Will the Lease Buyback Scheme increase intergenerational inequality?

By Aloysius Chia

Recently, it was announced during the National Day Rally that the Lease Buyback Scheme will be extended to four-room flats.

Although details are still forthcoming, there seems to be a detail that seems to be missed entirely, and scarcely mentioned.

Inherent in the scheme is the idea to allow those who have retired or who are elderly and poor, to provide a means of sustenance for themselves when they are old, using it to supplement for their lack of income. It is meant to allow the elderly to ‘unlock part of their housing equity’, according to the Housing Development Board’s webpage about the scheme.

But there is nothing remarkable about the scheme that is anything new. This is because what is meant to sound like a type of assistance by the government, is actually one in which the poor elderly sell their own assets in order to fund the rest of their retirement.

According to Singstats, in 2013, 9.4% of resident households have no persons working, and 24% of all Singaporeans live in three-room HDB flats or smaller.

These households that have at least one family member employed earn an average of S$976 per month for those living in one- or two-room flats, and $2,216 for those in three-room flats, including CPF per employed person. That puts the average working person staying in these flats in the range of the 11th to 50th percentile of income.

But given that one of the eligibility criteria for the scheme is age 63, which is also at the same time the retirement age set by most companies, it can be assumed that most who resort to the Lease Buyback Scheme do not already have a steady source of income.

This is considering the fact that a flat will continue to appreciate in value if one still has a long term lease.

The scheme requires one to put what is gained from giving up a part of the term in order to meet the minimum sum (now S$155,000 for those aged 70 and below) into the purchase of a CPF Life plan that will provide an annuity until death.

Someone who takes up the scheme will leave 30 years of lease remaining in the flat. If the person dies within this period, the spouse or child may choose to live the remaining term, or the remaining amount paid to nominees, and the flat eventually goes back to HDB.

In effect, the scheme is encouraging those at the bottom third of the population who are more likely to take up the scheme to otherwise forgo what would be an appreciating and wealth enhancing asset.

Rather than wanting the bottom strata of society to retain their assets so that they could put it to future use and pass it on to the next generation, so as to prevent inequality from reproducing itself from one generation to the next, the government is instead introducing a scheme that does nothing for them, other than repackaging what they already own.

For future generations of the lower strata, whose opportunities are already limited by the mere fact that they earn below average incomes, or do not start at the same starting point as others, they will find that forgoing appreciating wealth is not a good idea.

Yet, why won’t the government just leave the poor alone, since this scheme simply prevents intergenerational wealth from accumulating?

Is the aim of the government to quickly end the lease of these people staying in three-room flats or smaller, so that their houses can be put up for more economically productive development?

The scheme brings forth all the ironies and bitter realities of staying in an HDB flat. It is not really a home, if you think about it, but a place that you rent for a long term and eventually exchange for “schemes”. Couples and other people who spend their life paying for it find that it doesn’t last very long after that.

Image – screen capture from Housing Development Board corporate video

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  • Enrique Kit

    I don’t think the kids will blame their parents for not leaving them any bequeath assets. If the parents have excess assets, then it would be nice to leave something for their next generation. But if you are not wealthy to leave an inheritance, there is no compulsion. It’s more important to take care of the present cost of living than be sentimental. By the time the parents pass on, the kids would probably approaching retirement age and most of their major expenses (e.g. sending their own kids to uni) would have been taken care of.

    Would it be right for people that are asset rich, cash poor to receive handouts from the government because they refuse to lease out some rooms, take a reverse mortgage or downgrade into smaller properties? These groups of homeowners are not poor in the real sense of the word, and they are in much better position than those whom are truly needy. Otherwise, people could be tempted to make imprudent purchase of a large and less affordable home without proper financial planning, with the expectation that the govt will someday feed them while they stay in comfort. This creates a moral hazard and not fair to the rest of us that live within our means, paying our taxes only to channel to those that try to cheat the system.

  • Enrique Kit

    Can you name some other countries where the leasehold properties does not factor in land cost?

    Do you even understand the meaning of leasehold? The property is yours- for 99 years only. So, we are paying for the cost for owning the property for 99 years. It doesn’t mean when you buy something, it will be yours forever. In Singapore, due to scarcity of land- it is expensive and we are paying for that tiny slice of land space.

    In other countries, the lease period varies, from 70 years to 999 years. Seriously, why do you worry too much about 99 or 999. Your kids may not even want to live there, lest your grandchildren. You won’t be around to worry over who should inherit or what is the value of the property. The only time you need to be concern is if you buy an old, resale flat with few remaining years before expiry. Then again, I am sure you will consider carefully the price which you will pay for it.