and does depreciate in value with time. Painful as that fact is to stomach for home
owners who have poured life savings into the asset and have to temper their

https://www.businesstimes.com.sg/brunch/a-question-of-time-the-great-hdb-lease-decay-debate?Echobox=1554566491&fbclid=IwAR0es7Q33zC8n17dUTb2t… 8/12
07/04/2019 A question of time: The great HDB lease decay debate, Brunch - THE BUSINESS TIMES

expectations, the HDB market is one that has a solid base of demand that will continue
to anchor prices. Upcoming changes in nancing terms could also act in favour of
values.

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