Singaporeans get traditional when it comes to property. We want the land we pay for, and 99 years won’t cut it. We want our descendants holding on to it, long after the Great World War of 3012 when humanity is living off roaches and lichen. But freehold property is a monstrous cost; and are we being practical, or buying an overpriced security blanket? In this article, I examine how freehold property has conditional value. Depending on your situation, it may not be the best choice:
"And I also want a moat, a drawbridge, and 200 foot walls. My family's staying here forever."
What’s the Big Deal About Freehold Property?
In Singapore, property can be leasehold (held for 99 years) or freehold (held for 999 years). Because there are video games with bigger maps than this country’s, 80% of our land is leasehold. And contrary to popular belief, the government isn’t obliged to pay compensation when the lease expires.
As such, leasehold doesn’t sit well with traditional Asian perspectives; we’ve been raised to equate family with land. But coming from a more practical angle, there are disadvantages to freehold properties. These are:
- Higher cost
- Freehold status can be changed
- Location over lease
- Changing family structures
- Little difference in depreciation
"This is also freehold what. I'm free to hold on as long as I can."
1. Higher Cost
It shouldn’t take a stroke of genius to figure out that freehold property costs more.
All things being equal (same location, same size, same annoying neighbours, etc.), freehold property will cost 10 – 15% more than its leasehold counterpart. Now, if we’re talking about a T-Shirt or something, 10 – 15% isn’t a big deal. But we’re probably talking about a million dollar condo, and that’s an extra $100,000.
I’m no psychology expert, but I bet the thrill of owning a “permanent” home quickly vanishes. Especially when monthly repayments start, and your financial situation becomes riskier than a roller coaster in a Chinese theme park.
Think about it: How “permanent” or “secure” is a home when you’re struggling with its financial upkeep? When your family’s idea of shopping involves a petition to the Salvation Army, your home’s freehold status will do nothing.
"Actually I can't afford freehold property. But asking to negotiate got me this complimentary lunch."
2. Freehold Status Can Be Changed
Freehold status isn’t permanent. If the government decides there really has to be a military base or satellite dish where your house is sitting, then it’s gone; freehold or no.
At best, you will receive compensation at market value. But don’t succumb to any notions of permanence; land is only freehold for so long as agencies like the Urban Redevelopment Authority (URA) don’t feel like trolling you. Also, be aware that freehold property is prone to en-bloc sales; after 30 or 40 years, your neighbours might decide they’re sick of the scenery. Then your condo is sold off and you’re back to house hunting.
"Ah, we have a lot of good reasons why we need the land back. Important government reasons."
3. Location Over Lease
When it comes to renting and resale, the emphasis is on the location, not on the lease.
A leasehold condo that’s near an MRT station, for example, probably beats its freehold counterpart in market value. Likewise, if someone wants a place near their children’s schools, they might be willing to pay more regardless of leasehold status. Hey, they can always move in 20 years.
Tenants, obviously, couldn’t care less about any of this. So when you’re out house hunting, don’t be distracted by freehold status. Stay focused on where the property is located, its possible rental income, and its simple convenience.
"Legend has it that, when there's a solar eclipse, a bus going to my place will appear."
4. Changing Family Structures
The Singaporean family unit has changed. It’s no longer assumed that children will live with their parents, and it’s become the norm for married couples to find their own place. That removes the need to build the equivalent of a fantasy ancestral palace.
If your children or grandchildren move out anyway, the extra you paid for freehold becomes irrelevant. You could have just gotten a leasehold, and spared yourself years of excessive repayments. And I don’t know about you, but I don’t know what I’ll be doing in 15 minutes, let alone where my children will be living in 50 years.
I’m willing to bet that, for my first property at least, a leasehold is good enough. I can live with that for 30 years, then I’ll see.
"Aww, my little girl's all grown up. That's it, you're applying for a flat next week."
5. Little Difference in Depreciation
There’s a common worry that, as the 99 year lease runs out, leasehold property will depreciate faster than freehold.
In truth, a boom and bust market will affect both kinds of property the same way. During the 2002 – 2005 cycle, for example, freehold prices were just as depressed as leasehold prices. Likewise, during an upswing, your leasehold property will appreciate just as quickly as freehold counterparts.
Tenure isn’t always relevant to property prices; whether you buy leasehold or freehold, it doesn’t free you of the need to time your purchases. Don’t let tenure put your radar on the fuzz; if the market conditions are bad, don’t feel pressured to buy just because it’s freehold.
Can't tell if downward market trend, or my annual performance review is out.
Getting the Right Financing
Still can’t make up your mind? I’d advise you to consider the financing with care.
Visit SmartLoans.sg, and compare the available home loan packages. This website automatically picks the cheapest loan packages on the market, and you can use the home loan calculator to compare leasehold and freehold options. Once you’re prepared to buy, SmartLoans can even put you in touch with a mortgage specialist, who can advise you further.
What do you think of Freehold properties? Comment and let us know!
Get more Personal Finance tips and tricks on www.MoneySmart.sg
More From MoneySmart