SINGAPORE — It has been reported by the Straits Times that about 9,700 households have taken up the Housing Development Board (HDB)’s Lease Buyback Scheme (LBS) as at December 2022, with nearly 70 per cent of them receiving between $100,000 and $200,000 for selling part of their remaining flat leases to the housing board.
Giving an update on the scheme on Sunday, HDB said that about 55 per cent of the households who took it up live in three-room or smaller flats, while about 31 per cent live in four-room flats, and the remainder – about 13 per cent – live in five-room or larger flats.
HDB noted that since 2020, the yearly take-up of the scheme has “remained steady at around 1,500 households”.
Under LBS, which was launched in 2009, those aged 65 and older can sell part of their flat’s lease back to HDB, while retaining lease lengths from 15 to 35 years, in five-year increments.
The scheme, which requires retained leases to cover the flat’s youngest owner until the age of 95, provides an option for seniors to convert part of their remaining leases into retirement income.
According to HDB, 61 per cent chose to retain 30 years of their lease, about 19 per cent opted for 25 years, 9 per cent went for 20 years, while about 5 per cent each chose 15- and 35-year leases, respectively.
ST cited an example of Madam Teo Siew Lian, 75, who lives in a four-room flat at Block 79A Toa Payoh Central, as one of those who opted for the lease buyback scheme.
She chose to retain 25 years of her remaining lease, receiving about $400,000 in proceeds for selling the rest of it back to HDB in September 2022.
About half went to her CPF Retirement Account and CPF Life plan, and the other half was given back to her in cash.
The freelance travel agent, who is unmarried and lives alone, had considered selling her home after living there for more than ten years. But after looking around at smaller flats in other estates, she decided it was too much of a hassle to move.
Unlike some of the media reports in the past, the ST article seems to be missing the following information of Mdm Tan:
1) How old is her flat?
2) How much is the HDB paying her for the remaining lease to the HDB, and how much is she paying to HDB to retain her 25-year lease?
Since the article states, “after living there for more than ten years”, does it mean that her flat is only ten years old, and an 89-year lease remaining?
Let’s look at an example of a previous lease buyback reported on TOC in 2014.
“In the article by the Straits Times on 13 Jan, it was reported that elders such as the one mentioned in the article, 68-year-old Mr Tan, a single male Singaporean have found a solution to their woes through the HDB Housing Development Board (HDB)’s schemes. Mr Tan, the retired senior clerk lost the bulk of his $300,000 savings by betting heavily on Toto.
He then sold his three-room flat back to HDB under the Lease Buyback Scheme for about $360,000 in 2013 and paid HDB $222,900 for a 30-year lease on the flat, so he could continue to live in it.
It is reported that about $120,000 of the net proceeds is transferred into his CPF Retirement Account, and he receives a monthly payout of $731 from the account.
Apart from the monthly payout, he also received a $20,000 bonus in cash.
So we heard what Mr Tan got to gain from the scheme, now let’s try to analyse what this may mean for the HDB.
HDB may stand to gain $2.2 million?
The $222,900 that Mr Tan pays to HDB and if left to compound at 4% for 30 years, comes to a sum of $859,133.
The current flat value is $360,000, and if the flat appreciates at 4.6 per cent per annum for the 30-year lease, the flat value for HDB at the end of 30 years becomes $1,387,564. (The HDB Resale Price Index increased by 145.9 per cent or 4.6 per cent per annum, in the last 20 years (69.9 4Q 2002 to171.9 4Q 2022)
So, does it mean that in this case study, the HDB may stand to gain $2,246,697 ($859,133 + $1,387,564)?
The net payment by the HDB is actually $132,100 ($360,000 – $227,900) – but of this – $120,000 goes to his CPF account.
So, from a cash flow perspective – the $120,000 may be utilised by the Government – such as being invested, as it would become part of the overall CPF funds.
The ST article further touched on the story of Mr Tan of him, saying that he wanted to sell his flat in the open market but did not want to do so as he is very used to his surroundings after living in the area for more than 30 years.
Mr Tan also said that he brought his flat in Toa Payoh for $45,000 in 1982.
So based on what Mr Tan has shared, the flat that he lived in actually appreciated by 6.9% per annum over the last 31 years – more than the 4.6% assumed in the above calculations.
In contrast, let’s examine what normally happens in a typical reverse mortgage in other countries (currently, there are no reverse mortgage schemes in Singapore)
The $20,000 cash CPF Silver Bonus given for using the flat’s sale proceeds to top-up one’s CPF Minimum Sum, plus the $731 monthly CPF Life monthly annuity – compounded at say 5% as a loan – becomes $700,271 after 30 years
So, if the flat owner dies or decides to sell after 30 years – the net proceeds available to the flat owner or his or her estate is $859,729 ($1.56 million – $700,271).
In this sense, the flat owner may end up losing $859,729 while the HDB may gain $2.2 million.
Another shortcoming may be that there is the uncertainty as to what happens if the flat owners are still alive after the 30-year lease.
The assurances being given so far that arrangements will be made to enable the lease to be extended are not good enough.
In contrast, in a typical reverse mortgage in other countries – the retiree gets to stay until his or her death.
HDB may realize gains earlier?
Since Mr Tan is 68 years old, chances are quite low that he will get to live up to the 30-year lease which he has paid for to the HDB.
So, does it mean that the HDB may likely take possession of the flat earlier than the 30 years – and in a way, get to realize their gains on the flat even earlier?”
(Note: Minor edits have been made to the above article to reflect changes from 2014 to now. And of course, no one could have known that in about 3 years after the above article was written – that S’poreans would be reminded in Mar 2017 – that their flats would become worthless, at the end of the typical 99-year lease, after decades of the consistent narrative of the “HDB asset enhancement policy”)