While the majority of Singaporeans own their homes, quite a number of them, especially among the retirees, are asset-rich but cash-poor. And their numbers are growing with our rapidly ageing population.
Unless these retirees have other sources of income or can count on the financial support provided by their children, they will have to find ways to monetise the value of their homes.
Downgrading is not preferred as most people want to grow old in the homes and neighbourhoods they have lived in for a long time. Renting out rooms in the unit is an option, but besides concerns over the loss of privacy and security, the move may also be a gamble because one never knows what kind of tenants one gets. The trouble may not be worth the rental income.
Reverse mortgages had been proposed as one option, but the plans offered by OCBC Bank and NTUC Income in 2006 were discontinued because of a lack of demand. There are emotional and psychological barriers to reverse mortgages but beyond these, I suspect they failed simply because they weren’t attractive enough.
As it was a new market, those offering such mortgages had to build a large enough financial buffer so that they can be protected from losses, but this meant a smaller payout that made the scheme less attractive.
New markets such as reverse mortgages are usually best handled by the Government, at least in their early years. Thus, it comes as no surprise that the Government is having another go at its Lease Buyback Scheme — where HDB flat owners sell part of the lease balance back to the Government — by extending it to four-room units and raising the income ceiling for participation.
However, I fear the Lease Buyback Scheme may go the way of the reverse mortgages. Already, some are questioning why the unsold lease is worth more than the portion sold.
Assuming a stable market, the property’s value does not fall at a steady rate. First, there is the time value of money: A dollar today is worth more than a dollar in the future. Second, a property with a very short lease left tends to depreciate faster than one with a very long lease remaining. These are well-established principles.
The counter argument is that property appreciates over the long term — and the current evidence supports this. That is why most of us are so obsessed with property in Singapore. Some older HDB flats are worth many times what they were bought for decades ago even though the remaining number of years of lease has declined significantly.
With Singapore being such an attractive place to work and live in, it may be only in the last five years that the value of the flat depreciates rapidly. So whether the front portion is worth more than the back portion is debatable depending on the economic outlook.
Unlike the private sector, the Government is not a profit-maximiser and does not have to work in targeted profit margins into the scheme it is offering. In that sense, it can give flat owners the best deal. I see the Lease Buyback Scheme as a social good that needs to be provided to prepare Singapore as the population ages.
So let’s try and keep it simple. If straight-line depreciation of the flat’s value is what the population understands and perceives as fair, why not do that? I feel it is a small price to pay to gain wide acceptance for a scheme I see as necessary for the good of Singapore.
By Colin Tan – director of research and consultancy at Suntec Real Estate.
Source : Today – 26 Sep 2014