A recent report published by the World Economic Forum confirms a fact that every Singaporean is already aware of — that their country’s real estate prices are among the highest in the world.
Here’s a snapshot of the World Economic Forum data comparing residential property prices in various global cities:
The number of years a skilled service worker needs to work to be able to
buy a 60m2(650sqft) flat near the city centre
What does this data tell us? A skilled service worker in Singapore needs to work for 12 years before he or she can afford to buy a small flat near the city centre.
Singapore’s property price-to-income level is the fourth highest in the world. Hong Kong residents, who live in the most expensive property market in the world, need to work for 22 years to be able to afford a house.
What about other global cities? The price-to-income level stands at 11 in New York, six in Toronto, and four in Los Angeles.
Despite the high residential property prices in Singapore, the homeownership rate in the country is more than 90%. How do the vast majority of Singaporeans have the money to buy their own homes? The answer lies in the wide availability of loans and the ability to access CPF funds to purchase residential properties.
However, a recent change in the rules governing the use of your CPF money to buy a home may affect the sum that you can withdraw for a property purchase. Let’s understand what the amendment is all about.
What are the changes, and why were they introduced?
The new rules came into effect from 10 May 2019. They apply to the use of CPF money for buying HDB flats as well as private properties.
The main issue that is addressed in the amendment is connected with the remaining lease of the property and the age of the buyer.
This is what the old rule said:
⇨ If the remaining lease of the property was 60 years or more, the buyer could use CPF to pay for the property up to the valuation limit.
⇨ If the remaining lease of the property was between 30 and 60 years, CPF could be used if the lease remained valid until the buyer reached at least age 80. The total amount of CPF that could be used was capped at the pro-rated valuation limit.
Here’s what the new rules say:
⇨ CPF money can be used up to the valuation limit if the property’s lease covers the buyer up to 95 years or more.
⇨ If the remaining lease doesn’t cover the buyer up to age 95, CPF money can be used only up to the pro-rated valuation limit.
Here’s a handy CPF Housing Usage Calculator that can be used to estimate how much CPF money you can use to buy your new home.
There’s another change that you should be aware of. Under the old rules, you couldn’t use your CPF money at all if the lease on the property had less than 30 years remaining. Now, with the amendments coming into force, the restriction on the use of CPF is applicable only if the remaining lease is less than 20 years.
Why have these changes been made? The rationale of the authorities is that Singaporeans are living longer. Average life expectancy in the country now stands at 83.2 years. The new rules attempt to help Singaporeans buy a home for life while also trying to ensure that they have enough funds to see them through their retirement years.
Implications of the changes
The primary reasoning behind the amendments seems to be the desire of the authorities to help Singaporeans provide for themselves in their retirement years.
The new rules could give a boost to the prices of older homes that have a lower number of years remaining on their leases.
Under the rules that were in existence before 10 May 2019, the property that was being purchased was required to have at least 60 years of its lease remaining if the buyer wanted to utilize CPF money to pay a sum that was up to the property’s valuation limit.
But this rule has now been relaxed. It’s no longer necessary for the remaining lease to be at least 60 years if CPF is to be used to pay for the property up to the valuation limit. Instead, the age of the buyer is also taken into consideration.
Now, the rules stipulate that the remaining lease should cover the buyer until at least age 95. Consequently, if there is a property with a remaining lease of, say, 30 years and the age of the buyer is 65, CPF money could be used to pay for the property up to the valuation limit. This wasn’t possible under the old rules.
Clearly, there’s a benefit for older buyers who opt to purchase residential properties with a lower number of years remaining on the lease. They can now use more of their CPF money than was permitted earlier.
But there is a flip side to the changes.
Younger buyers may now be at a disadvantage. When younger people buy older flats, if their age plus remaining lease is less than 95, they won’t be able to use CPF money up to the valuation limit to make the purchase. Hence, with effect from 10 May 2019, younger Singaporeans could be deterred from buying older properties.
The bottom line
Changes to the CPF rules are likely to have a dual effect. On the one hand, they will help older buyers. Seniors looking to purchase a home will now be able to use more of their CPF money to buy properties that have a relatively lower number of years remaining on their leases.
However, the amendments could have another implication as well. Younger buyers may have to steer away from homes that have fewer years remaining on their leases. It would probably be a better idea for them to focus on Build-To-Order or recently constructed flats.