By Christine Li
Last week, the much-awaited rule change for the Central Provident Fund (CPF) was finally announced and home owners would be able to draw more CPF to buy ageing flats from May 10, provided that the remaining lease of the flat can last them until the age of 95.
These changes are not expected to affect majority of the CPF transactions today, as 98 per cent of Housing Development Board (HDB) and 99 per cent of private property households have a home which covers them to 95 years or beyond, according to the Ministry of National Development and Ministry of Manpower.
Still, the changes could make some impact, especially on public housing with short leases whose buyer may struggle to cough up much cash to finance the purchase due to the restricted use of CPF.
Before May 10, once the flat crosses 40 years old (or in other words, with 59 years of remaining leases), the eligible buyer pool will shrink dramatically, as the CPF financing terms become stringent. Buyers, young and old, may have to fork out more cash upfront if they take up a smaller HDB loan because of the new loan-to-value limits. The pro-rated CPF usage limit may restrict how much of the loan they can pay with CPF.
It is akin to a 60-year mark curse where property values of flats fall sharply when it reaches 60 years because of the restrictive financing terms.
To illustrate this, if the youngest buyer of a flat with remaining 59 years of lease is 25 years old, under the old scenario, he can use his CPF to pay for up to 49 per cent of the flat’s valuation limit . As a result, he may have no choice but to go for a more expensive flat with a longer lease in the same location, or a flat further away from the desired location but is of the same price or even cheaper.
Under the new rule, the same buyer can use his CPF to pay for up to 78 per cent of the flat’s valuation at purchase , and the amount of cash he needs to fork out over the loan period is reduced by 29 percentage points, from 51 per cent to 22 per cent of the purchase price. This would translate to a substantial cash saving of $87,000 on a flat that costs $300,000, easing the financing burden of the home buyers.
The new rule also applies to private properties with shorter leases, although the impact would be limited, because during the past two en bloc cycles, many such old apartments have already been redeveloped into fresh 99-year leasehold properties.
For older buyers purchasing a flat with shorter leases, the financing terms are even more generous. For instance, if the buyer is 45 years old, he could buy a 50-year leasehold property with maximum CPF usage of 100% of the valuation limit, as compared to only 80 per cent of the valuation limit under the previous framework.
Things are a little bit trickier if a flat or private property cannot last the youngest buyer until the age of 95. In some cases, the buyers’ CPF usage will be reduced by a small proportion, even though under the old rule, they may qualify to use CPF for up to 100% of the valuation limit. This is a prudent move by the policy-maker given Singaporeans’ longer life expectancy of 85 years and the higher possibility of them outliving the flat leases, if the old rule remains in place.
For example, a 45-year-old buyer would like to purchase a flat with remaining lease of 40 years, the CPF usage will now be reduced to 67 per cent of the flat’s valuation limit, as compared to 75 per cent previously. As the property does not cover him to the age of 95, he will not be able to withdraw CPF savings above his Basic Retirement Sum (BRS) from the age of 55 (except for the first $5,000 from the age of 55, and 20 per cent of their retirement account savings from their payout eligibility age).
The new rule boosts the liquidity of older flats and clearly cheers the market. It is definitely good news for both sellers and buyers who previously faced challenges transacting a property with short remaining leases.
In my opinion, the tweaking of the CPF rules kills two birds with one stone. On one hand, as long as the property can last the buyers until the age of 95, they can use more CPF to fund their housing needs. This should work well if they do not have any bequest motive, and the flexibility they get in terms of funding their housing needs through CPF should render some cash-strapped Singaporeans extra help.
On the other hand, the government still wants to instil financial prudence when buyers opt for a home with shorter leases that cannot last them a life-time. More CPF savings are required to set aside for non-housing needs and will ensure the retirement adequacy of the individuals. Moreover, there is additional restrictions in terms of CPF withdrawals when the buyers turn 55 years old. A balance was struck between using more CPF for loans and retirement.
Though the new rule is not going to be a game-changer for the ailing HDB resale market, it does help to smoothen the transaction for older flats which have fallen literally out of the radar of home buyers. As such, we could see prices of older flats and apartments stabilising especially in light of the greater uncertainties in the economy.
So should you or should you not buy a flat with shorter remaining leases?
My suggestion is that if you can afford something with a longer lease, you should stick to this strategy because buying an older flat may come with greater uncertainties after leases run short. It may pose many challenges in finding a replacement home when you outlive your lease, as well as finding the next buyer who is willing to compensate you adequately when you need to cash out. In addition, due to the shorter remaining leases on the property, you might also lose out on your capital appreciation over the long term, as asset prices generally move up in line with sound economic fundamentals.
Unless your options are limited by either budget or location, and the trade-off is worth it financially, it will still be a good outcome. After all, in many developed markets, buying a property is typically just a hedge against rental escalation over the long term, and capital appreciation is usually non-existent or secondary. It should be the key decision-making factor for this group of buyers.
The writer is the head of research for Singapore and Southeast Asia at global real estate consultancy firm Cushman & Wakefield.
(Note: An edited version of this article appeared on The Sunday Times on 19 May 2019)