Tuesday, 3 October 2023

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An HDB flat is for building a home, not an asset or a nest egg

by Ng E-Jay

Approximately three decades after the Singapore government mooted the concept of asset enhancement and the evolution of public housing as a retirement nest egg for Singaporeans, it is time to confront some harsh realities.

Firstly, asset appreciation of leasehold property such as HDB flats and private property like condominiums has a natural time limit of 99 years, which is the duration of the lease. This means that as much as our houses can initially be expected to appreciate in value as the population rises and the economy grows, there will always be an inflection point, somewhere in the 50th to 80th year period, in which the value of the property will reverse course and head toward zero.

In order to benefit financially from asset enhancement, home owners would therefore have to time the market. They will have to engage in some element of speculation, albeit with a longer time horizon than say, equities. This much will always remain true: The greater the asset moves away from fair value, the greater will be its volatility and risk, and the more certain will be its pending downside.

To emphasize, when one generation passes the property on to the next generation, the purpose can no longer be for asset enhancement. Parents can at most bequeath a home for their children to reside in, not a nest egg to help their kids in their retirement. Offspring who are fortunate to receive such a gift from their parents must therefore attenuate their expectations and divest themselves from the notion of asset enhancement.

Secondly, it has become clear, at least to me, that a piece of property derives a significant proportiion of its long-term intrinsic value from the land on which it is built.

It is therefore my contention that a home owner should consider himself or herself as owning an asset only if he or she also owns the underlying land. The house itself may be periodically upgraded, it may be renovated, or it may even be demolished after some time, but as long as the land is owned by the individual and not the state, the individual can claim to own an enduring asset, and even a physical stake in the nation itself. The house itself may come and go, but the land will never depreciate in value as long as the country remains strong and secure. It is the land that is the real asset, not the house.

In the case of HDB flats, the Housing Development Board is the owner of the land, having purchased it from Singapore Land Authority. HDB therefore is the only asset owner in this regard.

An asset is owned by the individual only in the case of strata-titled condominiums where each homeowner owns a fractional part of the land, or in non-strata titled property like freehold bungalows where owners directly own the land through a land title. Unlike them, HDB dwellers are not owners of assets.

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