Source : HDB.gov.sg.

HDB reply on resale prices and HDB LBS example show Resale buyer are not overpaying

by Chris Kuan

The reply by Housing Development Board (HDB) on resale prices and Lease Buyback Scheme (LBS) sums don't seem to add up to resale buyers overpaying.

Ignatius Lourdesamy, a HDB director gave the reasons a refurbished HDB flat with 62 years lease is priced ($357k) higher than what an ST letter writer calculate as the depreciated price ($253k).

Other than the superior attributes of the refurbished flat (floor, location), Mr. Lourdesamy said, "Furthermore, the price of a property is not directly proportional to the length of its lease. Based on valuation principles widely used by professional valuers in Singapore, a lease’s value is front-loaded in the initial years of the lease to take into account the time-value of money."

If this is what it is, these valuation principles are valid through each phase of a lease, aren't they? A brand new 99 year lease's value is front loaded in say the first 35 years. Subsequently whatever the resale price is, then the remaining lease value is front loaded in say the next 30 years of the lease. So on and so forth resulting in low residual value right at the back end of the lease. But this is not what HDB is telling us in its Lease Buyback Scheme.

In the example provided, a pair of HDB owners has a 4-room HDB flat with 65 years lease remaining valued at $450k. In the LBS, the couple sold the last 35 years of the lease priced by HDB at $190k, 42% of the HDB flat's present value which is received as cash and top up to their CPF.

On the surface the back end of the lease is indeed lower. But wait a minute, the couple received $190k today, a sum of money meant to be a value realised in 30 years' time.

Remember time-value of money mentioned by Mr. Lourdesamy, "There are two reasons for it. One is time value for money. A thousand dollars today is worth more than $1,000 in 35 years’ time. Secondly, properties with very short outstanding lease tend to depreciate faster than properties with still very long lease."

So said then Minister of National Development Khaw Boon Wan back in 2014. Indeed, the $190k the couple received today is really the net present value of $390k in 30 year's time (standard methodology using 2.5% 10 year government bond yield as the risk free rate). So the value of the last 35 years of the lease is worth 87% of the flat's value today with 65 years left to go ($390k vs $450k).

Contrary to Mr Khaw's words and Mr Lourdesamy's inference, the flat did not depreciate much as the back end has a lot of value left since HDB has put a very high price on it.

If this is what HDB is really paying out in the LBS, then resale buyers are neither overpaying nor imprudent.

Or am I missing something? If not, I take back what I said about fair treatment of lease expiry - everyone should do an LBS, the government is compensating for lease expiry provided you do a LBS. Funny they didn't trumpet this though.

By the way, what is Lawrence Wong the present MND on about? Trying to talk down resale prices as a prelude to HDB cutting back on the LBS price was my initial thoughts?

Editor's note - Note that the above points are not applicable to resale buyers of 5-room flats as the flats are not eligible under the LBS. The main crux to determine if the resale buyers are overpaying for the old flats is whether HDB holds its side of the bargain to buy back the remaining value of the flat under LBS, if HDB does so, then the resale buyers are not overpaying.