When it was announced that four-room public flat owners will be able to sell part of their lease back to the Government for retirement income, property experts praised the move yet did not expect a large impact.
The Lease Buyback Scheme's take-up has been muted since its introduction in 2009, when it was restricted to three-room and smaller flats.
It allows Housing Board flat owners to retain 30 years of their lease and sell the rest back to the Housing Board.
The Housing Board's worked example is for a flat with a remaining lease of 70 years and a market value of $323,000. It will buy 40 years of the lease at $138,000. This figure is derived by accounting for depreciation over time.
The owners use the proceeds to top up their Central Provident Fund Retirement Accounts to a required level, set at the Minimum Sum for those aged 70 and younger, and slightly less for older flat owners. This allows them to have higher payouts under the CPF Life annuity scheme. The remaining money from the Housing Board is given to the couple as cash.
So assuming that the couple make top-ups of $121,000 in total to their CPF Retirement Accounts, they will get $17,000 in cash. They will also get more per month in annuity payouts from CPF Life. As of last month, just under 800 households have taken part in the Lease Buyback Scheme. That's a tiny number, considering about 42,000 owners of three- and two-room flats who meet the age and other criteria are eligible. There are over 230,000 sold three- and two-room flats.
The scheme's expansion to four-room flats will likely generate just moderate interest, said experts.
Good reasons for poor response
Should the Government be worried about the limited take-up rate for an apparently worthwhile scheme?
In this case, not necessarily.
First, some flat owners could simply be uninterested because they do not need the money, as ERA Realty key executive officer Eugene Lim observed.
The significance of the scheme's expansion is that more flat owners will "have this additional monetisation option to tap on should they have a need" - but of course, not everyone might have such a need.
For others, it might simply not be an option. For instance, flat owners living with their grown children may decide not to take up the scheme so that their children can continue living there, said SLP International Property Consultants head of research Nicholas Mak.
Second, the scheme is meant as one option among many, not a new default. A low take-up rate could simply indicate that other options are more attractive.
Another way to derive income from one's flat is to sublet either a room or the entire unit. About one in 10 flat owners aged above 55 does so.
Alternatively, owners could sell their flat and move to a smaller one. In the last three years, 5,600 elderly households have bought studio apartments, some of whom would have done so after selling their old flat.
Such older flat owners are not losing out by not taking part in the Lease Buyback Scheme. They have simply found other options.
National Development Minister Khaw Boon Wan had a similar take on the situation. When asked in February, he said: "I do not regard the low take-up rate as a failure. I would just say that what it means is, people are not financially desperate to need to take advantage of those options."
Property experts agree. Said OrangeTee head of research Christine Li: "I don't think we should worry too much about the low take-up rate because after all, there are many other ways to unlock the value of our Housing Board flats which are more flexible."
Less flexible option
Not only does subletting one's flat yield higher returns, flat owners can stop doing so when they wish to. In contrast, the Lease Buyback Scheme is irreversible.
Furthermore, the Lease Buyback Scheme offers less flexibility in terms of what form the retirement income takes, as the proceeds must first be used to top up one's Central Provident Fund Retirement Account. Excess funds will be received in cash only after the required top-up level is reached.
The Lease Buyback Scheme also locks owners in, such that they are not able to resell their flat once they are on the scheme.
This means that they will not have a chance to benefit from rising housing prices.
Owners therefore "have too much to lose when the lease is sold back to the Housing Board", said Ms Li.
All this shows precisely that older flat owners have a wealth of options for unlocking the value of their flat. Surely this is something to celebrate rather than worry about, even if one consequence is that the Lease Buyback Scheme has a low take-up rate.
What the Government should focus on, therefore, is not simply the number of households which have joined the scheme.
The true concern is whether there are households who don't have other options and could benefit from the scheme, yet are not choosing it for some reason.
Some may simply have not heard about it. More effort should be made to reach out to the older generation about this scheme, especially as many of them may not be conversant in English or Mandarin, said Century21 chief executive officer Ku Swee Yong.
R'ST Research director Ong Kah Seng suggests dedicated committees to advise elderly flat owners based on their own circumstances and objectives. For those who do know of the scheme, the barriers may be emotional.
In an Opinion article in The Straits Times, Lee Kuan Yew School of Public Policy Associate Professor Hui Weng Tat said that the scheme's low take-up "already provides strong hints that the typical Singapore family would prefer to have the option of bequeathing their property to the next generation".
They can't do this under the Lease Buyback Scheme, as the Government has bought the tail-end of the lease.
This so-called bequest motive is what National University of Singapore Associate Professor Chia Ngee Choon considers the most important obstacle to the scheme.
At a dialogue on Sunday, several elderly people also worried about what happens if they outlive the 30-year lease. The Housing Board has assured that "no elderly flat owner will be left homeless" in such a situation.
But it was not specific, saying only: "Such cases will be dealt with on an individual basis and appropriate housing arrangements will be provided to those flat owners who are not in a position to pay for the lease extension."
The uncertainty could make flat owners avoid the scheme.
Some owners may also have a strong emotional attachment to their home as an asset.
"These are people who have gone through economic hardship to get this apartment, and now you're telling them to sell back part of the lease. They may feel that you're trying to take away what is theirs," said Mr Ku.
All these psychological barriers should be tackled if the Government wants to ensure that those who need the Lease Buyback Scheme are willing to take it up.
For a start, giving more details on what to expect if you outlive your lease could soothe some anxiety.
The Government could make clear what sort of payment is required for a lease extension, and what the possible alternative housing arrangements are.
Mr Ong suggests offering the option of a low-premium insurance that they will have an equivalent house if their lease ends in their lifetime.
How should the bequest motive be addressed? One idea is to provide ways that the flat can still be left to one's children.
For instance, dependants could be allowed to repurchase the remaining lease after the owner's death. But this may be hard, said Chris International director Chris Koh: "It is difficult to calculate the amount to be paid by the owner's dependants to the Housing Board, taking into consideration interest accrued."
Besides, such flats will only have a few decades of lease left and may not be attractive assets.
Rather than hold on to the dream of willing their flat to their children, elderly people in need of retirement income today need to figure out if it's better to monetise their flat today and leave less for their grown-up children - who may not be able to inherit the flat anyway, if they already own a flat. They can however sell it and keep the proceeds.
Perhaps their children should be the ones assuring older flat owners that they do not want such sacrifices from their parents.
As for those who are unwilling to part with a hard-won asset, they could be given a sympathetic explanation of what the scheme entails and that they will still own the flat and can live in it, even after selling the tail-end of the lease to the Government.
The Government is doing a good job expanding the option to four-roomers.
This means more than half of Housing Board households potentially qualify. But it should address the emotional barriers to the scheme if it wants to ensure that it is a viable option for those who need it most. Only then will it truly improve retirement adequacy.