What’s said to be the first attempt to quantify the price impact of declining leases on HDB flats has drawn criticism that the study ignores too many of the factors that operate in the Singapore property market.


The study by UrbanZoom, a homegrown artificial-intelligence-enabled research portal, found that HDB flats would depreciate, on average, 0.67 per cent per year across the first four decades as their leases run down. But this assumes a stagnant economy and property market with zero growth.


But critics point out the fact that this theoretical value decline has been more than offset by economic and property market growth since the 1960s. In fact, HDB prices have jumped over the past three decades, with the HDB resale price index multiplying more than five-fold since it began in 1990, something the authors also concede.


The research was published in a blog post on UrbanZoom’s website on Sunday, at a time of public attention on the value of older HDB flats running down their leases.


UrbanZoom combed through all completed HDB transactions from 1967 to 2013 to identify pairs of adjacent blocks across Singapore that are within 100 metres of each other, and segmented them into buckets based on the difference in the lease commencement year between the corresponding pair.


So for instance, two HDB blocks within a 100-metre radius circle along Upper Boon Keng Road – one whose lease started in 1999 and another whose lease started in 1980 – will be considered a pair and captured into the “18-19 years” bucket.


The research methodology picked blocks that were close to one another and transacted in the same period to cancel out any variance that might have been brought about by location and timing factors, so that any difference in the price per square foot is likely due just to the difference in their remaining lease term.


What the research found was that for flats with a difference in length of lease of zero to nine years, there was a negligible difference in pricing.


In the 10-25 year bracket, older HDB flats started to display a “non-trivial” amount of depreciation, with a median discount of 12 per cent compared to their newer neighbours.


For flat pairs that have a difference in length of lease of 26-37 years, older flats faced further downward pressure, with a median discount of 21 per cent.


Finally, for those that have a difference in length of lease of 38 years and older, there was a marked jump in the median discount, pushing close to the 30 per cent range. However, there were not many observable transactions beyond the 38-year range given that HDB’s public housing programme only started in the 1960s.


UrbanZoom said the jump in discount rate over the years could also be due to changes in terms of both the borrowing limit and CPF usage limit for purchases of HDB flats when they cross the 40-year mark.


UrbanZoom’s research did not take into account factors such as floor level and flat sizes in order not to set too stringent a selection threshold which would severely impact the number of observations, it said. But it did run more complex studies where it controlled for these variables and the general result still holds.


Then again, the public has generally assumed that the older the property, the larger the depreciation effect. That said, this effect has actually been largely negated by a multi-decade rising market, testament to Singapore’s “wildly successful” economic policies, noted the study.


“Therefore, while leasehold properties may be theoretically depreciating assets if one only considers the expiring lease, the observable trend in home prices may actually be the opposite – a steady rise through the years along with economic growth and a well-balanced housing market.”


UrbanZoom founder Michael Cho, a Temasek scholar who worked for CapitaLand and was later head of strategic investment at an Abu Dhabi family office, said: “While we try to isolate the price effect of HDB expiring leases in this study, the value of older HDB homes can, in fact, still appreciate in coming years if Singapore continues to enjoy robust economic growth amidst a well-balanced housing market.


“The opposing effects of economic and property market growth can be so good that they totally overwhelm the depreciation effect of 0.67 per cent per year. To me, 0.67 per cent is quite slight still, which is a good thing, because if both the economy and property market grow, the upward force will be greater than the downward force.”


Responding to BT, an HDB spokesperson noted the limitations to the study. For one thing, many factors influence the value of an HDB flat besides length of remaining lease. These include location, storey height, floor area, extent of renovation, market conditions, and the economic growth of the nation.


“As acknowledged by UrbanZoom, some of these factors have not been factored into their study. The researcher’s solution was to compare adjacent blocks within 100m of each other, to control for locational attributes. However, this resulted in a rapidly diminishing sample size for the comparison of pairs of flats with longer lease lengths apart. The robustness of the sample is thus a key limitation.”


HDB further noted that the bigger the difference in the lease start year, the more difficult it would be to attribute the price difference to the different amount of remaining leases, because the physical conditions of the flat can also have an impact on resale flat prices.


It added that UrbanZoom’s analysis should not be read as a depreciation curve for HDB resale flats. This is because given the existing stock of HDB flats, the price difference illustrated for the first 10 to 15 years can be derived from pairwise comparisons of flats with very different amounts of lease remaining.


“For example, a two-year difference in lease start year can refer to comparisons between an 85- and 83-year HDB flat or a 60- to 58-year HDB flat,” the spokesperson said.


The reactions from property consultants were in the same vein, with ERA Realty key executive officer Eugene Lim saying that “it is just math” and does not help the inherent problem that buyers of flats with just 50 to 60 years left on their lease face when trying to finance their purchasers.


Still, to UrbanZoom, the attempt was worthy. “While there were plenty of commentary around the potential depreciation effects of expiring leases, data scientists have been silent on this subject (of quantifying the price impact),” it said.


Adapted from: The Business Times, 7 September 2018