Property & Home Loans

Singapore's 99-Year Lease of Residential Properties: Weighing the Facts and Possible Solutions

We explore some of the facts around property market in Singapore, as well as the plausibility of different alternatives to the 99-year lease expiration of HDB units in Singapore.

There has been a very intense discussion around what is going to happen when 99-year lease of HDB units in Singapore expire. While some officials have been hinting that lease willl indeed expire and homeowners may have to return their properties back to the government, some consumers have also been contending this issue. But, what other alternatives are there? Below, we explore some of the facts around property prices in Singapore, as well as the plausibility of alternatives to the lease expiration.

Real Estate Market in Singapore vs Similar Asian Cities

While Singapore isn't known to be very cheap city to live in, evidence suggests that the real estate market in Singapore would be much more expensive had it not been for the HDB programme. For example, Singapore's private property prices are actually very similar to those of Seoul, Hong Kong, Beijing and Shanghai where population density is quite comparable to that of Singapore's. Given that population density is one of the major driving factors of supply and demand dynamic in real estate, it's quite possible that flats in Singapore could cost just as much as they do in Seoul or Hong Kong if there were no public housing. Owing to the cheap HDB price, Singapore has been able to achieve an extremely high home ownership rate of 90%, while Seoul and Hong Kong continue to remain at 50-60% range.

Comparing Singapore's real estate market to those of other Asian cities

Should the Government Privatize All Real Estate Activities?

Given the dynamic discussed above, it seems unfeasible to look to complete privatization of real estate as an alternative to the current 99-year lease system. If pricing of properties were to be decided completely by market supply and demand, real estate prices could increase by many fold in Singapore. To illustrate, HDB units in Toa Payoh currently cost somewhere around S$400 per square foot, while private condo units in the same area are listed at around S$1,900 per square foot as of May 2018.

HDBs cost a fraction of what condos cost in similar areas in Singapore

Therefore, a complete privatization where all homeowners are entitled to their property forever may property prices to skyrocket. If every home in Singapore cost as much as condos do now, the increase in price could be so large that a lot of people may not be able to afford to buy a home even with the help of financing from banks. At the worst case scenario, it could even cause the homeownership in Singapore to drop down to 50-60%, meaning around 30% of families may find themselves unable to afford to own an apartment anymore.

Plausibility of Lease Extensions: a Potential Happy Medium?

Having said that, there are some alternatives methods that could be less dramatic. For example, what if owners were given the ability to renew their lease for a small fee? China has already signaled that it may allow residential property owners in the country to renew their 70-year lease without much trouble. Admittedly, China isn't the most appropriate point of comparison because the government doesn't provide a public housing like HDB and property prices in cities like Beijing and Shanghai are high compared to HDB prices. But, there are still softer ways of extending the lease for Singaporeans, such as paying a fee to renew the lease or extending the lease only for buyers of resale flats.

This could solve multiple problems at the same time. First, it would allow HDB owners to either maintain their home ownership for more than just 2 generations. Secondly, people can also monetize their property more easily since they won't have to worry about their ability to sell their flat with only 10 to 20 years of lease left. Thirdly, it could also allow the government to collect some revenue from renewal or extension fees, which can then be used to fund more HDB activities.

Parting Thoughts

Without getting too political, we attempted to weigh in on the issue of HDB lease by providing an international perspective on the Singaporean real estate market. It seems undeniable that the government has provided an ample amount of financial support in promoting home ownership in Singapore by lowering its property prices. However, it also seems rather extreme to suddenly take away something on which people have spent hundreds of thousands of dollars to own. Hopefully, one can find a balanced solution at the happy median that will allow consumers to continue their daily lives without too much disruption while the government can still find enough funding to continue its activities.

In the meantime, it's important for prospective home buyers to be prudent with their purchase decisions. It may be tempting to go for the best and most expensive home you can afford by getting as much housing loan as you can. However, over-leveraging yourself could eventually comeback to bite you, especially when the uncertainties around the lease could lead to further declines in HDB prices.

HDB Resale Price Index (RPI) 2013- Q1 2018)
Duckju Kang

Duckju is the Senior Vice President of ValuePenguin Singapore. He covers the financial services industry, consumer finance products, budgeting, and investing. He previously worked in the financial services industry, including at such hedge funds as Tiger Asia and Cadian Capital.