Tuesday, February 09, 2010

HDB 101

This is an interesting article by a internet forumer from www.sammyboy.com

By PAPSmear from Sammyboy Forum:

I find that just talking to people I know, even educated people like school principals and what not, they are totally ignorant about the way the HDB system works. Here are some myths and misconceptions. Please add to them.

1) "I bought my HDB flat"/"I own my HDB flat" - No you didn't and no you don't. You are a tenant, the the HDB is the landlord. Its says so in your contract. Than why did you just pay all that money for? What you have actually done is pre-paid your rent 99 years in advance, in one lump sum. That's why you have to borrow from the bank the $300K or whatever it is to move into your flat. So people, you are pre-paying your rent, not buying your flat. Get this concept first, than everything will fall into place.

2) If I don't own it, than how come I can sell my flat for a lot of money? - What you have sold is not your flat. In other words, the four walls, floor, toilet fixtures etc. do not belong to you. You cannot sell something that does not belong to you. What you have sold to someone else is the right to occupy your flat for the balance of the 99 years lease. Lets say that your flat is 15 years old, which means that you have 84 years left on your list. The person "buying" it is willing to pay you x amount of money for the right to occupy your flat for the next 84 years, and he therefore will enjoy the rights priveleges of your flat instead of you. You have in affect, assigned your flat to someone else, with the stipulation that he will take over all responsibility of the flat (like conveyancing fees, upgrade costs, etc.) in addition to paying you the assignment fee aka purchase price. Its similar to subletting. Because the HDB is your landlord, the HDB has to approve all "sales", as the new person taking over your flat is going to be their new tenant.

3) You are using your retirement income and funds to pay for your current living expenses - By enabling you to buy and pay for the monthly mortgage with your CPF, the PAP has in effect inflated the price of the flats, and forced the people into paying the inflated price by jeopardising their retirement for current living expenses. Most retirement advisors will tell you to pay for your cuurent living expenses with after tax dollars and from income that you are currently earning and not thru the use of funds earmarked for your retirement. But if people were to follow this retirement advise, they will find that their after tax dollars cannot buy too much. Hence, the PAP has allowed them to dip into their CPF account, and allowing to buy flats at an inflated price.

4) Than why do so many people use the CPF to "buy" flats? - People do this because they are ignorant and don't understand the concept of retirement funds and the real purpose of it. You can see many retired aunties and uncles working at menial jobs and barely able to make ends meet in the twilight of their lives. This is a time when they should have been enjoying their retirement and not wondering when the next meal will be. If they had not spend all their money from their CPF paying for their flats, would their lives be easier? The second reason why people use their CPF is because the PAP have set the interest rate so low for the CPF accounts that people actually are losing money in their account because the rate of inflation is higher than what they are getting paid. Even if you max out all the avenues in your CPF to get better returns than what the govt. pays you, you will still not be keeping up with inflation. If the PAP pays people 8%-18% per annum interest on their CPF accounts, much fewer people will be enticed to withdraw funds for the purposes of acquiring a HDB flat. Why do I mention 8%-18%, well this is what GIC, Temasek, and other GLCs ostensibly earn when they borrow money from CPF for their own investment, money that is actually yours. Consequently, people are forced into dipping into their CPF for HDB flats. It is important people understand this PAP tactic.

4)Well, I can sell my flat when I am old and retire on the money that I get - Yes, you could do that. But this is not the 70s and 80s anymore. The days of buying a $70,000 flat and selling it 25 years later for $400K are gone. There are many cases now of people losing money on their flats. And if you sell it, where would you live? Would you rent for the remaining years of your live? Would you downsize and buy a smaller and cheaper flat? Nowadays, its not unusual to purchase a $400K flat and still have to renovate it. If your flat ends up costing you $500K after reno and what not, how much do you have to sell it for 25 years later to make enough money to retire comfortably on? $1 million? The market for this price is iffy. And if you stay in the same flat for a long time, lets say 50 years or more, your flat will actually start to decline in value as the maturation of the leasehold period approaches. If you sell your flat at the highest point of its value, lets say in 10-20 years, where will you live? You will still need buy another flat at the new higher price to live in for the remaining 30 years of your life.

5) Is what I pay for this flat really all I pay? - The simple answer is no. If you pay x amount for the flat, you have to factor in the following:-
- Opportunity costs of foregone returns from your CPF that you have used on the flat.
- Mandatory HDB money making schemes like upgrades that will add to the capital cost of your flat. In every country in the world, if the building has deteriorated to the degree that upgrades are needed, its the landlord that bares the burden. In uniquely SIngapore, the tenants pay for it.
- Conservancy charges, that keep going up and not down.
- Possible forced relocation to another flat in a new estate because your block has now be taken over by the HDB for demolition/rental to FTs, etc. Forced relocation means you have to now pay additional money for the new flat they want you to move to, hence increasing your capital costs.

6) The long term consequence is a very expensive housing costs - If you look at many European and Asian countries like Japan, you will find that the same property stays in the same family for generations. Just imagine if a person owning a freehold property in another country can pass his property on to his son, and than the son pases it on his grandson, etc. over 3 generations. By the end of the 3rd generation, the property could be worth a lot of money. In the same scenario in S'pore, the property is worth nothing.

So, what is the solution? The main gist of the solution is to minimize your exposure to the HDB. Some solutions I can think of:
- Create 2 family households in a flat rather than one household. Kongsi with your siblings or parents and live in one flat.
- Rent from the HDB instead of "buying"
- Live in JB, commute to S'pore, after all 300K Malaysians do that every day.

The whole game is set up for the HDB/PAP to win. They have set the rules, but this thread is intended to educate the people as to what some of these rules are. It does not mean that you will win the game, but it helps to know what they are.

5 comments:

xl said...

Thanks. Enlightening. Surprised it came from sammyboy.com

Chart 2:
http://mycpf.cpf.gov.sg/NR/rdonlyres/1CD89DEC-1CD2-4772-83CE-F6D2B65F3467/0/CPFTrendsMinimumSum_2008.pdf

U can see chart 2 that is bleak for most people in old age as $ are sucked up by flat prices.

Not hard to guess what is % in 2010 based on the downward trend right?

HeWolf said...

On point #5, how can he left out the impact of loan interest?
For the loan over the spread of 30 years, the interest paid will be as much as the principle (i.e. paying double for the loan amount).

miss said...

有空我一定會常來逛你的部落格!!!! ..............................

HousingDebtBurden said...

Clever analysis of HDB scheme !

Which simply means Lee Con You and the famiLee is the landlord.

Anonymous said...

It is the same for private condos. As long as the property is mortgaged to get a loan, the property does not belong to you. It belongs to whoever loans you the money. This is actually very simple. The property belongs to whoever who paid for it. If you take a loan to buy it, it means you have not fully paid for it and it does not belong to you.