Friday, September 5, 2014

Lease buy back: Avoid it like the plague

Income is rising faster than cost of living according to the PM. At least that is what I just read off in a Facebook story of his radio talk show which I missed. I didn't even know it happened.

I read this article in the ST last night. Two main thoughts. If you are a senior citizen even if  you are still gainfully employed and if we could sustain high growth rates many of the opportunities will go to the young, just like it went to you when you were young. Your income is likely to outpace cost of living. For the senior citizens it is likely to be the other way round. On the other hand the value of your flat would be high and you can now unlock its value through the lease buy back scheme.

If our growth slows, the value of your flat would also be lower but cost of living might not race away faster than your income. You would keep your flat for your children.

So fast growth, you are likely to unlock the value of your flat into cash. Slow growth you keep it for your kids. What's the underlying assumption for these two possibilities? That the income gap continue to be wide or evening widening.

If the income gap narrows, fewer people will feel they have less need to sign up for lease buy back.

But the above are hardly my biggest worry over lease buy back. It is the hidden cost people might end up paying to the in-between folks in the business sector that help organize this scheme. When money moves in financial transactions a lot of hidden fees go into the finance professionals pockets. We must not allow that.

My second greatest worry is investing the proceeds from a lease buy back. Generally this is a bad idea because you get a liquidity discount from converting an illiquid and appreciating property compared to investing on your own. Most of these folks are likely to end making losses investing on their own.

Thirdly there is a potential political cost to the government. Those who took the lease buy back and most people are financially naive would be very unhappy if five or ten years later they discover the value of their flat could have been much more if  they had not cashed their property lease.

Fortunately there are far more shrewd Singaporeans that foolish ones. At the end of the day I agree with Khaw Boon Wan that this avenue for cash is available, but the take up would not be overwhelming. If you run out of money you should sell your assets for cash instead of society footing your bills. This is sacrosanct for keeping Singapore viable.

So everyone should try very hard not use the lease buy back scheme unless they really have no choice.

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