The coming S$270 billion bailout

There are very few cars in the second-hand market more than five years old. Given that cars have to be either scrapped or exported when they reach ten years of age, there are probably too few buyers for such cars, in the absence of which it is extremely difficult to discover a market price for them.

The ten-year rule is related to the fact that Certificates of Entitlement (COE) have a life of ten years, though strictly speaking, the rule is separate from COEs. COEs, as most Singaporeans know (but foreign readers may not) are auctioned rights to own a vehicle. There’s a limited annual supply as determined by the government based on road and parking space capacity, adjusted by the number of decommissionings occurring simultaneously.

In the second-hand car market, prices move inversely with the age of the car. The older the car, the lower the price. Another way of saying it is that the price moves more or less in tandem with the declining number of years left in the COE until somewhere around the halfway mark, when the price falls off the cliff. Old cars cost more to maintain in addition to having fewer years left.

Most of us would say that such price trends reflect a perfectly rational way of assessing value.

* * * * *

Public housing in Singapore is also governed by its own kind of “COE”, though we call them title deeds. They have a life of 99 years. The oldest flats, built in the 1960s, are now approaching 50 years in age.

However, Singaporeans have totally different expectations about value. We expect it to go up as the termination of the lease approaches. Cabinet minister Lim Swee Say assured Singaporeans that this is in fact government policy as well, in a Chinese-language debate with other political parties televised on 3 April 2011. Using a translation provided by Donaldson Tan of the NewAsiaRepublic website, this is what he said:

The PAP’s view and approach on housing policy consist of 3 points. The first point is that home ownership is the cornerstone of the housing policy.

The second point is there must be gradual appreciation in property prices. Why is this important for HDB price to appreciate gradually over time? Consider the hypothetical situation of a Singaporean who bought a HDB flat for $200,000. In 20 years time, would he benefit if the selling price is less than the price he bought today? If the Opposition thinks depreciation of HDB price is good, it can use this point as a platform to fight for more votes.

— Lim Swee Say, as translated by Donaldson Tan. Source link.

It is inconceivable for this government to allow the values of public (“HDB”) flats to decline, when through law people are forced to set aside a big part of their incomes in the Central Provident Fund (CPF) and then encouraged to commit a huge part of their existing and future CPF savings to pay for a flat. The flat effectively becomes the primary form of saving for retirement. Yet, the asset is a declining lease.

The brick and mortar aspect of it too can barely be expected to survive 70 years let alone 99. The perennial complaints of spalling concrete should tell us that our HDB flats are not in the same league as Egyptian pyramids when it comes to withstanding the ravages of time.

It’s as if every citizen is encouraged to put his savings into a longer-term COE+vehicle with the government promising one and all that COEs will increase in value as its lifeterm decreases and the vehicle becomes a boneshaker. Where is the logic in this?

There seems to be widespread delusion about what the HDB market is really all about. We call it “property” and, fooled by language, we think the market has the properties of property. It does not. In a classic property market, the asset changing hands is a freehold title to physical piece of land. Land has a natural scarcity; the title is in perpetuity. Neither of these critical attributes apply in the HDB market. It is certainly not in perpetuity, nor is there any natural scarcity.

The title is, in a sense,  to a slice of air for a delimited length of time. How many slices can there be? As many as a government wishes to create by fiat, and technically possible by advancing construction technology. It is theoretically of infinite quantity. There is no natural scarcity, only man-made (and therefore man-reversible) ones.

And yet, buyers bid higher and higher. Of course, the hope is that after they have purchased the flat, the market price will go yet higher and they will manage to cash out before the market comes to its senses and, recognising reality, crashes.

What did I just describe? A bubble. And like all bubbles, it will burst.

* * * * *

Let me make a digression and talk a little about SERS. These initials stand for “Selective En-bloc Redevelopment Scheme”, under which the Housing and Development Board identifies certain old blocks of flats and buys them back from leaseholders. The Board then tears down the blocks in order to build new, taller blocks on the same site, increasing housing density. At this point, let me point out that this process exactly illustrates what I said above: The government is able to create new quanta of “property”  by slicing up more blocks of air; it only proves my point that there is no natural scarcity.

Unfortunately, my block has not yet been identified for SERS, so I don’t have detailed and personal experience how it works. But I have two friends who have benefitted and from them I understand that the process involves the government buying back the leasehold based on market value. The purchase price can then be used towards the price of a new flat somewhere close by. If the new flat’s price is more than the old flat’s market value, you will have to top up the difference.

The thing to examine closely is the market value of the old flat. As I described above, it is based on mass delusion. This means the first people who enjoy SERS will get a bubble-based valuation for the old flat. Once the bubble bursts the remaining people will find their old flat’s market value crashing. To get a new flat to stay in after being evicted by SERS, you will basically have to pay all over again virtually the full price of a new flat.

And the bubble has to burst. At some point, people are going to say: Oh, your block is nearly 80 years old and your lease has only 22 years left, no way I will even consider buying your flat, just like how cars with less than five years left on their COEs don’t find much of a market.

* * * * *

However, the government has given an implicit promise to sustain a rising value of HDB flats, as you can see from Lim Swee Say’s words above. It will be political suicide to let prices crash because people’s retirement savings are tied up in the value of this make-believe asset.

When the crash looks like it will happen, the government will likely step up SERS, making themselves the biggest buyer of HDB flats in order to reassure the market when all other buyers are fleeing. Then when market valuations are pointing south, the government is likely to establish a floor valuation (i.e. decoupling it from the fast-sinking free market price), to reassure existing leaseholders that they will get more or less the expected value of the flat based on previous bubble delusions. Effectively, the government will be forced to underwrite near-worthless “assets” and bail out citizens whose nest-eggs are evaporating.

What is the cost of that bail-out to come? It’s hard to say because we don’t know what stratospheric prices HDB flats will have reached. But if we assume today’s average price of about $250,000 per typical flat, and add a bit more, say to S$300,000, and multiply this with the present stock of over 900,000 flats, it comes to S$270 billion.

Like most big numbers, it’s hard to visualise S$270 billion. But we can compare it to the annual gross domestic product of Singapore, which is S$304 billion. Yes, that’s 90 percent of our present GDP.

Still hard to visualise that? Let’s take the experience of another small country. Soon after the Irish government was forced by circumstances to take on the debts of its overextended banks in the wake of the 2008 financial crisis, it found its commitments too heavy to bear. The country, facing bankruptcy, had to run to the International Monetary Fund for a bailout, in the process of which, severe austerity measures had to be implemented. What was Ireland’s commitment to its banks as a percentage of the country’s GDP that precipitated the crisis?

Irish Central Bank Governor Patrick Honohan said total loan losses at the country’s lenders, including foreign-owned banks, total at least 85 billion euros, about half of GDP.

— Bloomberg News, 21 Nov 2010, Ireland Seeks Bailout as ‘Outsized’ Problem Overwhelms Nation. Link.

Half of GDP was enough to break Ireland.

There will be a difference, of course. Unlike the acute crisis that Ireland faces, buying back a stock of flats over an extended period of time makes it a chronic crisis. But don’t kid ourselves, going broke slowly is still going broke.

You might say, what does it matter to me personally so long as I get back the value of my flat? Yes, you will get back its value, e.g. all S$300,000 worth of it. Except that when Singapore is considered broke internationally, you will have in hand 300,000 scraps of banana money.

133 Responses to “The coming S$270 billion bailout”

  1. 1 PART1 6 April 2011 at 20:33

    Bingo! Good points, YB.
    Another intermediate control route is through HDB’s valuation scheme which is last known to be on moving average basis; it buys some time on the way down.

    Guess the rising awareness of mentioned risks is one reason default risks are now beginning to be shared with private banks.

    Piramid on a piece of quicksand! (or on Fukushima)

  2. 2 Tanky 6 April 2011 at 21:24

    Yes sir, this is a Ponzi scheme.
    However, given that most Singaporean’s retirement plan is his/her HDB flat, the show must go on and the music can’t be stopped.
    It was easier before to keep the scheme going but with the introduction of a large number of new PRs and new citizens, I think the scheme will soon be tested. All we need is a prolonged global economic slowdown and we will start seeing some relatively new citizens and PRs giving up on Singapore insearxh for the next good harbor. This will put huge pressure on the property market and we might just hear the huge pop in the HDB bubble.

  3. 3 sgcynic 6 April 2011 at 21:59

    I sure would like to put this to Mah Bow Tan’s face and see how he wriggle his way out of it.

  4. 4 Vin 6 April 2011 at 22:31

    “The thing to examine closely is the market value of the old flat. As I described above, it is based on mass delusion. This means the first people who enjoy SERS will get a bubble-based valuation for the old flat. Once the bubble bursts the remaining people will find their old flat’s market value crashing. To get a new flat to stay in after being evicted by SERS, you will basically have to pay all over again virtually the full price of a new flat.”

    When the bubble bursts, both the old and new flats’ values go down isn’t it. So if you sell your old flat under SERS cheaply, you will also get to buy a new one cheaply, partly financed by whatever you got from the sale of the old flat.

    • 5 yawningbread 6 April 2011 at 23:40

      Not so simple. The market price for new flats with new leases can and should be very different from the price of old flats with much reduced lease-lives. Does one seriously expect to swap an old car with 2 years of COE left for a brand new one with a new COE and have both valued at the same market value?

      Let’s say a new flat with a new 99-year lease commands a market price of $400,000. People can judge that a 99-year tenancy is worth $400,000, or $4,040 a year. In any case, there are inescapable construction costs that constrain the pricing of such a flat, so the price cannot go all that low even if the market does.

      Now, take two persons: Mr Ahmad used to live in a 35-year-old room flat and was offered SERS. At that time, the bubble had not burst and his flat was valued at $335,000. He gets to move to the new flat by topping up $65,000.

      Ten years after, Mr Khairul, who lives one block away in a flat identical to Ahmad’s old flat is offered SERS. Now, however, the bubble had burst and Khairul’s 45-year-old flat is valued at just $115,000. To get a new flat identical to Ahmad’s new one and which the HDB and market still values at $400,000, he needs to top up $285,000.

      Think about it. In a rational market, Khairul’s old flat can never be considered to be worth $400,000 like his new flat, if both are of roughly similar floor area, floor level and location. The old flat is (a) older and (b) has a shorter remaining lease. By any rational calculation it has to be worth less than half that of the new flat. In other words, to continue living in a similar amount of space in a roughly similar location, Khairul has to cough up a lot more money. It is Ahmad’s old flat valuation (pre-bursting) that was irrational, but huge numbers of Singaporeans are like him, depending on an irrational valuation to safeguard our savings.

      • 6 Vin 8 April 2011 at 12:23

        YB, thanks for your illustration. The example you used is however based on some very big assumptions, and those are that Khairul’s flat is one block away from Ahmad, and SERS took place within 10 years in the same neighbourhood. No rational govt will do that.

        For SERS to take place the govt would carefully calculate and select within the neighbourhood which areas have lower housing density. Take the real example of Tanglin Halt area which was my friend’s residence and which I believe underwent SERS about ten years ago. Those in lower density flats were selected but higher ones were left out. The higher ones are those which have more storeys/levels too.

        When the new SERS blocks were ready in the past 2 or 3 years, residents of the old SERS block moved into their new flats about a stone’s throw away from their old flats. The new ones are even higher-rised flats, thus have even higher density then before. In return the govt got a nice and big plot of land leftover in Tanglin Halt which they can use for whatever purposes, even for release of land to build new flats/private housing later on if needed. As for the amount differences to pay for the new flats, I do not know exactly but when SERS take place the residents were very happy to get the new flats at affordable prices, some call it ‘strike 4D’. Today those who bought in are even better off as the prices of flats there have sky rocketed due to excellent location.

        So it is a happy situation for all mostly. What about those not selected then, i.e. your ‘Khairul’ flats? Indeed these were nearby but they have high enough density to leave it alone for the time being. The govt is in no hurry to SERS them. More likely it can remain status quo for another 10 or 20 years.

        So for SERS, it is most unlikely that the govt will leave a block so close by out of the scheme initially without good reason. Having done their calculations they will also not do a SERS so quickly in the same neighbourhood after the initial SERS.

        Also bear in mind that the govt is not giving away freebies. It is also taking back a lot of goodies, i.e. the new vacant plot of land for redevelopment, and of course the residents have to pay for their new flats too. The new lease? As far as I know it is 99 years for the newly built flats.

  5. 7 Libran 6 April 2011 at 22:55

    Good analytical and insightful piece. Thank you for alerting us to the impending crisis. When it hits, it would really hurt for foolish Singaporeans (who still think the PAP govt. is doing a wonderful job) to realize how the PAP govt. has been screwing them over.

  6. 8 cy 6 April 2011 at 23:16

    Alex, you made an elementary calculation mistake

    300,000 X 900,000= 270,000,000,000 = 270 billion

    Not 2.7 trillion.

    As far as i know,SERS flats are either the like-for-like swap or swap to upgraded flat with more money from SERs flat owner. In first case, govt don’t pay much for SERS except so called subsidy, for 2nd case, govt lock in more money.

    It is still wrong for PAP govt to sell this dream of asset appreciation for retirement financing when it can’t be realised for all.

  7. 10 Booya 6 April 2011 at 23:44

    Dude, your article doesnt make sense esp the Ireland comparison.
    1) Ireland’s real estate did not have a documented past on land prices. So each transaction was literally based on exuberance and sentiments.

    2) The single biggest worry that Singaporeans need to worry about is that their CPF money will be able to buy a flat tom, with the current inflationary situation

    3) You forget that govt still holds large swaths of land which has not been opened for development. If market tanks, they can certainly restraint the supply. And whats happening currently, they are opening up more land to cool off the market.

    And finally, I am no genius, but comparing car vs housing is simply idiotic–how many people do you think can live permanently in a car?

    So sir, though you have tried to argue well, its not based at all on facts or logic.

    • 11 yawningbread 6 April 2011 at 23:51

      No, it’s you who cannot see the picture. It was exactly the same exuberance in Ireland. Valuations surged, loans surged, people hoped that the bricks and mortar would preserve the value that they paid for them. Happy times lasted so long as everybody else was similarly exuberant. Secondly, you’re still seeing cars and flats. I am saying this is the wrong way to look at it, because in Singapore (at least with HDB flats), the controlling factor is the time limit. What you’re buying is not the Toyota or the 4-room flat. You’re buying pieces of paper with expiry dates.

      And as for the government controlling supply and demand, yes they can, but reducing supply is very difficult. When prices fall drastically, and you want to reduce the quantity of the commodity (create scarcity), what are you going to do in practical terms? Blow up several blocks of flats? Well, perhaps, but you’d still have to buy out (bail out) the residents.

      • 12 Rajiv Chaudhry 7 April 2011 at 11:32


        Singapore does not have an unlimited supply of land. That is another PAP myth that we need to stop propagating.

        Singapore has a total land area of 710 sq km. Land reclamation is reaching its limits both because of objections from our neighbour to the north and difficulty in getting sand. Two-thirds of this land area is taken up by reservoirs and the central catchments. After you remove airports, airbases, golf-courses, parks, public places and roads (the last makes up 12% of the surface area), we are left with very little.

        FYI, Singapore has an effective population density of over 21,000 people per sq km, making it the most densely populated country in the world. So, please, do not fall for this “we have plenty of land in reserve” business.

    • 13 Tanky 7 April 2011 at 08:55

      1. I cannot believe that there were no historical prices of Irish land. Please point me to your source.
      2. In reality, CPF is no longer a provident fund. It is a housing fund. Singaporeans feeling now of the property market is similar to what happened during 1980s in Japan (I was there for 5 years between 1984-1989) and during 2003-2007 in the US (I was involved in the Residential mortgage market between 2004-2009). In different languages, I have heard the same phrase “property prices will only go up”.
      3. I can’t agree more with YB, both COE and land title are paper. There are no intrinsic value in them.

  8. 14 ExExpat 7 April 2011 at 00:00

    Hi Alex, well I am not sure I entirely agree with your analysis, and with your parallel of COE pricing and the ten year rule.

    Let me start with the car:

    A few years ago, I bought a 17 year old car, a solid model, and 2 years ago prematurely a cheap COR (when prices crashed to 2 $ fr a moment). So today, my 20 year old car is worth much more than I paid.. so for most cars you are right, but not always.

    Similarly, our country leadership controls both supply AND demand of HDB flats (the latter via immigration), and does this as far as I can see very carefully. Although I agree that part of the “ownership” part is debatable, I am not sure we can speak of a true bubble here! If there were a bubble, we would just stop supply, or increase demand, and do this well. Our small HDB market is very tightly controlled much more than property markets in the US or Japan. (It’s a different story for the other 2 markets (condos, landed), yes Singapore has a very special situation..)

    Second: don’t you give the argument yourself: far before a flat reaches 80 years, HDB will take it back and give you market value, so the hypothetical trigger for the bursting event as you write it wont happen right?

    Cheers ExExpat

    • 15 yawningbread 7 April 2011 at 00:01

      Re your car, you have an exceptional situation (being able to get a COE for $2); it does not invalidate a principle. Your last point: “far before a flat reaches 80 years, HDB will take it back and give you market value” — but what is market value then? Is it necessarily higher than today? Why should it be higher? The fundamentals point to lower valuation when the flat is old with little lease life remaining.

      • 16 Gard 7 April 2011 at 14:27

        In thinking about market value, it is necessary to bring in another variable: rental prices. Say you are planning to buy a 98 yo apartment, so there is only one year left, your purchase price cannot rationally exceed the annual rental rates in the comparable apartment. Real estate economics explores this relationship between housing prices and rental rates.

        If we assume that population and median real income to rise, then rental rates will rise correspondingly if supply does not outstrip demand, though short run economic fluctuations will introduce volatility. This higher rental rates also translate to higher housing prices.

        At some point, the general rising trend of rental rates is inufficient to overcome the remaining life-time rental income. So you will have a peak in the housing prices.

        So, theoretically, if the government is shrewd enough, it can buy back the apartment before this peak, and rent out the apartment for its remaining life to recover the cost of the buy-back. With interest, of course.

        The question is, does the government have the information and tools to do all this? We do know that the government has a lot of information not widely published; and there are sophisticated financial models that have been applied to non-residential real estate and other asset classes such as gold.

        Taking about sophisticated financial models raise the memory of the Great Financial Crisis. So I won’t dismiss the dismal possibility of the $270b bailout. At the same time, I hope that the government has enough sense to learn from the Financial Crisis.

  9. 17 PY 7 April 2011 at 00:01

    hi. i’m sorry. maybe i’m a little dumb but can this be put in simpler terms? who is being bailed out? and for what?

    is it how housing inexplicably appreciates in value as years pass. and because of that the flat gets harder to sell? and the govt has to bail out those who own the flat?

    did i get it right?

    another thing is.. i don’t see my parents selling their flat anytime in the near future even after we’re done paying the loan. the scenario seems to be based on the assumption that everyone will be selling their flats after they’re done paying the loan, right?

    will yb be able to analyze or show what possibly happens when the alternative happens i.e. HDB flats depreciate in value?

    sorry.. just trying to get things clear in my head so i can understand it better.

  10. 18 Peter 7 April 2011 at 00:45

    MAS says SG have 280B reserve as at 2010

    So theoretically Sg can afford the bailout TODAY. However at the rate asset inflation is going, 15 years later, the numbers may grown beyond our reserves.

    As you said, the flats of 1960s are now 50 years left on the lease. For a married couple at 30+yo, buying 50 years lease flat will allow them to use it up to ripe old age of 80+ yo.

    10 years later, these batch of 1960 year old flat would have lease of 40 years left, it will be soon become clear to the mass that the they will out-live the flats lease. That is when the price dip will come and at some point, the bubble has to burst.

    So watch for the next cycle, it may be Singpore’s turn.

  11. 19 dZus 7 April 2011 at 01:42

    Interesting article Alex, as a prospective home owner this really scares me. But on the other hand, a tiny island like Singapore with very limited amount of land, and as our population grows, doesn’t the amount of land decreases inversely thereby creating a constant demand for housing? With growth and demands, it dictates that prices will continue its upward climb.

    You suggested with advances in construction methods, flats can be build to accommodate more and more people, which means scarcity of housing can be remedied. But location always play a big part in house pricing, and no matter how advance building method becomes, in the prime districts, there is a finite amount of living space before overcrowding becomes a big issue. An example is the number of lift shafts will increase with the number of people living in a block of flats, thereby limiting the number of units a development can possibly have in a piece of land. Therefore, demands to live at a convenient location will ensure prices for this places will not drop significantly. This in turn trickles over to prices of flats at lesser location.

    The only problem with this model as you point out is that its tie to the prosperity of Singapore. But you’re talking about a total collapse of the economic for this to happen. Wouldn’t this ‘title deed’ collapse be more a by product of our economic crashing rather than as a result of it?

    Lastly, you talk about the SERS scheme. I really doubt that many HDB flats will last till the half way point of its 99 years lease before the government buys it back for redevelopment? With our limited land space (there is no cemetery too sacred to dug up for developments), The old flats sitting mostly on established estates that command high resale value will not be spare long from the demolition squads.

    In my opinion, in our land scarce nation, which is only 42km across its longest point, a property bubble might be happening, but a total collapse like you described is highly unlikely. There might be market adjustment like we’ve never seen before brewing, but we still sitting on a very small piece of rock, so even a space floating 15m up in the air is still precious commodity.

    PS. I think the real bubble that’s brewing is that of the DBSS (Design, Build and Sell Scheme) flats. 5 years down the road when all the DBSS flats are allowed to be resold, how are owners of these flats going justify selling a flat that is similar in size and facility and probably furnishing and finishing to their HDB counter parts at more or less same location for a higher price that they will surely demand? At that point any advantage of the build in cabinets or frills and fancies will be leveled by any HDB build flat with decent renovation done

  12. 20 Try 7 April 2011 at 01:58

    Does this article mean that Singaporeans really don’t have much ownership of anything in Singapore?

    After reading this, I wondered why wouldn’t the government just grant freehold HDB flats for sale to Singaporeans if the point of public housing was for Singaporeans to have a real stake in the country? Especially when (the current scenario of) 99 year leases, coupled with the imperative to increase property values in tandem with (CPF) savings stored in the flats, becomes dangerously speculative and unsustainable as seen in this article.

    Instead of tackling the “time-bomb” problem associated with the expiration of 99 year flat leases (by perhaps, extending 99 year leases to 999 years/freehold [for a 1-time price]? **) , the HDB has gone in the opposite direction and proposed the Lease Buyback Scheme (LBS) as an avenue for further cutting down the duration of flat leases.


    ** I’m no expert in housing and hence, I stand open to criticism. I suspect that the HDB has thought about “life after the 99 lease years”. It might have made much profits from the years of selling flats (this is only theory as the cost price of HDB flats is not published) to be able to afford a potential 270 billion bailout in the next 50 years to come.

    The LBS is only limited to elderly households living in 3-room or smaller flats. However, this in itself is a sign of the HDB trying to compensate such residents for reducing their duration of rights to HDB flat ownership by offering them a current market price valuation that is sure to be lower than a future one, given Mr Lim Swee Say’s assurance of rising flat prices in time to come.

    Hence, although the LBS is meant to unlock liquidity for elderly people who require ready-in-hand cash for living/medical expenses, it can also be seen as a measure of HDB to buy back leases and at the same time, relinquish its responsibilities of “potential bailouts” more quickly for these residents, leaving them and their children to be at the mercy of property markets in a few decades when their leases expire.

    So how does the government gain from 99 year leases when it can lead to future problems? A 99 year lease essentially means that the conditions of housing will ultimately be on the terms of the state. The limited leases accord the state more flexibility in urban planning, as opposed to if HDB residents had eternal rights to their flats.

    Also in the short run, HDB residents are dependent on the government for increasing the value of their flats through controlling the supply of flats. In the mid and long run, they would inevitably be forced to pay higher prices for new homes (with new leases), allowing HDB to make more profits, presuming it does not sell flats based on a cost-price approach.

    In short, a majority of Singaporeans possibly face the worst of two worlds: being held hostage by the state and CPF commitments to their flats and yet, having the anxieties and insecurities as a nation of (flat) tenants.

    In a reply to a Singaporean’s letter to Straits Times Forum last month to allay uncertainty over HDB leasehold, the Deputy Director (Policy and Property) of HDB Mrs Lily Chan admitted that HDB flats are 99-year leasehold properties:

    “HDB flats are 99-year leasehold properties. Like all leasehold properties, the land will revert to the Government when the lease on the land expires. The overwhelming majority of HDB flats today are far from expiry of their leases,” she wrote.

    Taking a day to be a decade, the term “Hotel Singapore” may be more apt than at first thought.

  13. 21 eddycurrents 7 April 2011 at 02:39


    It’s certainly rather dramatic, the way you have put it. Your article, however, has made several leaps of logic and assumption.

    The first was the comparison of leases to COEs. It is accepted market practice that COE depreciates with its age. The same, however, has yet to be seen for leases. I live in a HDB that has seen 42 of its 99-year lease go by. My neighbour next door bought his flat 42 years ago at $18,000. Today, his property is valuated at $600,000, despite the fact that there is only 58 years left on the lease. Property prices (or the price of leases, as you prefer to see it) is often determined by a myriad of factors, with demand and supply being one of them, but not the only reason.

    A good analogy would be the private property market. Despite there being almost no scarcity of developers annually putting new private homes to the market, the prices keep going up. Many see this as a result of the investment mentality of the market as well, and that holds true for the HDB market as well.

    An assumption you made without clarifying how it will happen is that you assumed that the market will crash and the bubble will burst, despite it not having happened, to my limited knowledge, in the past 42 years at least.

    The only real chance of that happening is if the prices of these “lease” go beyond the ability of the population to afford them, much like it is in the case of Hong Kong, and with the widening income gap, that certainly is a concern.

    You also assume that these leases will see close to maturity, but as you rightly mentioned, most brick and mortar will not survive the 99-year lease, or even 70 years. I don’t have the facts about this with me, but how many HDB leases have been allowed to whittle down to 22 years (as stated in your analogy) in its history?

    Don’t get me wrong, I’m not saying you are completely off the mark. There is some merit to what you say, and the final scenario you portray is possible, but it wouldn’t be as simplistic a scenario as expiring leases, or COEs as you like to call them.

    I hope I didn’t come across as confrontational in my comments, but I do believe that when one writes so eloquently as you do, it is important that the views portrayed can stand up to any challenge so that your readers are able to consider the issue from varying viewpoints.

    • 22 Lee Chee Wai 7 April 2011 at 12:42

      As a subsequent poster commented – to properly resolve this issue, you’d need guarantees that reasonable restitution and/or compensation become available for expiring leases.

      As far as I can tell, there are no legal guarantees to that effect – which is quite unlike that afforded to a title deed. This means the Singapore government has NO legal responsibility to ensure that your home’s value is non-zero at the end of its lease. As a HDB leasee, you will be at the mercy of the generosity of the government when the time comes. Quite frankly, that is a very unsatisfying position to be in for a “home owner”.

      As for prices in practice, 42 years is less than 50% of the lease. It also leaves 57 years … more than enough for a person to live out his or her life from purchase to death. I am willing to buy the argument that you’d start seeing vastly different economic decision-making once the leases run down to 30 or 20 year remaining.

  14. 23 Kumar 7 April 2011 at 02:51

    Thanks for the article YB.

    Whats the solution? Is there one? How do we go about restructuring the entire system?

  15. 24 khonsu 7 April 2011 at 04:25

    Wouldn’t an easier solution simply be to renew the expiring leases? Many people have suggested that that is what the Government would do.

    Which is why the market isn’t likely to crash – unless the Government comes out and says that it will not renew the leases, people will assume that HDB leases will not be expiring any time soon, and they will continue to buy HDB flats at high prices.

    • 25 yawningbread 7 April 2011 at 12:36

      Renewing leases is definitely one option, but as and others said below, most HDB blocks will be unlikely to remain sound for that long. This is a theoretical solution that is not practical. The cost of maintaining an aging building will be very high.

      Also, renewing leases come with notional costs. If the lease renewal is given out free of charge, there is the value of the new 99-year term foregone. Another is the opportunity cost of building a taller block on the same piece of land, housing more people, reaping more sales revenue to HDB. Accountants will be able to put a value to the renewed lease, and that value will either be borne by the government as a gift to the existing residents (in which case residents elsewhere will cry foul), or that value will be imposed on residents as the price for renewing their leases. In that case, what if (some of) the residents don’t agree, or can’t afford?

      That’s why, after giving it some thought, I think what is more likely to happen is that the pace of SERS will go up. More and more, the HDB will be buying back properties. But then the following problems arise: When the HDB becomes the biggest buyer of old flats, how does one determine what is the “market price” of this category of old flats? Referring to the market price of newer flats is not a good indicator, because the products (old flats vs new flats) are not inter-substitutible. One could say, let’s refer to the free-market transactions of old flats (however few those transactions may be) to determine the market price or SERS-grade flats. But then, if the number of free-market transactions are few and the HDB’s repurchases are many, effectively the HDB’s price sets a pricing floor. In other words, the free-market transactions are using the HDB’s repurchase prices as reference, not the other way around. The fundamentals (old structure, few years left on lease) may point to a low value, but the HDB’s floor price keeps the price up artificially.

      Without a reliable market price to guide the HDB in their SERS repurchases, HDB’s buy-back price will more and more be determined by non-market considerations, primarily political considerations. The difference between the low value (based on fundamentals) and HDB’s arbitrary repurchase price is the bailout, where government money is used to top up private losses. When the government runs out of money they can do two things: stop the bailout and fall from power or start printing money.

      Also, once the bailout starts, there is the question of political equity. You can’t as a govt agency pick and choose which citizens (or PR-lessees) you will do SERS with and bail out, and which other residents you will not. You will have to give an implicit promise that once bailing out starts, you will bail out all HDB lessees.

      • 26 anon 7 April 2011 at 18:10

        > When the HDB becomes the biggest buyer of old flats, how does one determine what is the “market price” of this category of old flats?

        Even today, isn’t HDB the body that primarily decides the value of flats since they are the folks who do the valuation?

        > You can’t as a govt agency pick and choose which citizens (or PR-lessees) you will do SERS with and bail out, and which other residents you will not. You will have to give an implicit promise that once bailing out starts, you will bail out all HDB lessees.

        Not really relevant to your core argument but the PM’s recent remarks regarding selective upgrading for PAP supporters invalidates your assumption of an equitable bailout.

      • 27 yawningbread 7 April 2011 at 18:12

        Valuation methods require some objective basis; it’s not all arbitrary.

        As for upgrading, the value involved is nowhere near the value of the entire flat. And I would say it proves my point as we’ve seen how even selective upgrading is a politically contentious issue, what more when it comes to selectively repurchasing the flat.

  16. 28 patricia 7 April 2011 at 08:59

    You think private property market in Singapore is logical? Think again.

    In the classic definition of property, what you pay for belongs exclusively to you – to use, to lease out, to sell to anyone else. If you wish to get a good price for your apartment in the resale market, you can do several things – great selling techniques, great interior makeover for instant appeal to potential buyers and more.

    But in Singapore, there is one additional way to get a good price for your unit – and this defies the classic definition of private property. You simply sell your neighbour’s unit as a package along with yours! If 75% of your neighbours wish to get a better price for their apartments, they can convert your gove housing HUDC into private property. This will pave the way to sell your unit to a private developer.

    After your HUDC estate is privated, as long as 80% of residents agree, the whole estate can be sold en bloc to any private developer. You get the “better price” for your unit, even if you belong to that 20% that dosent want to sell. Then you go and look for another place on your own. (Now that’s another disillusioning story!)

    Whither property rights?

  17. 29 lim chai yen 7 April 2011 at 09:05

    As I was selling my 3 rooms flat 10 years at age of 15 years, I was worried who will buy my house, but a taiwanese PR bought it at 168K and I saw a flat today in the block today sold at 288K (now it is 25 years old flat at Yishun).

    Ha ha. What a good way to go.

    As long 85% believe and the whole foreigners and PR is in it, the bubble will go until such a huge force from external such as 98 Asia Currency Crisis to bring it down.

    So let’s wait another 7 years, this time it should be China Bubble to bring it down.

  18. 30 Rehsa 7 April 2011 at 09:22

    Maybe that’s why each HDB flat has to be sold at a profit, assuming that the profit will be invested over the period of the flat’s 60-70 year lifespan to cover the cost of its eventual SERS? To have profit, the value of the flat must be greater than the cost of building it. In fact, the greater the value, the lesser the burden on the government will be to cover the cost of SERS.

  19. 31 Gard 7 April 2011 at 10:20

    Would your analysis be different assuming the following continue to be true:
    1) Continued surge in foreigners and PRs (towards 6.5 million population and beyond)
    2) Sustained rise in median income in tandem with cost of housing
    3) Occasional ‘pricking of the bubble’ through higher borrowing costs and legal hurdles

    Actually, I can’t tell what are the options or outcome you think the government should intervene to achieve, apart from the option to allow HDB prices to rise ‘gradually’ (ah, gradual appreciation is the keyword). To allow HDB prices to gradually decline in value over time like cars? Stay flat? Or your point is that the government cannot effectively manage a gradual increase in prices?

  20. 32 Jimmy 7 April 2011 at 10:30

    Actually there is one more way to earn back..

    like today, 1st owner of the old HDB bought it for 30K (kopi 10 cent only). now can sell for 400K(kopi from 70 cent to 21 dollar)…

    does the value of the house really went up? or the inflation went up…

    so for current home owner, whom bought house at 400K. let wait for 10 years (kopi 10 dollar a cup), for home to be cost millions. due to inflation.

    we can then sell it “for a gain”

  21. 33 a kind of chicken 7 April 2011 at 11:24

    Let me put it another way. Basically, the govt has assured people that their leasehold will act like freehold. It requires no cash on the govts part to effectively keep extending leases. There is some re-building cost but it is significantly below what you estimate.

    I don’t agree with the govt’s policy and I believe we are in a bubble. But your sloppy analysis significantly over-estimates the govt’s liabilities.

    • 34 yawningbread 7 April 2011 at 18:42

      Has the govt assured people that their leasehold will be as good as freehold? I don’t think so. Some people or lots of people may think so, or may be unable to see the difference between the two, but I can recall no such indication given by the government. As for extending/renewing the leases it is by no means cost-free, as I have argued in an earlier comment. If there’s any sloppiness, I believe there’s more of it in your reasoning.

  22. 35 geee 7 April 2011 at 12:10

    Your doomsday hypothesis is interesting, but in my opinion unlikely.

    The government will have various options to mitigate such a dramatic fall in home prices. You mentioned there is no natural scarcity, but overlook the fact that there is man-made scarcity. The rock-bottom situation you painted will take time, months if not years, to develop & i expect that HDB, and private developers will take a hard look at the supply demand dynamics and stop “slicing more blocks of air”.

    Last but not least, there is always the option of extending these 99-year leases should your doomsday scenario start to precipitate…….. thereby automatically stopping depreciation & creating value according to your time-based thesis (without a big bail-out bill)

    • 36 yawningbread 7 April 2011 at 12:46

      Extending the lease is also a bailout, because leases have notional values. Strictly speaking, the government has to charge the block’s residents a price of extending the lease. This price ain’t cheap. Because if the old lease were allowed to lapse as per law, then new, taller towers could be built on the same piece of land with much greater sales revenue & profit. This is the opportunity cost foregone should the govt renew the lease for existing residents. Therefore, if the residents prefer a renewed lease, they should pay for the new lease term the same amount as that opportunity cost.

  23. 37 BABO 7 April 2011 at 12:11


    Good attempt with your analysis. But, your conclusion is a bit over the top. And you might just have overblown the bubble you are trying to alert.

    As far as I know, HDB blocks under SERS program are older blocks with low density. So, there is some additional value here in terms of the lower density even if the flats are say 35 years old. Once, these old blocks are demolished, new flats can be built on with double (or more) the density.

    So, this bubble can continue as long as new flats can be built with higher and higher density. How long that would be would be limited by height constraints, technology, land supply and market demand for such high density flats.

    Cars do not have this land element and so a direct comparison is not accurate.

    A case could be made that the price for the old flats paid under the SERS program may be too high (or artificial) vs real market value. And that this is the “PAP premium” that is itself funded by the “profit (HDB sale price less actual costs)” of new HDB flats sold to other buyers. It is almost like a self-sustaining bubble. And again sustain it can as long it does not hit any of the constraints mentioned above. Or that prices are not beyond real affordability (subsidies, grants or not).


  24. 38 Tanky 7 April 2011 at 13:24

    The situation we are in now is called “riding on the tiger back” in Chinese. If you come down, you will be eaten. The government needs to find ways to allow the baby boomers to monetize their HDBs as that is their only source of fund for retirement. They now have (1) 30-year lease “old folks” condos, (2) reverse mortgages (so far not popular), (3) stay with kids and rent flat to foreigners (4) sell and buy another flat (by themselves or with kid), (5) sell and leave Singapore for a cheaper place, roughly 5 ways to monetize their HDBs. (4) is just to buy time while (5) is clean break. My gut feel is that there are quite many who have already done (4) and are now serving a much bigger loan than before. Higher HDB prices will bail them out. Letting in foreigners will firm up prices and so allowing all options to be feasible. I don’t know what is the physical limit to our population size but judging from what I hear and see, it seems we are approaching psychological limit? The youngest of the baby boomers are a couple of years from reaching 50 years old, while the average age of the baby boomers cohort is around 60. From what I see, we are right in the middle of the bail out exercise — bailing out the baby boomers who have nothing but a HDB.

  25. 39 Eveline 7 April 2011 at 16:12


    I’m by no means a supporter of SERS but I do have to ask how you account for the “set off” effect between SERS compensation and additional revenue from sales of the new HDB flats built in place of the SERS flats. Revenue flow from SERS is not always negative because HDB does build new flats on the old sites and earn a revenue from these flats.

  26. 41 anon 7 April 2011 at 18:21

    IMHO, the risk of a crash due your argument is minimal thanks to the tight grip that the government has on both demand and supply.

    What I find much more likely is a crash due to rising interest rates.

    If interest rates rise due to external pressures, etc., many of those who bought their flats in the past couple of years will soon find their monthly payments ballooning out of control. If a sizeable number of them decide that selling their house is a better deal than refinancing, then there will be a bear run on the property market. HDB may try to control the market (by setting a floor price as you suggested) but since interest rates will effect the private property market equally, their measures will not be enough to control the crash.

  27. 42 Francis 7 April 2011 at 20:26

    Many good points raised, i though of this situation before and formulated the below plan just for it since last year.

    I just bought a new BTO flat. now waiting for construction to finish. if the economy don’t “tank” i intend to sell my flat after maybe 10 years and buy a flat with about 30 to 40 year lease left, i will be able to end my HDB loan liability and fully paid for the balance of lease (no one including HDB will finance a flat with so little lease left). In the event of en-bloc HDB cannot penalise me for buying a 3rd HDB flat.

    Compare to studio flat, i believe that flat with about 30 to 40 year lease left will be cheaper.

    Anyway, HDB in their boon year in the 70s to 90s built too many HDB, they would not be able to SERS it before the lease runs out, look at those flat in Circuit road are still around these flat has almost tip 40 years if i am not mistaken.

  28. 43 prettyplace 8 April 2011 at 00:25

    Outstanding arugment YB, excellent comparison between COE.

    The problem with SERs is that the HDB does not want to explain the mechanics clearly, as usual. We do not know the timings or the age of the flats which will go under the SERs knife nor the estimated numbers which will come under SERs over the years.

    a)market value paid by HDB.

    1)This market value will be suspect because of the number of flats needing SERs at that point in time. It is possible that many might come up early, considering a HDB minister committed suicide.
    2)The economic conditions in Singapore as well.
    Banks are already not very keen to offer old flats decent loans.

    b)If HDB does offer a replacement flat, this again depends on the location, which HDB has full control. An old flat from Rochor moving to Sengkang will not be unusual as there is simply no place around that area for a replacement flat to be built.


    Now will the market tank?
    To those who think property prices would never tank, it almost did in Singapore in 1985 & 1997(asian crisis).
    A major bank almost, went under in Singapore.
    It can happen anywhere in the world if prudence is neglected coupled with irrational excuberance.

    In Singapore, the prices did not move an inch till about 2003 and till the en-bloc fever came about around the time. However, even before that, the govt did realise, there will not be any headway of pushing prices up, unless immigration was relaxed to the max.

    Demand cannot outstripe supply in our Singapore since there are, the same number of buyers and sellers(HDB only), unless more foreigners are injected into the system. Only demand for certain types of flats will change, thus the stop order on 3rm flats then. Given the fertility rate, in fact the prices would be certain to go down.

    Therefore, one can safely assume that immigration will not be going down anytime soon.Unless of course, we improve on our decades’ old productivity drive, production and technology

    Our worst case senario would be, if the govt cannot afford to do SERs to most needed flats and if there were too many needing SERs, during an unfortuante economic time, all at one go.

    Assuming the flats built from 1970 to 1975 should get SERs, if the number of flats is about 150,000, then the cost we are looking at will be based on YB’s SERs estimate will be
    300K x 150K= 45,000,000,000. $45Billion. This amount, alone will choke the govt.

    They still have to built replacement flats and pay for those who want monetary compensation. Thus, expect many flats around town going for SERs first, then the outskirts. Since, they will sell the land to rake up the much needed money.

  29. 44 Anon 8 April 2011 at 01:28

    People in opposition wards who are not ‘entitled’ to robust enbloc initiatives are pretty screwed once the bubble bursts.

  30. 45 Kelvinli1974 8 April 2011 at 10:30

    Great article. Love it. But can you help me understand a few points which I don’t think you touched on.

    1. You are working on a premise that one person my a flat and stays for 99 years which most don’t.
    2. You are not taking into consideration those who upgrade using SERS who have an additional grant from the government if they are second time HDB buyers which to a huge extent cover their difference in price if they choose something more expensive.
    3. You have also not taken into consideration that each move to a new flat, the lease resets to 99 for the new property.

    I think the question you should be asking is this:

    Who is staying in flats that are older than 40 years of age? Those who stay there are probably elderly residents who do not want to move at all or cash out at all. They want to spend their remaining years in the same house.

    The government introduced a buy-back scheme which basically allows a senior citizen to sell back the HDB at prevailing price and be paid via installment while staying in the same house, till they passes on.

    Isn’t that a good thing?

    I really enjoyed your article. Many good points there but I’m wondering if you have failed to take into account other factors such as above that makes it less scary than what you portray it to be.

  31. 46 prettyplace 8 April 2011 at 11:42

    What happens if SERs is rejected by the owners?

    Assuming Hougang, if people do not want SERs, since their replacement flats or the monetary compensations are unattractive.

    Can they do anything else?

  32. 47 iisterry 8 April 2011 at 11:51


    If your folks have bought their flat for the sole purpose of living in it, they are generally unaffected so long as they are able to comfortably service the loan.

    However, PAP has propagated the notion that the “HDB flat” is an asset and able to monetize it for retirement. In essence, asking everyone to speculate in property. A simple $250,000 compounded at around 2.5% for 30 years will give you an eventual value of around $500,000.

    If you would have simply kept the intial monies in CPF, you would have half a million 30 years later. If you bought the flat at $250,000 30 years ago, you would have to sell it at $500,000 simply to break-even with CPF rates! The new owner would then have to sell it at $1,000,000 30 years later.

    Herein, you see the problem. Prices cannot go up perpetually. Neither can “your” HDB flat provide you with a retirement means, for some yes, if a “greater fool” comes along and plays the game. What happens if majority of HDB owners decide to let go at the same time?

    By forcing Singaporeans to “save” 35.5% of their earnings in an arbitrary account and then asking them to buy an “asset” at inflated price with a short finite lifespan, they effectively eroded away all their retirement savings.

    We might see 50 or 100 year loans down the road. This delicate game can be played on and on.

  33. 48 lobo76 8 April 2011 at 11:55

    First off, Singapore can afford it. Foreign reserves alone can cover it (though the whole sum may be depleted).

    Then we’d still have 127.4 tonnes of Gold reserves

    Second, I don’t think it would cost as much. In a worst case scenario where Govt allows people a straight swap, the bailout is the cost of demolishing the old flats and building the new. The combined total which I would think is less than the ‘market’ price. The latter being the one used for calculating the 270 billion.

    Third, as others have mentioned, there are various way to counter the bubble, and HDB does have the capability to do. The simple reason being that it (HDB or SLA) is a monopolistic land owner. The level of control that is being afforded in theory can overcome any bubble.

    lastly, 270 billion is what is needed to bail out the WHOLE country. What this means is that it is essentially a ‘reset’ button. In theory, this affords (literally, as in point 1, we CAN afford it) us another 50-60 years till the next bubble is form.

  34. 49 Rajiv Chaudhry 8 April 2011 at 13:06

    This obviously is an issue that will affect most Singaporeans since 85% live in Housing Board (HDB) flats, according to the Minister of National Development.

    I agree completely with YB’s assessment that there is likely to be a crisis when HDB leases approach the end of their lives. Typically in leasehold agreements, the fall-off in values or “panic”, if you like, occurs in the last 20 or 25 years. This is also a function of banks’ (or the Housing Board’s, in lieu of banks) financing norms. When I last checked, banks were prepared to finance properties with 60 years remaining on their leases (down from 80 years previously). If they are prepared to cut this period further, leasehold values might be maintained a bit longer. At some stage banks will stop financing leasehold properties when the periods remaining on their leases are less than their “comfort” level. At this stage if the HDB steps in to take up the slack, well and good otherwise, this will typically be the point when the music will start.

    YB readers might be interested to know that The Reform Party has said that if it is elected to Parliament and is in a position to influence policy, it will propose that HDB leaseholders be allowed to buy out their freeholds so that they become equivalent to private properties. It believes the government should not have a monopoly on Singapore’s land. See Kenneth Jeyaretnam’s article “Why Singaporeans should see through the upgrading carrot” on If you have questions, I suggest you post them directly on his blogsite.

  35. 50 nobody 8 April 2011 at 15:33

    Price of HDB depends on a lot of factors. One of them is the supply and demand.

    16 years ago in 1995, a HDB EA in Woodlands cost $$215k with 99 years lease. $2.17k per year of lease. Today, in 2011, the same HDB cost over $500k with 83 years lease. $6.02k per year of lease.

    Why did the price go up instead of going down if we use the CAR and COE theory? One of the reason is the demand is more than the supply and that helps to push up the price of the HDB.

    Another reason is “HDB is an asset”. Because of inflation. Salary goes up, HDB price also goes up. The value of S$215k in 1995, after 3% yearly inflation is S$345k in 2011. So for the same HDB cost $500k, that’s an increase of 44% in 16 years if you take into account 3% yearly inflation.

    As long as people believe continue to believe HDB is an asset and demand is more than supply, it will continue to go higher. When people start to realize it’s not an asset, the value will start to go down.

    Before that, they will have to take action.

  36. 51 Libran 8 April 2011 at 16:54

    Jimmy 7 April 2011 at 10:30

    “Actually there is one more way to earn back..

    The crisis that YB talks about is certain to happen; it’s just a matter of time, but may happen sooner rather than later. Like all capitalist economies, the Singapore govt. encouraged the growth of a giant credit bubble (51 pct. of bank loans outstanding go to the property sector; credit card rollover debts are rising by leaps and bounds, etc.) which fueled consumption, asset price inflation, and short term economic growth. In other words, our GDP growths of recent years have been bought with credit, or debt. But as with everything in nature, it is self correcting. Just like high tides will lead to low tides, sunrise will lead to sunset, summer will lead to winter, so economic booms will lead to economic busts. So the belief prevalent in most of us, after experiencing decades of high inflation, that inflation is permanent, and will always bail out the speculator and imprudent investor, is flawed. History tells us that Inflation will not lead to more inflation, but instead, will do exactly the opposite, i.e. deflation. This is clearly illustrated by history, if we care to learn from it. Thus we have witnessed great depressions at regular intervals throughout history, the most recent being the Great Depression starting after the crash in 1929.

    The major economies are now going through great upheavals, starting with the collapse of Lehman Bros. and the financial crisis that followed in 2008. They are by no means out of the woods yet. Portugal has just sought a bailout, along with Greece and Ireland. Spain is also in dire financial straits, and may need a bailout soon, which may then cause a major global financial meltdown again, as Spain is deemed too big to bail out. Japan’s public debt stands at 200 pct. of GDP. America and Europe are going through severely needed austerity measures that will surely adversely impact Asia. The world’s top banks are in no position to lend, being hit by high rates of doubtful and bad debts. Consumers are cutting back on spending, with high levels of debt and loss of jobs. With crushing debts stifling consumption, corporates will get hit too, and will then cut back production and capital spending, leading to fewer jobs and a downward spiral that cannot be stopped.

  37. 52 Jay 8 April 2011 at 17:22

    This is the most hilarious piece of article I have ever seen, basically what this writer has done was question the whole concept of real estate not only in Singapore but around the world. I wonder if this writer realises that in some countries i.e UK and even China you pay in the millions for a property which may have a lease of 30-50 years and their prices still appreciate.

    The other thing is the Irish situation is not even comparable to our HDB issue, the Irish were building satelitie cities, not just apartments whole new cities but never had a sustainable population or even a current demand to satisfy it. What made it worse for them was despite them realising this they still carried on building more satelite cities. You will not see blocks and blocks of brand new HDB’s in Singapore without an occupant after 2 years of being built.

    In short the person who wrote this article should really get their facts right and understanding of economics as well, I am neutral on the political scene but this article to try and relate it to our incumbent government is to me ridiculous.

  38. 53 yawningbread 8 April 2011 at 17:39

    More and more comments here are getting bogged down by specifics. I can see that many readers are finding it hard to understand what the problem is because the indicators they see around them (rising flat valuations) contra-indicate the thesis that I expounded.

    But if you are looking at current valuations you will never understand the thesis because my thesis is that MARKET EXPECTATIONS (which underpin current valuations) are based on a MISUNDERSTANDING of what the asset is. My point is that valuations and expectations are not soundly based, so looking at valuations won’t help you understand my argument.

    My argument is a remarkably simple one. It is that an asset of limited duration will have value declining to zero upon its expiry. To even begin to understand the rest, you first need to understand this point. If you cannot understand this point, you cannot understand anything else in this article.

    The next step is: After having understood this principle, how can govt policy promise a steady appreciation? Policy conflicts with logic. It’s plain stupid.

    Yet, trends in actual valuations seem to bear out the govt’s position. So how to explain present reality? My argument is that all of us can and have ignored the inescapable logic because so far, all HDB flats are still less than 50 years old. Expiry of leases are far enough away that we can pretend such an endgame does not exist. Thus, ignoring the existence of an expiry date, we act as if 99-year leaseholds are same as perpetuity. This, I argued in my article is a massive delusion. And as some other comment-makers here have noted, will become apparent (in a huge shock) within another 20 years, when a significant number of flats reach 70 years of age. Precisely because valuations have been going up instead of steadily going down during the first few decades of a flat, so the slide down towards zero will be even steeper.

    There are a variety of solutions to this problem, and my article does not attempt to argue which one is better, only to mention that SERS is most likely (simply because people will still need another flat to live in), but I will assert this: No solution is cost-free. All solutions will cost big money. After 99 years, you have nothing. You cannot have something after that for nothing. Either you pay or the state pays.

    However, my chief point is this: The govt is foolish to give an implicit guarantee that a limited-duration asset will streadily increase in value. Such a promise completely violates economic logic.

    If the govt did not give such an implicit guarantee; instead act responsibly by advising people to see a declining asset as a declining asset, and then ordinary citizens still go crazy bidding up prices and expecting the rise to go on forever, then I won’t blame the govt; I will blame mass stupidty (which is very common in the history of economics).

    The above naturally is based on the HDB building enough flats to cater to demand, which over the longish term, they have (despite short-term booms and busts).

  39. 54 yawningbread 8 April 2011 at 17:56

    Another way to look at the issue is this:

    Let’s say a brand new HDB flat (maybe 1,000 sq ft) costs $300,000. It’s actually a good price. But you ought to see it this way: The $300,000 is your prepaid rent for 99 years of that flat.

    It’s a good price, because it works out to just $3,030 rent per year. Of course, accountants will want to add in interest foregone if you pay rent so far in advance. My calculation shows that assuming a 3 percent interest rate, you are effectively paying $750,000 for 99 years’ rent, which works out to $7,575 per year, or $631 per month. For an entire flat, still not bad.

    So if the government stops calling it “home ownership scheme” but instead calls it Life-long Leasing Scheme and explain to the people that they’re getting a good rent rate for a guaranteed period, then I call it fair advertising.

    The lease is transferable, so a secondary market in leases will develop, but that in itself is not a problem.

    The problem is when the govt uses whatever levers it has to prop up the secondary market to a level higher than justified by economic logic. Defying economic logic this way cannot go on forever. Sooner or later, reality will bite and somebody has to pay the difference.

    The odd person may be able to cash out entirely before realtiy bites, but “cashing out” means selling/getting out of HDB flats while valuations are still deluded and NOT BUYING another HDB flat. However, the majority of us will be staying in HDB flats when reality bites, and we won’t escape the force of economic logic.

  40. 55 yawningbread 8 April 2011 at 18:04

    How long can the delusion/bubble be sustained? I do not hazard any guess. Few people have ever managed to make such guesses correctly.

    Under normal conditions, we think the realisation about impending lease expiry will not hit until flats are over 70 years old. It seems like it’s a while more.

    But let me paint this scenario:

    NEWSPAPER HEADLINE: 43-year old HDB block suffers severe cracks; residents asked to move out urgently.

    Just as we never know when an airliner may develop fractures in its airframe, we can never fully anticipate when one or more HDB blocks develops structural cracks and has to be condemned. That particular HDB block may be an untypical one, suffering from construction defects from its earliest days but no one knew of. It may not represent most blocks of similar age.

    Nonetheless, the effect of such a headline will spook the market. All of a sudden, despite official reassurances about exceptionality, buyers will start to look closely at the age of the block before they buy and market prices for older flats will adjust with seismic suddenness.

    • 56 Gazebo 9 April 2011 at 01:48

      and that’s why the govt has in place the final piece to ensure the delusion stays put –> information censorship and control over the media. nobody will ever know there is a problem.

  41. 57 sigmundringeck 8 April 2011 at 18:04

    Simple solution- top up or eoxtend lease, just like upping plot ratio to pump domestic property market out asian crisis slump. These r all the standard forms of financial engineering done previously in other countr
    ies. Your worry, tho sincere, will not come to pass.

  42. 58 Jay 8 April 2011 at 18:07

    Quote: yawningbread
    “The above naturally is based on the HDB building enough flats to cater to demand, which over the longish term, they have (despite short-term booms and busts)”

    So based on what your saying this whole article is pointless, if i am not wrong. This is because as long as HDB controls the supply and demand we would not see an issue with 99 year or 50 year old apartment. If I am not wrong is it not cheaper to tear down and rebuild an existing building as the foundations are already solid and there would be no need for extensive work? (I am not sure about this assumption)

    HDB will be able to control the supply and demand by having proper planning and forecasting on demand and they dont always have to use land reserves they can take from flats which are over 50 years old, its cyclical isnt it.

    And yes of course it will be higher than your existing HDB but you have a brand new lease of life for it and thus allowing you to profit from future price appreciation. The matter of fact is if you think we are going to suffer a sub prime crisis is Singapore you have to be pretty dillusional as we have a pretty big population fro our landspace, however I am not ruling out short term price corrections of 5%-8% at minimum.

  43. 59 Libran 8 April 2011 at 18:29


    Thank you for the brilliant analysis and explanation. It’s no doubt a time bomb ticking away hurriedly.

  44. 60 yawningbread 8 April 2011 at 18:32

    Sigmundringeck and Jay — you’re still not getting th point. Jay is still seeing the issue at personal micro level: “I won’t be affected” because if I buy a new flat every once in a while, I can effectively renew my leases indefinitely.

    Sigmundringeck says govt can renew my leases indefinitely and problem solved.

    But at the macro level both these so-called solutions have hidden costs. If you think you’re not paying anything extra, then surely the State is. Which is exactly why my title of the article uses the word “bailout”.

  45. 61 yawningbread 8 April 2011 at 18:33

    Is it possible that the average Singapore does not understand the concept of “opportunity cost” — that’s why they have a hard time understanding economics?

  46. 62 Jay 8 April 2011 at 19:14

    Oppurtunity cost need not have a monetary value, so your valuation of the bailout is flawed or am I wrong?

    I could be trying to sell my product but instead I am here debating with you on your article, so my oppurtunity cost is me loosing my commission on a possible sale. Am I not wrong in my concept of opportunity cost?

    Relating this back to your article, how are you relating opportunity cost to it? The system which we have is unique to Singapore because of our conditions and it is one which is sustainable as long as it is managed efficiently. Which brings me back to my whole initial argument that your theory and examples used cannot be compared to our situation. Thats all I am trying to explain.

    Your valuation of $270 billion expects a whole array of circumstances to take place at the same time, which honestly doesnt make sense.

  47. 63 Libran 8 April 2011 at 20:29

    yawningbread 8 April 2011 at 18:33

    “Is it possible that the average Singapore does not understand the concept of “opportunity cost” — that’s why they have a hard time understanding economics?”

    I believe many do not understand the concept of “opportunity cost”, just as many do not understand what really causes inflation, linking it mainly to the govt. printing too much paper money, and running huge fiscal deficits, whereas the real cause of inflation is actually the runaway creation of credit by banks, which would always lead to crash.

  48. 64 shame shame 8 April 2011 at 21:14

    In Singapore the hard truth is everyone who owns a vehicle or a 99 years “property” is a rental. You don’t really owns it because after 10 years for vehicles and 99 years for “properties”
    it has a zero value!This is the hard truth when the time comes and don’t expect the government to bail you out.

    Although it is possible for the then government to extend the lease but at a price very much similar to the COE system.

    So don’t ever believe Lim Say Swee’s statement that HDB prices will rise for eternity!If it is so then ask the PAP government to put this wordings in the lease agreement or has the government publish a guarantee statement to that effect. At the end of the day someone is going to be the greater fool!This is the hard truth!

    • 65 J 9 April 2011 at 02:49

      The post from Shame-shame is correct. You don’t just dissect what the politician said on TV. You need to understand during an election, they mask out the bad news. What he wanted to add was, … 10 yrs later, the buyer of the flat will find that the market value has gone up, IF AND ONLY IF there is remaining lease left. Surely, he conveniently omits the last part because the people need not hear the bad news now as it is an election year.

      The late Mr. Goh Keng Swee was wise, probably more Austrian than Keynesian. Precisely why they started with 99 year lease in the first place!

      In the world we live in, we have many ponzi schemes to build up the ultimate bubble.

  49. 66 T 9 April 2011 at 00:14

    About the point of (misguided) market expectations that underpin the valuation of flats, I think there are several things to consider.

    Owning a flat (whether by lease or freehold) will always be an aspiration for residents. This contributes to market expectations and means that on top of construction costs of flats, HDB flats will attract a certain minimum premium just for being a form of housing/status indicator in land-scarce Singapore.

    To problematize the housing issue a little, the measure of “building up and up” HDB flats to ensure an artificially unlimited supply of flats can also have an impact on market expectations. Would one want to live in a literal concrete jungle, where flats might rise to 50 stories tall at the point of time when the current 99 year leases are about to expire? In addition with increasing urbanization, the sheer density of the built-up HDB environment might become uncomfortable. The increase in population(primarily due to foreigners/PRs) further worsens this discomfort of overcrowding and alienation. Add to this, rising HDB flat prices that out-pace income growth of (young) couples, whom might then increasingly choose to stay with either pair of their parents. All these can have an effect on the (local and perhaps, even foreign) demand for HDB housing that will overwhelm the “aspiration for HDB housing” and the ability and willingness to purchase a flat.

    One of the proposed solutions to avoid the potential bailout in 50 years has been to extend the flat lease or to offer freehold ownership to residents, both measures at a cost to the resident, the State (or even both). The opportunity costs* of these two measures is that the land could have been use for building higher flats (and hence more value could have been derived from the same area of land). This discourse suggests that there are only two scenarios

    a) either continue the 99 year lease system (as an extension of the leases) whereby prospective bailouts are ultimately inevitable as expressed in this article
    b) or whereby freehold flat owners can potentially hold on to their flats forever, incurring the opportunity costs as mentioned above*.

    I tried to break out of this (twin-faceted) paradigm of housing and found that there is a 3rd form of housing ownership other than leasehold and freehold.

    This is a new system of joint ownership introduced in 2004. It is considered to be better than leasehold for some types of property, especially blocks of flats. Under commonhold, a company, known as a commonhold association, owns the freehold of the building and is responsible for maintaining the common parts. The owner of each flat is a member of the association and must agree to certain terms and conditions (usually similar to those of a lease). Like leasehold, commonhold has both advantages and disadvantages.

    Being relatively new, commonhold is not, as yet, widespread. Some commonhold developments are now being built, but housebuilders have tended to hang back, to see how well the new system works in practice before committing themselves.

    You may be able to convert an existing leasehold into a commonhold, but the process is complicated and expensive. You and the other leaseholders in your building must first acquire the freehold, and you must all agree to convert. Again, the Leasehold Advisory Service can provide details.

    There is also a piece of legislation, the Commonhold and Leasehold Reform Act 2002, pertaining to such a type of home ownership

    One of the thoughts I had after briefly looking at the legislation was this:

    A similar management committee could be formed for a block or several blocks of HDB flats, comprising of government representatives, real estate professionals, lawyers, members of the construction industry and an ombudsman, all of whom will make decisions together with the residents.

    Some of such decisions that could be undertaken are:
    -A gradual conversion of leasehold flats into freehold with a further discussion on how much residents and non-resident actors should pay, taking into account factors such as the flats’ proximity to MRT stations, prospective developments in the vicinity, etc.

    -The setting up of conditions (e.g. to build underground MRT lines) in which leasehold/freehold flats can be brought back by the Government, whom then might have to guarantee the availability of a block of similar flats at an agreed fixed price for residents to move into.

    -The collation of the discussion content in such commonhold arrangements for policy-makers to make better urban design policies that
    1) secure the permanency of designated residential (HDB) zones, hence further legitimizing the status of freehold flats in such areas
    2) differentiates and deals appropriately with the geographical mix of freehold and leasehold flats (so as to manage and stabilize market expectations as to what is the majority/wholly-accepted price of freehold and leasehold flats)
    3) establish distinctive HDB (multi)cultural enclaves that encourage residents to stay on and not move out
    4) better match the current and projected demand of HDB flats with Government-controlled supply to reduce market fluctuations in prices
    5) monitor foreign demand for HDB resale flats and adjust immigration policies accordingly

    -Cross-communication between commonhold management committees so as to gradually form a zonal/national network of coordinating HDB flat buyers and sellers that keeps the expectations of both in check, thus focusing on making HDB flats a home to own and to strive to eliminate the profit motive.

    (This is particularly important because at the moment, buyers and sellers deal with each other individually for their own interests, and this tends to lead to speculation or “a race to the top for the best flat price” e.g. Sellers trying to get a good price in boom times by asking for higher COVs (Cash Over Valuation) and Buyers trying to make a profit on HDB flats by “buying low and selling high”, even if this has been made more difficult by new HDB rules controlling when one can sell his/her HDB flat.

  50. 67 Neptune 9 April 2011 at 00:26

    Thus, ignoring the existence of an expiry date, we act as if 99-year leaseholds are same as perpetuity. This, I argued in my article is a massive delusion. And as some other comment-makers here have noted, will become apparent (in a huge shock) within another 20 years, when a significant number of flats reach 70 years of age. Precisely because valuations have been going up instead of steadily going down during the first few decades of a flat, so the slide down towards zero will be even steeper.

    Good point.

    To simplify the thesis, suppose a parent with a hdb flat valued at S$400K and his is happy to pass the HDB property with 20 yrs lease, to his cash-poor son. The 80 yr old man thought his son will become rich after he passes away. But he never know that 15rys after he checked out Sg, the flat reaches 90 yrs old–to be demolished. So the value of S$400K is just a ‘Delusion’. The old man invested all his retirement fund(CPF) for nothing.

  51. 68 Libran 9 April 2011 at 11:14

    Jay 8 April 2011 at 19:14

    “The system which we have is unique to Singapore because of our conditions and it is one which is sustainable as long as it is managed efficiently.”

    You’re are like a member of the deluded crowd out there who have chased the price of HDB flats to manic proportions. As a member of the crowd, you become an instant egghead, losing your ability to think logically and intelligently.

    Our HDB market is like an inverted pyramid with larger and larger layers piled on top. Now it would take god-like balancing skill to keep the whole damn thing from crashing down like a ton of bricks!

  52. 69 JR 9 April 2011 at 11:36

    Thanks YB for the insightful article.

    In order to make it easier to understand YB’s thesis, you have to remove all that fluff to find the lowest denominator or the root of the fundamentals. It is not about cars vs properties per se.

    All things being equal,
    1) Leasehold – it is a time expiry piece of paper.
    Every accountant knows that the closer to to the expiry date, the diminishing value it will be approaching zero.

    2) Physical structure & fitting – New vs Old.
    Accountants also know that new will be worth more than old. This is also a diminishing value and will come a time when Disposal Cost (demolish) will be higher than Residual Value.

    The above 2 are the general rule, and there are exceptions, like an antique is worth more than something new. But I regard these exceptions as external factors. All other factors (external factors) that affect prices should be treated as exceptional rather than norm. It is for this reason, in accounting books, all assets are depreciated, including property. When a property is sold at a higher price, it is captured as an Exceptional Capital Gains in the accounting books. Even disposing of an asset there is a residual value, and these are also treated as exceptions. These external factors do not alter the basic accounting principle.

    I regard external factors such as, demand/supply, inflation, changes to plot ratio/density, changes to land use, location, amenities, housing policy, financial policy, interest rates, immigration policy and the list goes on. Do not let the external factors cloud your judgment on the fundamentals.

    I agree with YB that this is a ticking time bomb. The government will try to use all “levers” within their control (i.e. external factors such as supply, policy etc) to control the rate of ticking (delay as long as possible the inevitable). Maybe the impact of the bailout will be felt in 20 years time? I cannot put a finger to it. Maybe if the government play their levers right, 30 years, 40 years? But certainly an exuberance market with prices hitting sky high will accelerate and magnify the ticking time bomb. Hence, you have the cooling measures. The government is in a catch-22 situation, whereby they cannot let the prices crash, but also not rocketing to the moon. A short term gradual decline is what they hope for, and after which a longer term gradual increase. Why gradual increase? To follow through their story that assets are increasing in value because of their good governance.

    The government can prop up their story by doing SERs. The first few batches of oldest flats, in terms of absolute numbers (quantity) is not much. There will come a time when estates like Toa Payoh, Clementi and Ang Mo Kio becomes old, that will be the time where the government will not be able to keep up with the SERs. Then there comes the question of population density. To support SERs financially, the assumption is that you can increase density (built higher flats), so that the profits from the extra units sold could fund the SERs. But there will be cost constraints, demand constraints, and points of diminishing returns. The higher the flats, the higher the construction costs. Imagine the whole of Toa Payoh, Clementi and Ang Mo Kio to be 40 storey concrete jungle, would there be enough population to fill up the supply? Even with foreigners and PR, it would be a tall order. Even then, physical constrains start to set in. Everyone will feel overcrowded (as if it isn’t already), no more personal space, transport and infrastructure will be stretch to its limits.

    Extending the 99 yr lease for a nominal price may buy the government some extra time. But it comes at a cost, and the buildings are structurally old and may come a point in time that it is beyond economical repair.

    This at the end of the day is a downward spiral. It just depends on how fast this spiral will take. The S$270b is just a figure. Of course it depends on which of the major estates hitting the critical magic number of remaining years left of the lease and needing a bailout. By any standards, even a 20%-30% of S$270b can easily break then whole economy.

  53. 70 Vin 9 April 2011 at 12:00

    I think the whole thesis is also dependable on economic growth.

    BUT first the whole argument about leases running out. Actually you have real examples. I cannot remember exactly where but it was reported in the media not too long ago that certain areas have landed properties on the cheap. So the houses cost something like $180,000 but running out on a 10 year lease. These are private properties. Using this example, you can see YB’s scenario being panned out. But then again, both seller and buyer are going into the transaction with their eyes wide open. They do their own calculations and come to an agreement or disagreement. Market forces are at work. There is no crisis. The same market forces would also have been at work some 10, 20, 30 years earlier. Based on the prevailing economic conditions and the remaining lease, buyers and sellers make their calculations and transact accordingly.

    Private properties, e.g. condo, can also be ‘SERS’, especially if they are on good location. Developers must apply to the govt to top up the lease and pay for the top up. If this happens, the original condo owners will sell en bloc to the developer, and amidst negotiation, may be offered to buy a new unit in the new condo with a new lease at a new price. So everyone wins, including the govt.

    So where is the crisis? In the first scenario, even if leases are running out, people are ‘opened’ to the ‘problem’. They resolve the situations on their own. In the second scenario, if private properties can have their leases extended with sound economics, what more about public HDB housing using SERS?

    The question about who pays? Well, if you want a brand new flat with newly refreshed lease you have to pay for it, using partly the proceeds from the sale of your old flat. You get a new lease of life so to speak. The govt also has to pay for buying your old flat and constructing new ones. And it may get back some plots of land if it can increase density in the new flats. So theoretically the HDB leasehold can become a freehold property in this aspect.

    But all bets are off if there is severe economic recession/disaster etc. The whole situation is premised on continued economic growth. Otherwise, the govt will not have the money to rebuild and the people will not have the money to buy new flats.

    • 71 yawningbread 9 April 2011 at 20:19

      It’s important to remember a crucial distinction between private condo 99-year-leasehold and HDB 99-year-leasehold. Private condo leaseholds include the land. So even if the buildings collapse as a heap of rubble, the condo owners have lease title to the land (for the remaining duration of the lease), thus value. Land leases are generally renewable, on payment of fees. HDB leases do not include land. If the building is no more there (e.g. it collapses, or it becomes too old and unfit for habitation) the lease effectively has no value anymore.

    • 72 ST 11 April 2011 at 19:31

      The cheap houses on land with a very short lease is a good example of treating it as if it was rental for a fixed time frame ie till the lease is up. No one in that scenario expects the value to increase or to profit from it. But HDB flat owners don’t think of 99 year leases the same way especially since there are plenty of SERS examples.

  54. 73 Laoshi 9 April 2011 at 16:07

    At the rate of increase in HDB prices, we could well be looking almost a million dollars for maybe a 110 m2 4/5-room apartment. Unless there is going to a great, great surge (highly unlikely with the government’s policy to get cheaper to be competitive) in real wages, I wonder how many average working class people are going to find them affordable. Never mind what’s going to happen 45 or 50 years down the road!

  55. 74 Melbourne 9 April 2011 at 16:37

    I’m just going to throw a few spanners into the works.

    It’s in the Singapore Government’s interests to continue the SERS program. Simply because it profits massively from the increased plot ratio – if you knock down a 15 storey block in Queenstown and build a 40 storey block on the land, thats 25 storeys of pure profit.

    SERS is a huge conflict of interest – basically an en-bloc where the Government is developer, regulator and landowner all at once. Huge profits. Alex has already mentioned why they won’t give you a lease top-up. They will SERS instead.

    In my opinion, they won’t let leases run out, because it will affect market sentiment adversely. There’s no point shooting themselves in the foot while they can simply SERS, still make large profits and keep the party going.

    Therefore I think Alex’s scenarios are a little far-fetched.

    “At some point, people are going to say: Oh, your block is nearly 80 years old and your lease has only 22 years left, no way I will even consider buying your flat…”

    – What if the Government guaranteed that all flats would be SERSed before their lease ran out? Would people buy an 80 year old flat then?
    – Which begs the question, why don’t they?

    Food for thought.

  56. 75 Melbourne 9 April 2011 at 16:47

    But if you are looking at current valuations you will never understand the thesis because my thesis is that MARKET EXPECTATIONS (which underpin current valuations) are based on a MISUNDERSTANDING of what the asset is…

    My argument is a remarkably simple one. It is that an asset of limited duration will have value declining to zero upon its expiry.

    People expect old flats to get SERSed, i.e. have their duration extended. Therefore they will pay high prices for them.

    They expect this because the Government has a good, selfish reason to do so.

    So would this be a logical and reasonable expectation?

    • 76 JR 9 April 2011 at 23:18

      Melbourne, now a few blocks are old and SERs by the government and they make some profits building 40 storey flats and sell at a profit. But imagine the time when the entire Toa Payoh new town, Clementi new town, Ang Mo Kio new town all require SERs! How much supply is thrown into the market? Do we have that many locals to take up “25 stories” per block x blocks x 3 new towns??? Not to mention the very high density and overcrowding!!
      Or do we still need to increase further the foreign talents to take up these supply overhangs? There will come a point in time the sheer volume of HDBs requiring SERs will overwhelm the ability to handle it.

    • 77 prettyplace 10 April 2011 at 12:13

      SERs cannot be indefinitely applied.

      HDB might be able to recover the cost and in fact make a tidy profit out of SERs, but they will displace people from their locations. The master plan of 2008 has increased 3 times the density population in town areas.

      They will have to import more ‘foerigners'(lol) as well for this to take place.

      At the rate, the govt is selling land, mmmm…we might not have enough land for replacement flats. I think this is an important factor.

      it sure isn’t rosy.

  57. 78 Libran 9 April 2011 at 22:28

    Melbourne 9 April 2011 at 16:47

    Now Melbourne, don’t be simple. You’re making a straight line rosy projection, that the world economy will continue to grow with no major upheavals, that we can continue to create unlimited no. of jobs for foreigners who want to come here, that our little island can somehow stretch itself to provide for the building of necessary infrastructure to cater to a much bigger population, that Singapore will continue to remain attractive to foreigners as it gets more congested, etc. How much taller and closer can we build our flats, how many more people can we pack into this tiny island, before it becomes unstable and undesirable a place to live in? And also don’t forget that an earthquake of magnitude 8 and above in nearby Indonesia may cause tall buildings here to collapse.

    Remember, nature has her way of correcting excesses and absurdities like what you are proposing.

    • 79 Melbourne 10 April 2011 at 11:59

      Please read my comments carefully. You’re a little off tangent here. I have not made any projections, nor am I proposing any “excesses and absurdities”.

      I’m simply saying that Alex’s arguments about the lease expiring don’t seem very realistic to me. Simply because political factors and the mechanics of SERS makes it a non-issue.

      Singaporeans should be worrying about other things such as affordability and what you have described. Not the lease expiring.

      • 80 yawningbread 10 April 2011 at 12:53

        Hang on a bit. You’re saying that since political factors make rescue mechanism like SERS virtually assured, this means the HDB leaseholders do not need to worry about any scenario where their homes become zero value, therefore I was wrong.

        Your argument goes like this:
        1. There will be a rescue mechanism,
        2. HDB leaseholders aren’t going to lose money,
        3. Therefore there will not be any crisis of valuation,
        4. Therefore there is no need for any bailout,
        5. Therefore Alex is wrong to paint a scenario of crisis and bailout. . . . because there will be a rescue mechanism (a.k.a. bailout)

      • 81 Melbourne 10 April 2011 at 16:17

        @Alex: A straightforward lease top-up would be a “bailout”.
        As the landowner cum developer, the Government profits immensely from SERS. I wouldn’t call that a bailout.

        @JR: “But imagine the time when the entire Toa Payoh new town, Clementi new town, Ang Mo Kio new town all require SERs! How much supply is thrown into the market?

        The point of SERS is to free up existing land value in prime locations, there are many ways to profit from that. This doesn’t necessarily lead to extra supply.

        Let’s say you have three existing 15 storey blocks and SERS them all. The Government can build a new 45 storey block on 1 plot and sell off the other two plots for condos or low density luxury housing. A good example of this is the former HDB blocks opposite Redhill MRT.

        Not to mention the very high density and overcrowding!!

        I don’t think they care.

        @prettyplace: I agree with you that SERS cannot be indefinitely applied. But they will milk it for all it is worth.

        Another related point I want to bring up is that I have serious doubts about the 270 billion “bailout” figure cited in the article. This was derived simply by multiplying 300K x the existing stock of 900K flats, and ignores the fact that the Government holds a monopoly over public housing.

        Even assuming a worst-case scenario e.g. land utilization cannot be further increased and those profits are ignored, given that the Government is the landowner and the majority of people affected by SERS will immediately purchase another flat from them, they only incur the costs of building new flats – which, frankly, with all the economies of scale they enjoy, is not very much.

        And yes, that would be a bailout.

        But what are the costs to the Government of not doing this bailout and thus losing political power? The future profits from the sale of new flats, for one. Or the profits from investing your CPF monies.

        All things considered, I think they would view building new flats for the people once every 99 years as a very small price for them to pay.

        In conclusion, while I agree with some points in Alex’s article, I don’t think that the expiry of HDB leases will be a major factor in the popping of the current property bubble, and it certainly won’t lead to the “crisis” he is painting.

        Housing affordability would be a much stronger candidate in my opinion.

  58. 82 Cicada 10 April 2011 at 11:48

    Actually the generation who bought HDBs in the 60s/70s had it best. Those days, the flat can paid off with single income and 20 years mortgage.

    Back then, economic crisis was like once every 10 years. The first major economic crisis Singapore faced was in 1985.

    Now economic cycles/crisis is once every 5 years. So in a 30 mortgage, you faced at least 6 downturns or more.

    A lot of Singaporeans went into negative equity when prices crashed in 1998, especially those who bought HDB flats during the 1996 peak. Some of those who bought during the 96 peak managed to break even last year, after taking account of interest payment for 14 years.

    What is the difference between the last crash and the future one?

    In 2003, HDB allowed commercial banks to finance resale flats for those who exhausted their 2 subsidised loans. When prices crashed, banks will ask for top up in valuations. With a HDB flat in prime costing area $600-700k, one might need to cough out cash to a tune $70-150k, you might be able to get a bridging loan from the bank, if you are credit worthy.

    If not, you might need to face foreclosure.

    Some might still be in debt to the bank after selling off the flat.

    The question is not “will property prices go up”, the more pertinent question is can you stayed employed to service the mortgage.

    What HDB can do now is offer non concessionary loans for those on bank loans.

  59. 83 Melbourne 10 April 2011 at 16:36

    One unrelated point I want to make about SERS is that the Government land banks.

    I’m sure you’ve read about some flats in the Jurong area that were acquired for SERS, renovated and then rented out to foreigners by HDB/EM Services.

    To reiterate, the whole point of SERS is to free up land value which the Government can profit from. Doesn’t necessarily lead to increased supply instantly. They can just hold the land and get a revenue stream from the rent while waiting for the value to appreciate over time, before selling it for the best price.

    This is essentially theft – since if the leaseholders actually owned the land, their stakeholdings would be diluted.

    Using my earlier example of 3 blocks with 15 storeys of 4 flats each, each occupant gets 1/60th of a plot of land value.

    if you move everyone to a single 45 storey block, each occupant gets only 1/180 of a plot of land value.

    Same plot of land with the same value, but each person gets a smaller share.

    However, since Singaporeans don’t own their flats or the land – they merely own the right to stay in the flat, all this is academic.

    This is the primary reason why the Government will only allow leasehold strata titles for public housing – and you will never own the land.

    • 84 Melbourne 10 April 2011 at 16:38

      And the beauty of it is, they already own the land free and clear. There are no holding costs. Every penny of the rent translates into pure profit.

  60. 85 Gard 10 April 2011 at 17:26

    I am having a hard time understanding what Alex is saying given the exchanges so far. Are we talking about the economics of housing as a dismal science versus the economics of housing in a classic boom-and-bust cycle sense? I had thought it was the former.

    1) Mr Lim Swee Say said nothing about the ‘real’ price of housing; Mr Lim could be referring to the appreciation of nominal prices (in line with inflation). In a world with no inflation, the real prices can be flat (literally). You bought an apartment for $x and 99 years later, HDB bails you out with $x. You have enjoyed the use of your apartment without paying rent, and the State has enjoyed other sources of revenue from your family during your stay in Singapore even if it makes no profit or small loss on the HDB. It is win-win. In fact, you can think that you transferred the burden (and rewards) of investing $x to Temasek Holdings.

    Of course, the State would not buy back at the last moment; it would probably choose the right moment in the last 10-20 years where the State would not make a grevious loss on the supposed bailout (SERS).

    2) Pricing for long-living asset like housing is not normally treated the same way as cars. Nobody can tell you what is the rental rate 30 years down the road, let alone 60, 70 years. A conservative estimate can be given, based on the assumption that human beings are risk-averse. The post-independence 60/70s generation who bought HDB had it best because the valuation were way underestimated.

    3) When the government promises bailout, it leads to moral hazard, such as what happened in the financial sector (too big to fail mentality). This in fact aggravates the boom-and-bust cycle. The better mechanism would be
    a) Continue to push towards 6.5 million population and beyond (including an implicit transfer of bailout burden to foreigners as they cannot buy new HDB apartments)
    b) Continue to raise real income of households
    c) Discourage speculative activities (prick small bubbles)

    • 86 yawningbread 10 April 2011 at 18:00

      It’s me who doesn’t understand what you’re going on about. You’re bringing so many irrelevant factors, you’re confusing the whole issue. For example, in Point (1), you wrote: “You bought an apartment for $x and 99 years later, HDB bails you out with $x. You have enjoyed the use of your apartment without paying rent, and the State has enjoyed other sources of revenue from your family during your stay in Singapore even if it makes no profit or small loss on the HDB. It is win-win. In fact, you can think that you transferred the burden (and rewards) of investing $x to Temasek Holdings.


      What has Temasek Holdings got to do with it?

      Secondly, your argument boils down to: I paid $X for a flat. 99 years later, Singapore (the government?) benefited from my existence on earth and living/working in Singapore, therefore Singapore (the government?) owes me a brand new replacement flat before the 99 years is up. Are you serious about such an argument? Why don’t you also say: Singapore (the government?) owes you all the food , the entertainment, the brand new clothes, shoes, medicine you need since you spend your earthly existence here in Singapore?

      As for your rent argument, even if one uses rental return as a basis for calculating asset value, this too would result in declining asset value as the end of lease approaches.

      • 87 Gard 10 April 2011 at 18:35

        1) The Temasek Holdings is an example. I am pointing out, after you have paid $x to HDB, the money doesn’t disappear into some black hole and stay there for 99 years.

        2) You know that you are using the straw-man argument here. My point is, the government has an incentive to have you buy an apartment in Singapore, so that you would be rooted and continue to contribute to the economy. Think of HDB as the carrot in exchange for your loyalty. An analogy is, opening an Hotmail or PayPal account is free, but the company benefits from other ways even if no revenue is collected directly from you.

        3) I do not deny that it would be a declining asset value as end of lease approaches. A person who pay a 98 yo flat today (one year left) more than the corresponding annual rental rate is probably a fool. Information about rental rates 30,60 years down the road is ‘unknown’, however. You have made certain assumptions about the kind of rental rates in those horizons.

        4) I don’t think the factors such as rising population, rising median income and government interventions in the housing market are irrelevant factors as you called them, in assessing if there would be a $270b bailout at the end, since you talked about the ‘macro view’. Are you serious to believe that you are the only one who foresee this problem when those in the civil service ignored the housing crises that happened in Japan, Australia, USA, Europe, etc.?

      • 88 yawningbread 11 April 2011 at 00:07

        But indeed, huge swathes of government officials in many countries ignored the asset bubbles before they burst in 2007. Why do we find it so hard to believe that the same neglect can’t occur here?

    • 89 prettyplace 11 April 2011 at 00:04

      Hey buddy GARD, How can YB’s arguement be wrong.

      That those who enjoy SERs earlier benefit more and since SERs cannot be indefinte.( unless with enhanced building technology, which will anyway be too expensive for public housing)

      The banks don’t lend you, niether does CPF if your property is left with a lease under 60 years. Why can’t it be dismal science. There is only the govt to bail you out, and it sure looks like a huge bailout.

      Albiet, the last dismal science predicted by the old man on fertility was utterly wrong.

      • 90 prettyplace 11 April 2011 at 00:08

        Neither does CPF if you want to buy a reslae flat, with a lease under 60 years.
        (of course, this is a govt policy which can be changed, but for how many flats and will the demand continue to remain)

  61. 91 Libran 10 April 2011 at 18:15

    Melbourne 10 April 2011 at 11:59

    “I’m simply saying that Alex’s arguments about the lease expiring don’t seem very realistic to me. Simply because political factors and the mechanics of SERS makes it a non-issue.”

    And I’m saying SERS will not defuse the time bomb that is set to go off soon, as YB has pointed out. The number of flats requiring SERS will increase by leaps and bounds so as to overwhelm the govt.’s ability to SERS them. If I could use an analogy I used in an earlier posting, our HDB market is like an inverted pyramid balanced on its apex with larger and larger layers of HDB flats piled on it, each layer piled at higher “value” and higher leverage (mortgage loan). Being leasehold properties, their value will fall with time (there are no two ways about this, unless the govt. bails out the flat tenant, which the govt. will not do or will not be able to do).

    Financial leveraging is a double edged sword, it benefits you handsomely on the way up, but hurts you severely on the way down. Any of a number of factors can trigger a panic dumping of HDB flats (and cause the pyramid to come crashing down!), such as a credit crunch that we witnessed in 2008, or the realization that HDB flats with a diminishing lease, is a bad investment. When that happens, those HDB flat lessees will see their “investment” go up in smoke! This can happen tomorrow, next month, next year, or sometime in the not-too-distant future.

    • 92 prettyplace 11 April 2011 at 00:14

      I will suggest Melbourne & GARD read about the Failures of Pension Funds & Savings in the 80s in the US.
      Alan Bond in Australia.
      Any book on the Japanese economy and why it tanked.

      The recent US fiasco, does not apply much, because of diffrent factors.

  62. 93 Gard 10 April 2011 at 19:36

    Let me offer an example:

    Suppose you have $400,000 today and you want to know if a 50 yo apartment is worth this amount. You do have reasonably reliable information on the rental rates for the next 20 years. Your decision to buy the 50 yo apartment is simple: if the combined rental income for the 20 years exceed your opportunity cost (the return of $400,000 in an alternative investment, i.e. CPF), you will make the decision to buy the apartment at those prices even if you don’t know about what is going to happen after 20 years. If not, you are probably better off leaving that money in the alternative investment vehicle (CPF) and renting the apartment for the next 20 years. In the equivalent case, your returns in CPF exactly offset the rent.

    Some readers would jump and say, ah, in the equivalent case, isn’t it better to buy the apartment instead of rent – since at the end you still have a 70 (50+20) yo apartment versus nothing in CPF. Yes – but nobody knows what the value of that apartment is then. So I concede, your decision to purchase is also influenced by your risk appetite (about the unknown). The State can influence your risk appetite through borrowing costs and legal measures, to prevent you from taking excessive risks. You can try to buy ‘insurance’ but insurance companies probably won’t insure you against unknown risks.

    Now, 20 years down the road, someone would face the problem as you: a 70 yo flat but only 20 years of rental information available. The remaining ten years is unknown. Your decision is still based on the 20 years of known information and your risk appetite.

    How about the last 9 years? Remember, you do not have any better information about the last 9 years of the apartment than today. (If you are the owner or renter, you might have the insider information, though that results in adverse selection for potential buyers.)

    If this sounds complicated, it’s okay. Real estate economics or anything worthy of learning in depth is not something picked up over a few weeks or via casual discussion. If this topic has excited some readers to research more into the subject, Alex has already done a great service.

    • 94 Gard 10 April 2011 at 20:42

      To end: some readers might interpret ‘zero’ value of the apartment after 20 years. ‘Zero’ is not the same as ‘unknown’. Even if the State promises gradual appreciation, it acts as an ‘signal’ – as much as the signal to promise apartments to be ‘affordable’. These signals are information that would accordingly be translated into changes in rental prices as well. The State could even signal ‘zero’ value, if it so wishes, and market rental prices would be updated to reflect that information.

      As it is, the signal that the State seems to be giving is that, the growth of nominal prices of HDB apartments would not deviate excessively from the median nominal income. A very reasonable proposition.

      Signaling is a tool to deal with the adverse selection problems for markets with imperfect information. (To close the loop on my essay so far.)

      I hope I have simplified my end of the discussion as much as I could. Economics as a field of study has evolved so much beyond the classic models of the dismal science. It is an ideal to live up to Albert Einstein’s maxim that “everything should be made as simple as possible, but no simpler.”

  63. 95 Doublechin38 11 April 2011 at 00:29

    So what’s your point and what are we supposed to do?

    Sell our over valued flat and wait for prices to plunge ?

    • 96 yawningbread 11 April 2011 at 00:50

      Like many readers, you’re only reading it from the personal/micro perspective (How will it affect me?). The article was written from a macro perspective (How will it affect Singapore?).

  64. 97 Tan Ah Kow 11 April 2011 at 02:52

    Wow YB. This is the first time I have seen you arguing so passionately. I note that in previous blogs you have never attempted to respond to specific comments more than once.

    In this instance, I would say you have finally encountered something know as an emotional exuberance. When it comes to “brick and mortar”, I am afraid it is hard for people to see the woods from the trees. Working in the financial industry often expose me to this kind of mentality so I sympathise with you when you are trying to bring the big picture and others can’t see beyond the little one.

    On the whole I understand and agree with your thesis. You have brought up I point I have often when debating with my friends. I face the same counter argument that you see posted here.

    Personally, I believe that a housing burst is coming. But I think somehow many Singaporean and admirer of Singapore seemed to think that we have such fantastic financial reserved that such a bust can easily be bailed out. Somehow people don’t seemed to realise that our public debt is already 102% of GDP higher than Ireland or Greece when they went bust.

    Also they believe that in the case of bricks and mortar that there is limited land supply so demand will outstrip supply hence property price will always be on an upward trajectory. What many don’t realise is that market price is also a function of money supply — i.e. wages of buyer too. If you have a economic situation where wages have to be depressed to stay competitive and housing being “guaranteed” as an appreciating asset, clearly something must be making up the difference. A point many of your readers can’t seemed to see.

  65. 98 twasher 11 April 2011 at 05:46

    Some people are talking about a pyramid scheme with the number of SERS schemes required ultimately increasing to the point that the government cannot support them. Some questions about this claim:
    1) Is this increase part of Alex’s argument?
    2) Why would this increase occur? It seems to me it would occur only if the rate of new flats being constructed has been increasing over the long term. Is this the case?

    • 99 yawningbread 11 April 2011 at 12:18

      Answer to (1): No.
      Answer to (2): In fact it will not occur to anything like that scale, simply because population growth will level off. If anti-immigration folk have their way, population will decline instead, because native born Singaporeans are not reproducing themselves. So SERS may be used to buy back, say 500 flats, and replace them with 300.

      This then begs the question: How will the economics of that kind of SERS work? Can the 500 expect the govt to buy back their flats at values higher than they paid for them (vide Lim Swee Say’s implicit guarantee of steadily increasing values)?

  66. 100 Gard 11 April 2011 at 10:17

    The entire analysis of this supposed bailout is difficult is because of a vast tract of unknown prices in the future. I’ll come to that later.

    1) About government officials ignoring bubbles. If anything, the Singapore government is obsessed about statistics. But it would be good for readers to see the kind of housing bubbles that existed in Japan, Australia, etc. in terms of statistics relative to Singapore. Look at ratio of housing prices to median income, for example. A small housing bubble, when pricked, hurt some people; but the kind of bubble Alex is talking about hurts practically everyone, including the people and their children in the civil service. I don’t deny that this can happen, but looking at what the government is doing so far (i.e., cooling measures), they are not ignoring the problem.

    2) What should the normal HDB leaseholder do? Do the rational thing. When you choose to buy something that is way above your ability to service your loan given the information you have today about future expected returns, you have chosen to take on excessive risk. The State has no interest in encouraging excessive risk taking. If you are not yet a homeowner, you still do the rational thing; you can rent. If rental is excessive, you should flee Singapore. In that case, it would be too late, and yes, I shall concede that the State had ignored the bubble.

    3) The discussion on the possibility of the bailout hinges on the assumption on the perpetuality of the State (i.e., the State lasts forever). Of course, if this assumption is violated, all bets are off. With perpetuality, interesting numbers come into the picture, such as infinity. I don’t think accountants use infinity in their spreadsheets, but it is used in mathematics, physics, engineering and economics.

    The Greeks had a hard time coming to grasp about irrational numbers, but people today use it quite routinely, (though less so for complex numbers and other mathematical constructs).

    4) When disasters happen, they serve to enrich the field of study by challenging assumptions of the old model being used or strengthen the belief in models that made those prediction. I completely accept that things that happened in the past can happen again. At the same time, we must at least believe in the ingenuity of human beings to avoid that repetition, for without that, no progress is possible.

  67. 101 Libran 11 April 2011 at 10:24

    Gard 10 April 2011 at 20:42

    “I hope I have simplified my end of the discussion as much as I could. Economics as a field of study has evolved so much beyond the classic models of the dismal science. It is an ideal to live up to Albert Einstein’s maxim that “everything should be made as simple as possible, but no simpler.””

    The problem with economists today is that they try to turn economics into a science, on par with physics, chemistry mathematics, etc. So they have invented econometrics which few people could understand, except mathematicians, I suppose. But alas, economics is all about human emotions and behavior, which do not lend themselves to mathematical formulas and extrapolations. Human beings are prone to delusions and manias, greed and fear. At any time panic could break out and cause markets to crash, and expectations to become overwhelmingly pessimistic afterward. The general populace could fall into a depression psychosis, which could then lead to a great depression, unwinding the huge excesses that had been built up when everyone was optimistic and willing to take on huge debts to finance consumption and investment.

    Could you tell us how many economists actually forecast the near financial meltdown and the Great Recession that followed in 2008?

  68. 102 Melbourne 11 April 2011 at 10:33

    Alex, are you going to post the two comments I submitted in reply yesterday?

  69. 103 Rajiv Chaudhry 11 April 2011 at 11:06

    Melbourne, am I missing something in your arguments? YB said

    “Let me make a digression and talk a little about SERS. These initials stand for “Selective En-bloc Redevelopment Scheme”, under which the Housing and Development Board identifies certain old blocks of flats and buys them back from leaseholders”.

    Lets dwell on this for a bit. The government will probably buy an old flat at a knock-down price, right? This holds true no matter what point in time we are talking, old flats will always sell at a discount and the older they are the deeper the discounts.

    Now, if you’ve had your old flat bought out, presumably you need to buy a new flat at the current market price? Where do you get the money from at that point to pay the premium for a new flat? Do we need to go through the cycle of a whole new mortgage? This raises a separate issue of where people might be in their economic lives when they’ve been “SERSED”; if you’re middle-aged or a retiree, you might basically be “unbankable”, with no new sources of funding.

    I hope you’re not suggesting that the government of the day will do a one-for-one substitution, hoping to profit from the increased density of the new blocks? If they do so, they will be subsidising the existing flat-owners, which is a cost to the tax-payers.

    Whichever way we look at it, the 99-year leases are time-bombs that are ticking away.

    On a separate note, GARD’s suggestion above to “Continue to push towards 6.5 million population and beyond” is a horrible suggestion. I shudder to think of the consequences.

    • 104 Gard 11 April 2011 at 12:50

      It is not necessarily true that the older the flat, the deeper the discount. That means you have projected some rental rates at those horizons when none exists today. Think about Tampines back in the 70/80s and Tampines today. What would happen if that those old 30-40yo Tampines flats are selling today at… (put whatever number here that is less than the price back in 1970s)? You are free to assume no inflation too.

      Think about the reactions of private property developers to this. Think about the reactions of the State. And think about the reactions of the residents.

      Finally, isn’t HDB housing supposed to be some kind of subsidisied housing? Were taxpayers upset when your grandparents and parents enjoy subsidized rates to buy flats?

    • 105 Melbourne 11 April 2011 at 18:17

      Hello Rajev,

      Thanks for staying on point and addressing my arguments instead of going off tangent. I appreciate it.

      The government will probably buy an old flat at a knock-down price, right? This holds true no matter what point in time we are talking, old flats will always sell at a discount and the older they are the deeper the discounts.

      The government will SERS an old flat at the market price – which is not necessarily a knock-down price.

      My basic points are quite simple.

      1) If the market holds the expectation that the government will replace their flats, it will continue paying high prices for old flats.

      2) I believe this to be a reasonable expectation, for two reasons:
      a) Political factors.
      b) The government profits from replacing flats.

      Now, if you’ve had your old flat bought out, presumably you need to buy a new flat at the current market price? Where do you get the money from at that point to pay the premium for a new flat?

      In other countries, common sense would prevail and you would be correct. However, the Government extends the same “housing subsidy” to SERS residents as it does for new flats.

      So depending on market conditions, you could actually end up paying less or the same amount for your brand new flat. Of course, in reality, other posters have already mentioned that the HDB tends to SERS in a downturn. Let’s not go too much into that.

      Finally, look at the current prices for BTO and resale flats. Resale flats are by definition always higher since BTO prices are pegged to the resale price minus the “subsidy”.

      Uniquely Singapore, isn’t it just.

      I hope you’re not suggesting that the government of the day will do a one-for-one substitution, hoping to profit from the increased density of the new blocks? If they do so, they will be subsidising the existing flat-owners, which is a cost to the tax-payers.

      Doesn’t matter. The entire transaction is a net gain.

      I’ve previously raised two points.

      1) The true cost to the Government of replacing flats is just the construction cost, given its monopoly of public housing and the fact it owns the land. It’s definitely not 300K per flat.

      2) Even in a worst case scenario, the opportunity cost of the Government losing power is far more than what it would cost them to replace all HDB flats once every 99 years.

      Just look at the 2010 budget. 24 billion per year from land sales and investment income alone. Even if we were to use Alex’s inflated 270 billion figure, it would take just slightly more than 10 years to pay for it all. That’s another some 9 decades of unfettered profits in return.

      Its a really small price to pay to stay in power.

      Click to access 4%20GOS%20EE2010%20Revenue.pdf

  70. 106 yawningbread 11 April 2011 at 12:55

    By sheer coincidence, there’s a story in Sunday Times, 10 April 2011 (No en bloc, but please top up condo lease), in which the private condo Arcadia, completed in 1983, tried to obtain from the government a lease top-up, offering to pay. The govt said No.

    Mr Anand Danani, 58, who has lived for more than 20 years at Arcadia, said residents are seeking a top-up to conserve the estate – which has 66 years left on its lease – and to preserve its value.


    The owners are all too aware that the condo is approaching the 60-year milestone left on its lease.

    In Singapore, private properties that fall below this level typically depreciate quicker in value as there is a smaller pool of interested buyers. Central Provident Fund (CPF) Board rules dictate that Singaporean and permanent resident (PR) CPF members cannot use their CPF savings to buy private homes with less than 60 years on the lease. Similarly, banks are reluctant to finance loans for buyers of such properties.

    What does the above show?
    1. Depreciation begins when a leasehold crosses the 30-year point.
    2. Even when offered payment, the govt refused to top-up the lease.

    If this is the case with a private condo (whose lease includes land) why do so many of the comment-makers below think that prices for any given HDB flat can be sustained (or appreciate) indefinitely? Why are some comment-makers confident that the govt will renew leases when they expire?

    And if the govt is anyway not going to renew the lease, why would they exchange new flats for old ones (with new 99-year lease) at virtually no charge to lessees? Maybe they can do this on a very selective basis, but on a large scale to benefit just about everybody?

    • 107 Melbourne 11 April 2011 at 17:41

      Alex, my opinion is it doesn’t really show anything. Look at the location and you will understand why the Government rejected the lease top up.

      They earn more from development charges if the plot ratio is increased before extending the lease.

      Group is B2 (non landed residential) and sector is 108. Charges are calculated per square metre of floor space, not land area.

    • 108 baire 11 April 2011 at 22:27

      Hi Alex,

      You ask “why would the govt exchange new flats for old ones.. at virtually no charge to lessees… to benefit just about everybody”?

      I would argue that the HDB isn’t a profit-motivated entity. The outright cost they incur (by overpaying for a depreciated lease) is far outweighed by the benefit of propping up all the retirement nest eggs (and avoiding a tonne of social unrest).

      Is this a bailout? Yes, absolutely, and in fact it’s already happening.

      Will it cost $270bn? Very unlikely. Prices are unlikely to crash so long as the government remains the single buyer of old flats and single seller of new flats and can manipulate pricing.

      If compared to the US’s recent bailouts of its corporations, you might argue Singapore’s version is more socially equitable, i.e. more targeted towards relatively worse-off people.

      I would agree with @Melbourne that the “bailout” isn’t really a huge issue. Not when you have exploding credit growth and stagnant real incomes to worry about anyway…

  71. 109 Gard 11 April 2011 at 16:49

    Okay, let me put a different spin to look at the problem.

    1) HDB is no longer the builder of subsidized flats. It is making huge profits from you silly voters. It pays peanuts to the foreign workers that build your over-over-priced housing.

    2) These profits go somewhere to earn obscene returns or to pay the ministers (and those peverse economists) handsomely (or both).

    3) One day, all these bubbles will explode and you will be crying to your MPs for mercy and bailout.

    4) In an act of kindness, your MPs will agree, in exchange for your undying vote. The monarchy release what is essentially your money to bail you out. (It can even ask foreigners to come in to bail you out.)

    In this case, the State must not have squandered the money away to execute the bailout or let the people know what it is doing. That is why we pay the President lots of money to ensure the reserves are protected (and to keep his mouth shut and not ask too many questions).

    • 110 yawningbread 12 April 2011 at 01:42

      I am putting a stop to any further comments that include statements or assumptions of this nature: “[HDB] It is making huge profits from you silly voters”. Comments guidelines requires assertions of fact to be supported by evidence, and the assertion that HDB is making “huge profits” was not backed up by the above comment-maker, and is in fact not supported by published evidence.

      If you refer to HDB’s annual report (financial report) for 2009/2010, you will see that against an income of about S$3 billion dollars, it made a loss of S$907 million. It received a govt grant of S$959 million to plug this hole. The financial report for 2009/2010 can be seen here:

      • 111 Gard 12 April 2011 at 09:09

        My apologies. I like to offer this comment instead:

        My comments had been influenced by Mr Leong Sze Hian’s point about the cost of flat:

        which has cast doubt into the non-profit-making nature of HDB. I had not verified against the Annual Reports. Good for you to point out.

      • 112 Gard 12 April 2011 at 09:30

        I hope you can publish my last comment.

        I was hoping to point out (in a sarcastic way) that when the State bails you out, it need not bail you out with money; but with a new (identical) flat that cost the government the tendered amount to build.

        The Annual Reports accounts for other expenses which is not pertinent to my point (1); that is why, I did not verify against the Annual Reports. I was only interested in the price and cost of new flats.

        When your lease is up, the State could conceivably bails you out with a new flat (the cost to State) and not bankrupt itself, but the State could also conceivably played it up to earn voter’s gratitude.

        In both analysis – the rational economic model or the selfish State model – I am still reluctant to go with the dismal science of the $270b bailout.

      • 113 Melbourne 12 April 2011 at 20:15

        This is unrelated, but I’m just going to point out something interesting.

        HDB running a deficit does not equate to the Government running a deficit.

        That financial statement is quite interesting. One thing I noticed is that they had about 3.3 billion of capital expenditure. But I can’t seem to find it on their cash flow statement on page 18.

        And there’s no notes about “Cost of sales” on page 14.

        Any accounting guy wants to help me out here?

  72. 114 Melbourne 11 April 2011 at 18:34

    I’m not an unreasonable person.

    I actually agree with prettyplace that SERS cannot be continued indefinitely. And yes, I believe that Singapore property is in a bubble, and that like all bubbles, it will burst someday.

    All I’m saying is that it’s unlikely that expiring leases will be the reason for this.

    So when people use words like “time bomb”, “crisis”, and start saying 270 billion will be lost because because of properties becoming worthless when their leases expire, I would disagree with that.

    Think about it for a second. Singaporeans may have a lot to lose if property prices go down, but the Government will be the biggest loser of all. Lease expiry is one of the factors over which the Government has a lot of control. They dictate the system, and they can tweak it to suit their interests.

    If I owned a HDB flat, I would be much more worried about those factors which this Government has no control over. Such as the state of the global economy. Or the financial health of our major trading partners. Or the increasing amount of credit Singaporeans are consuming. Something along those lines.

    Like them or hate them, the Government knows how to play the property game – for their benefit, not necessarily yours. When you examine their policies and deconstruct them, you will realize that these guys really know how to work the system.

  73. 115 prettyplace 11 April 2011 at 19:11

    They still have a way, to a certain time.
    HDB will clear flats batch by batch with SERs, within the same estates.

    However, the flats will be smaller & taller.
    The only way to sell this to the masses, is to have the price of flats to rise. Cost can be recovered with some profit.

    Now the only way for a price rise, is to allow more foreigners in and increase the population as we all know, an 8 Million figure was thrown somewhere by someone, if i remember right.

    There might be attractive grants given to first time Singaporean buyers, if they can withstand living in a smaller coop.
    However, it cannot go on forever. At some point, the flats cannot be made any smaller, by that time I hope Singaporeans would have diffused into the larger world.

    The best beneficiaries of this system will be the PRs or those who careless about ciizenships.

  74. 117 prettyplace 11 April 2011 at 19:13

    This is a working model, but is this what we want?

  75. 118 Libran 12 April 2011 at 10:00

    Melbourne 11 April 2011 at 18:17

    “My basic points are quite simple.

    1) If the market holds the expectation that the government will replace their flats, it will continue paying high prices for old flats.

    2) I believe this to be a reasonable expectation, for two reasons:
    a) Political factors.
    b) The government profits from replacing flats.”

    By your writing above, you’re essentially saying that the PAP govt. has been manipulating the HDB market like a Ponzi scheme, for political reasons, aren’t you? By holding and increasing the market’s “expectation that the govt. will replace their flats, it will continue paying high prices for old flats”. In other words, so long as new fools could be found to buy HDB flats at higher and higher prices, the game could keep on going? Now, we know all Ponzi schemes must come to an end, don’t we? Madoff managed to keep his going for more than 2 decades, until he could not find new fools for the game, and old investors wanted out.

    Melbourne 11 April 2011 at 18:34

    “Think about it for a second. Singaporeans may have a lot to lose if property prices go down, but the Government will be the biggest loser of all. Lease expiry is one of the factors over which the Government has a lot of control. They dictate the system, and they can tweak it to suit their interests.”

    Now, you’re having too much faith in the PAP govt., aren’t you? Just like the crowd out there now. And that is the dangerous thing! You’re assuming that the govt. of the day will be able to balance a delicately balanced inverted pyramid, with larger and larger layers of debt piled on it, to keep it from crashing down like a ton of bricks! You’re assuming that the govt. would have the financial means to bail us out. You’re assuming too many rosy scenarios! But remember, if you think the HDB market is manipulated by the govt. for political reasons, then it’s not sustainable in the long run. A day of reckoning must come! Because the market is not real! Remember, the world is inherently unstable; any of a number of factors, like the earth’s tectonic plates moving, could cause an earthquake, a tsunami, and a man-made nuclear crisis, to derail all econometric outcome, or smooth-curve reasoning that human beings are prone to. We have too many economic tectonic plates (a mountain of debt is one of them) moving that will cause economic quakes.

  76. 119 oldman 12 April 2011 at 10:31

    The bailout is definitely coming, it is a question of speed and the amount involved. YB had illustrated the subject with many examples sufficient for Macro Economics 101. The bulk of the population will never understand this bailout issue and it appears to be ‘mad thinking’. However, for those who see the bailout coming, they can do nothing except to be prepared for it like building bomb shelters to use when the time comes – it is definitely coming only God knows when.

  77. 120 lobo76 12 April 2011 at 16:06


    I think the main point that you have failed to appreciate so far, is the amount of power that HDB enjoys. This alone makes it very different from all the other property markets around the world. Lease being an arbitrary thing, can easily be manipulated by HDB (as they DO have the power). In all your arguments, you have failed to touch on this aspect.

    You mentioned the articles about a condo that tried to extend its lease but failed. Yet, you also pointed out the differences between a private lease and HDB lease. For the latter, it is absolutely in the interest of HDB to do something (SERS, etc), so condo doesn’t really support your overall argument of lease being a timebomb.

    Like Melbourne, I think there is a problem with our Housing issue, and I agree with him, that lease period is the least of it all.

    • 121 prettyplace 12 April 2011 at 19:09

      No HDB does not have total control, over wear & tear.
      There is a time frame, thus involves the lease period.

  78. 122 Laoshi 12 April 2011 at 18:03

    The rise in prices for HDB and private properties is due to demand outstripping supply. This we all know is due to the great influx of PRs and new citizens. For SERS to remain feasible, there must be continuous rise in demand (and correspondingly rise in prices). But there is definitely physical constraints for singapore to have unlimited rise in population. For instance, right now our roads and transportation systems already appear to be fully stretched. What will happen when the maximum population has been reached?

  79. 123 Gard 12 April 2011 at 23:17

    I like to provide a summary of the discussion so far. Zero inflation is assumed for simplicity.

    Alex’s Argument:

    Like a car, the price of a HDB apartment with 99-year lease should decline over time; older things should fetch lower prices (with exceptions for antiques). This is also standard accounting practice for assets with fixed lifespan. The value is depreciated over time; and at the end of its life, the value is zero.

    However, Mr Lim Swee Say’s implicit promise of ‘gradual appreciation’ is counter-intuitive to this idea. Instead of prices of HDB going down over time, the State appears to be guaranteeing you higher prices over the years (barring normal economic cycles), that is, the price of a 20 year old apartment is higher than a brand new one; the price of a 50 yo flat is higher than a 20 yo; a 70 yo flat is higher than 50 yo; and so on.

    This kind of pricing, in which the apartment at its 99th year is worth zero, goes against intuition as well as established economic theories.

    Moral Hazard and Game Theory:

    People who bought into Mr Lim Swee Say’s promise would take on more risk than they otherwise would have, because the State has somehow promised them asset appreciation over time. This increased risk taking aggravates the normal housing bubble: people taking on more loans than they could manage, thinking that what they buy will increase in value over time.

    When these people are ready to sell, they believed they will be selling at a higher price than the price they bought.

    But it means another group of people has to do the buying at those higher prices (since you cannot have sellers without buyers). And these group of people would also think that they, when it’s time for them to sell, will get a even higher price (from another group of people).

    This cycle of increasing prices cannot go on forever, because eventually, the lease has to run out and the price is zero then.

    In the hypothetical case, the price of the 98 yo apartment is the highest possible guaranteed by the State (since the price of 99 yo apartment is zero). And by the guarantee of ‘appreciation’ it means a price higher than the initial purchase price.

    But if everyone tries to sell at the 98th year, nobody would want to pay for something that would become worthless in one year’s time. (They would rather buy a new flat instead.)

    So, knowing that there won’t be a market in the 98th year, people might want to try to cash out at the 97th year. Again, nobody would want to buy too at 97th year at those inflated prices, because they know there wouldn’t be any buyers at the 98th year.

    Working backwards, nobody would be doing any buying (or selling) at all after the initial purchase from HDB.

    The only possible sellers (those who can find buyers) are those who chose to sell at progressively lower prices, as the age of the apartment increases.

    And this is what happens in the second-hand car market. You cannot sell your second-hand car at a higher price than you bought it. It is the rare exception to do otherwise.

    To the rational person, Mr Lim Swee Say’s promise is hollow, or will end up costing the State $270 billion in order to keep his promise of ‘gradual appreciation.’ The State must step in to buy those 98 year old apartments.

    I shall stop here, so that Alex or others might correct me if I have misinterpreted Alex’s position.

    The counter-arguments ran along two broad dimensions:
    1) No bailout of $270 billion will happen.
    2) Bailout will happen; but will be tolerable or managable

  80. 124 Leonard 20 April 2011 at 11:43

    Maybe I’m wrong to see or view in this way but I prefer to ask myself this – Is HDB really making a lost for such exercise? My conclusion is no way. Why?
    1st – When HDB offer and replace your old “box” – On surface it does seem that we are gaining (Leaving the cost of buyback and selling aside 1st) cos your got your lease period “renew”. But then again your new flat would be much denser and the pieces of entire land for say 10 blocks of flat will be smaller than your old neigh. Even thou assuming you still get back the same size or maybe bit bigger of flat – The neigh will definitely be smaller (Example distance between blocks are closer). So in other words – You gain back/renew your lease period with a tradeoff of something else.
    2nd – Your old box will be redeveloped to something else. So whatever loses is simply quite impossible. I got 1 example on say Arsenal FC. They wanted to move to a new stadium and have to buy a new plot at very high price. On paper it cost them a fortune… But Arsenal re-developed the old plot they got and sell back to public again. In the end – They make a profit out of it. So to me it’s a very far fetch to believe HDB do not earn or at least will make losses for such exercise.
    3rd – Even assuming point 2 is not valid and they are do making losses. They can always recur back from other means like collecting taxes and maintenance.. It the very same example like when you one wanna upgrade something – Vendor will say “oh, we give you and upgrade or even give you cashback”. But the hidden rules is maintenance and ongoing fees. Just like Cisco system gives away their VOIP phone FOC to customer but maintenance is not. They still gain and still doing it.
    Also lastly – We do not have the actual breakdown cost of building a flat – So be it they are making losses or not is just our assumption. Whatever figure they publish is what they say. There’s no counter-check or authenticity at all. Why? Cos they are not accountable to us in the very 1st place. If what I said is not true – Why we are always somehow not getting the full picture but only bit of here and there.. And we bring them together – They turn around and say that’s not correct cos this and that. We will just keep saying hey u this and that and they comeback and say that’s not true bcos of this and that. It’s a vicious cycle which I doubt anything will change unless some high up there decided to stop this totally…

  81. 125 hayashi 21 April 2011 at 00:29

    YB made many valid points but the crash will not happen because the govt controls both the supply and demand. Supply can be controlled through GLS, SERS, rezoning, change in plot ratios etc. Demand can be reduced by new measures like recent ones or increase by simple letting in more PRs and “citizens”, which is what has happened in the past decade. Even if there was indeed a bubble, it can continue for much longer as long as more people willing to pay higher prices join in the game.

  82. 126 24 April 2011 at 17:38

    These people simply depend on the Government too much and look like they will have to be held ransom and vote for PAP because if there is a change of Government there can be a change of policy.

  83. 127 Taro Ries 5 May 2011 at 11:55

    In essence, HDB dwellers are like factory workers living in a dorm which they lease from a boss who tells them that their bedspace will appreciate in value the longer they stay employed in the sweatshop.

  84. 128 Gerry 13 May 2011 at 14:43

    Fresh insights, but you forgot to consider the fact that the resale price of old HDB flats is based on the build up possibility of the land such that older and shorter flats could be worth more than a new flat because by tearing down the block, alot more new flats can be built. In that case, there will still be a natural incentive for the government to contuinally buy old flats because of the amount of new flats that can be built up on the old site.

    This of course only holds if the demand for flats continue to persist. As you mentioned, it it still a bubble and demand cannot increase forever.

  85. 129 27 May 2011 at 17:10

    I agree with you that the property is Singapore is very tenious and a bubble is waiting to happen. What I am concern is the social cost. Presently, we depend on property price to appreciate, so that we can pay for our retirement. When we are old we need services for which we have to pay with dollars and not assets. The situation now is we are paying it with capital appreciation of our property as we have not much saving besides the asset. What we are effectively doing is transferring our asset to another sucker who will go into debt for a big part of his life and use up his CPF ( suppose for his retirement) to finance our retirement.

    This cannot continue to go on as at some point the bubble will burst and would be catastrophic to society as we will run out of cash to pay for services which we will require in our retirement years.

    Like you say this is a Ponzi scam which cannot last. Property prices can only rise if our productively and wages rise! alternatively, bring in foreigners to pay for the asset. Again this is not sustainable.


  86. 131 Peterinjb 12 October 2011 at 19:27

    Interesting hour long read… shack.

    My opinion, as long as the gov can effectively control supply and demand, this discussion is moot.

    The main worry, in my opinion is a mass exodus of foreginers, similar to what happened to Dubai recently. Terrible thought….and very possible too if there is a global depression, or should Sg become bad or expensive place to live. Alot of ppl who overpaid for their property whether HDB or private will be in very deep deep sh_t.

  87. 132 Andy 26 November 2011 at 23:09

    I’m very late to this discussion. It is only this morning that i started thinking whether the HDB is a big ponzi scheme or bubble. I google into this site by chance. I agree with the author but my numbers are higher. HDB prices have surged even higher after this article is written. 5R flats in Marine Parade have hit S$835k. There are over currently 930k HDB flats and the government is building even more.

    The SERS program rewards only a handful of owners but the program makes many believe that their flats will maintain its value. Something must give. For HDB flats to continue growing in value even if the lease or useful life is getting shorter, someone must lose at the end – the last owner, gov’t, taxpayers, banks or a combination. Some of the winners in this ponzi scheme are non-Singaporeans (they could be PR or Singaporeans who migrated overseas), resulting in leakage out of the system.

  88. 133 Andy 27 November 2011 at 10:15

    There won’t be a 270b bailout because Yawming Bread got it wrong. For purpose of illustration, assuming the entire estate of Marine Parade is going to be torn down, the government can move the entire estate to be housed in an area 65%-70% of its current size by increasing plot ratio, reducing unit size and creating voluntary (people cashing out) and involuntary (create new rules for non-qualification) non-participation. There will be new land free up and available for sales and the proceeds can easily cover the cost of construction of the new HDB flats. The flats can be pegged at current price less 10-20% to give people the feeling that the new flats are cheaper and new. The compensation to home owners for the difference between old flats and new can be made variable according to income/wealth. Problem solved. No 270b bailout. The only problem is that in a ponzi scheme, prices must keep moving up. When Marine Parade estate is due for 100% renewal in 10 to 30y, the 5-room flats could potentially be $1m to $2m each from the current 830k.

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