The National Development Minister Lawrence Wong on Thursday,March 7, 2019, stated that they would announce changes in the Central ProvidentFund (CPF) loan rules on buying of older housing resale flats forimplementation come this May. The minister referred to the restriction in CPFusage particularly for flats with less than 60 years of lease remaining. Thisis because 90,000 of stock worth one million is about 40 years old.
“Some banks take reference from these CPF restrictions whenassessing how much loan to extend. As a result, both the CPF and loan quantummay be reduced for the purchase of such flats. The CPF rule is intended tosafeguard the retirement adequacy of buyers who purchase older flats, but itsdesign has led to some unintended consequences. For example, if a buyer wouldlike to buy a 39-year-old flat, he can use full CPF; but one year later,because you hit this less-than-60-years requirement, the amount of CPF will berestricted. And there is no good reason why this should be so just because theflat became one year older,” MrWong pointed out.
He also mentioned that he has outlined and explained how theministry intends to change the CPF restrictions. He said that the Ministryof Manpower and the Ministry of National Development have been studying anddiscussing the issue. The CPF rule is intended to safeguard the retirement easeand adequacy of those who buy older flats. Other benefits include boosting theliquidity of older flats as they would no longer face adverse limitations ofhousing loans. What other advantages and effects does the CPF rule relaxationbring to the table?
Reduce fear of expiring leases
Among the concerns that many Singaporeans face when lookingto purchase HDB, flats are the expiring leases. The new rules aren’t there tojust change the numbers but mark a psychological shift which the governmentwould like everyone to adopt. Residents should now focus less of the 99-yearleasehold but more on having their own homes—without really thinking about whatwill happen to them when the flat lease expires so long as they have a roof forthe rest of their lives.
Of course, it will also mean dropping the thoughts of HDBflats as investments. There won’t be much of a legacy or any substantial bigpay at the end of it. Your children will be grateful to have a home but not getsome profit from it. This is an inevitable consequence that Singaporeans mustgrow fond of and accept, given the high number of ageing population as well asthe decreasing birth rate in the little island.
Rather than a sharp decline, a gradual fall
When the lease fell to 40 years or less previously, flatprices faced a sharp plummet. This however wasn’t just due to the CPF restrictionsbut also due to the bank policies. Banks reduced Loan to value (LTV) range oncea flat is over 60 years old, which could result in down payments that were highthan 40 per cent or even more. This would eventually result in a double whammy,whereby a buyer for an old flat would face restricted financing as well as verylittle access to CPF.
The aftermath is that old resale flats will get a moregradual slide in the prices, instead of a sharp drop. However, appreciation isnot expected as it is unlikely given the awareness of the short lease.
Banks and their loan policies
Like we have already mentioned, banks play a significantrole when it comes to financing housing loans. Banks currently dropped LTVratios for the old flats. In fact, some banks no longer finance such purchasesat all. Since prospect buyers can now use their CPF, there is a likelihood thatthere will be renewed interests in old flats. We should also expect that somebanks will be willing to cater to the new demands, by being less picky on aflat’s age.
A few aggressive buyers are already into rental yields
It is expected that there will be buyers with dollar signsflashing right in their eyes. Buying those old flats and renting them out at areasonable fee (after the MinimumOccupancy Period) is unquestionably going to be a lucrative business. Forinstance, let’s say your buy a three-room flat with only 30 years left on thelease—as it will soon depreciate, meaning that you will get it at a low pricemaybe; S$300,000. You can move in for the five-year MOP and later on move backto your previous home and rent this one out.
As the flat is in an already developed estate, given its oldage, you will still get a chance to rent it out for a good sum of money everymonth, say S$30,000 a year. Since the cost of the flat is low, that’s apotential yield of about 9.6 percent. You will be able tomake up for the value of the flat through collecting income until the leaseruns out in about 25 years. Well, there are rules with regards to this, butmany money-minded individuals will surely make money through this strategy.
It’s not for the money-hungry but the wise
Singaporeans want to own houses so bad that they would risktheir retirement funds on an asset that is a few years away from gettingworthless. The same people will again realize that their HDB flat won’t paytheir electricity bills, their broken fridge nor pay for bus fares when theyage. Remember that your CPF savings are themost crucial savings as they will financially boost you when you go onretirement. If you decide to spend all of it in an old building, then you willsurely have a problematic retirement period.
Let’s hope a vetting process will be put in place to ensure that no one surrenders all their retirement money in exchange for a depreciating flat. Owning a flat can turn out meaningless fundamentally when you have nothing left for back up.
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