VERS and the relaxation of CPF rules – kicking an empty promise further down the road?

At the National Day Rally last Sunday, Prime Minister Lee Hsien Loong said that the government will launch a scheme to deal with older HDB flats whose values will revert to zero as their leases run out. He suggested a Voluntary Early Redevelopment Scheme (VERS) where the government would buy back HDB flats with less than 20 years of lease remaining subject to resident's approval.

At this point, nothing has been confirmed yet as VERS will only start in about 20 years’ time when some flats reach 70 years old. This is because the government needs more time on how to select the precincts, space the redevelopments over time, iron out the details of the compensation and how to afford this scheme.

While this may sound promising, it does not deal with the current situation whereby the owners of older HDB flats are finding it increasingly difficult to sell their flats. Earlier this year, an owner of a older 3-room flat in Queenstown had to settle for 15% less after it was revealed that the value of HDB flats will revert to zero upon expiry of the lease.

There also could be other problems. On the same day as PM Lee's announcement, Chairman of the Government Parliamentary Committee for National Development and Alex Yam said that this scheme may bring about an acrimonious relationship with neighbours. “But the issue… is the acrimony that will come about, this idea of one group versus another, I want to stay, I don’t want to stay."

To this end, Minister of National Development Lawrence Wong has suggested in a blog post on Mon (20 Aug) that his Ministry will work with the CPF board to allow the use of CPF Monies to allow one to purchase an older HDB flat. Currently, CPF members cannot use their savings to buy a flat if the remaining lease is less than 30 years while there are also restrictions on older flats.

The 4G leader noted that there is still “scope to provide more flexibility for buyers of shorter-lease flats while safeguarding their retirement adequacy. So we are working with CPFB to review and update the rules”.

Nonetheless, experts interviewed by the TODAY newspaper have cautioned against this.

The head of research at one real estate research firm said that if buyers are allowed to put too much of their CPF savings in real estate, then the “original intention of having CPF as a pension fund would be lost." He suggested that there should be a “cap and limit” in this matter.

Another expert was more candid in his criticism, saying that the government was simply "kicking the can down the road" by trying to "placate today's owners who are afraid that their old flats can't sell" by expanding the demand for older HDB flats through the relaxation of CPF rules.

This is dangerous as "today's buyers will face a steeper price depreciation within the next 20 years" and warned that it is not wise to allow buyers to put "more and more of their CPF savings to an older property that is essentially depreciating to zero (value)".

Although the market response has been warm over this matter, this is not a panacea to a failed “asset enhancement” promise. The VERS remains a policy that has yet to materialise while the proposed CPF measures only serve to kick the problem down the road.

Ultimately, the situation remains urgent - more than 400,000 HDB flats will be left with a remaining lease of 59 years or less by 2030.