STI: Downgrading: For richer or for poorer?

Apr 19, 2004

Downgrading: For richer or for poorer?
by Tan Hui Yee

THE Yips were getting on in years. Mr Yip's wife struggled up the stairs in their maisonette flat because her worn knees made the trip excruciating. Mr Yip, who has a heart problem, struggled to keep the flat clean.

So the couple, both 58, decided to sell their home last month and move to a four-room Housing Board flat.

Retirees like them make up about 5 per cent of homebuyers on the HDB flat resale market, experts estimate, a figure that has stayed roughly constant over the years.

These people usually downgrade because they don't need that much space after their children grow up and move out.

The Yips, for example, have two grown-up children, a son aged 32 and a daughter aged 24.

Only their daughter is living with them. Their son is married and lives in his own home.

Said Mr Philip Yip, who retired from full-time teaching six years ago: 'I don't want to impose the condition on my daughter that she has to live with us.'

Three property firms interviewed say some retiree downgraders also use the money from selling their homes to pay for their children's or grandchildren's education.

Most, however, use the proceeds to cover their retirement expenses.

But this can be tough nowadays, when bigger flats have fallen out of favour compared to smaller ones.

Last year, for example, the price of a resale three-room flat went up 17.6 per cent, while that of a four-room flat went up 8.8 per cent.

The price of a resale five-room flat, meanwhile, rose by only 1.8 per cent, while that of an executive flat dipped 1.2 per cent.

All this means that the retiree downgrader has to keep a closer watch on his bottom line, and figure out if it is better to downgrade, or to keep his home.

For example, those who bought their homes when prices were at their peak in 1996 and will face a loss if they sell, shouldn't consider downgrading, said Mr Sazali Sarwan, associate director of Propnex.

Their options: Rent out rooms in the flat instead and live with the children, or rent a smaller home while waiting for the flat's price to go up.

If downgrading makes sense, there are several issues to consider: Cost of moving

Mr Joseph Chong, chief executive of financial advisory firm New Independent, estimates it could cost up to $50,000 if you add up the cost of hiring a property agent and movers, the cost of renovating the new home, and the value of furniture that cannot be moved to the smaller place.

Resale levy

Those downgrading from flats bought directly from HDB or from resale flats bought with a housing grant will have to pay a resale levy.

This ranges from 15 to 25 per cent of the declared resale price, or 15 to 25 per cent of 90 per cent of the flat's valuation, whichever is higher.

Cost of the smaller flat

Even if they are cash-rich after selling off their private homes, downgraders should not pay more for an HDB flat than what it is currently worth, said real estate agency ERA.

It said: 'Think about the day you may need to sell off your three-room flat - the higher price you paid for it, the higher your break-even point.'

The mortgage

Those who have to take a loan to buy the smaller flat will face difficulty, because banks are wary of lending to people who have no source of income, say housing agents and financial advisers.

And, at end of the day, downgraders have to make sure they have enough money to live on.

Mr Daryl Liew, an investment consultant with financial advice firm Providend, estimates that a retired couple would need about $2,000 a month for expenses. That would work out to $480,000 in 20 years.

Mr Yip has done his sums and intends to move just down the road from his Bishan maisonette.

He said the decision to move was 'painful' to make because the maisonette was his dream home. But he added: 'It is worth it. It will give us peace of mind.'