Thursday, March 18, 2010
HDB's Flawed Policy Direction
I have watched the Talking Point of Mr. Mah's effort to defend his HDB policies. After watching it, I feel very worried about the future of Singapore.
It has confirmed my initial guess of what this PAP government is up to, although I have heard about it from a professor whom might have helped to mold such policy direction.
MBT started off with three main points:
1) HDB flats are for Home Ownership, for Singaporeans to "own" their flats. This "asset" you could "sell it and you can keep everything that you made"
2) Extensive Coverage. Over 80% Singaporeans are within this scheme.
3) HDB is also acting as a form of retirement income. Singaporeans can "monetize" their flats, downgrade, rent out... etc. just for retirement financing.
Mr. Mah responded to my constant ranting on the ground that with a 30 years mortgage, our children will not be able to have sufficient money in their CPF for retirement financing. If our children married at 30 years old, they could only finish their mortgage payment by 60 years old. Almost all money in CPF apart from Medisave will be used for this mortgage payment. There will be very little money left for retirement financing.
Mr. Mah responded saying that we could "monetize" our HDB flat for this retirement financing. The assumption that one could actually "monetized" our HDB flats to finance retirement is totally flawed. There are many issues here. When you pay high prices for your first HDB flat, by the time you finish paying the 30 years mortgage, you would be buying almost 50% more than the price you initially bought in terms of interests.
Take for example, if you are getting a loan of $225K for a 4 room flat, you will be paying about $865 for a 30 years mortgage. Your interests paid at the end of the mortgage is a total of about $103K at the HDB's concessionary interest rate of 2.6%. It means that if you are to make any money out of your flat, you must be able to sell at least $328K by the time you finished paying the 30 years mortgage. Please bear in mind that your lease will be left with 69 years. This is the reason why PAP wants the resale price of HDB to stay high.
However, if you sell off your HDB flat, where are you going to stay? Assuming that the studio apartment by then will cost you $100K. (Very conservative estimate indeed.) So you will have $228K left for retirement financing.
Could we do better than this? If the price today is priced at cost price, maybe $50K less. The amount of interest you will save will be about $23K with the same 30 years mortgage. You will be paying $190 less per month for your mortgage payment. This $190 will be in your CPF account earning an interest of 2.5%. At the end of the 30 years, you will get about $109K from this monthly saving of $190.
You will be taking a loan of $175K and paying $675 per month for your flat. Total interest paid will be about $79K. So in order for you to break even, you will need to sell $254K. Deducting that $100K studio apartment, you will get $154K plus the CPF extra saving of $109K. A total of $263K!
Please bear in mind that this is selling at break even, at lower price than Case I. If the flat could be sold at the same price as Case I, $328K, you will have another extra amount of $74K!
Besides, nobody could possibly predict what price the resale market will be in 30 years time! For the Case II, you will definitely get $109K first regardless of whether you can sell your flat or not. If you take $1000 per month for monthly expense, this $109K savings could last you about 9 years.
The above is a simple example. However, I have not come to the other problems of Mr. Mah's method. If HDB insists on high HDB flat pricing based on resale market prices which are subjected more to excess liquidity from foreign sources rather than real income growth locally, the pricing mechanism will price young couples out. It is already taking effect on the lower income people now.
If we were to take Mr. Mah's policy direction at face value, it would mean that the resale market has to grow by at least 2.6% per year in order for the plan to be successful. However, can the Minister guarantees that our income growth could also grow at this rate for ALL Singaporeans? Apparently, by historical data for the past 10 years, the wages for the middle-lower income group has been stagnant or even regressed!
If more and more Singaporeans are priced out of the HDB property market, forced to stay with their parents, such a scheme will collapse. You may have 80% of Singaporeans staying in HDB but not all adult Singaporeans owning their flats! How could Mr. Mah's "HIGHFALUTIN IDEA" of using HDB flat as retirement financing works then?
On the other hand, more and more Singles and Divorced Singaporeans will be priced out by the system because the system is basically based on two income earners assumption. In the end, they may be forced to buy studio apartments or 2 room flats. If that happens, they couldn't possible downgrade further, could they?
Besides, this system is in danger of turning into sub-prime. At this rate we are going, there is no guarantee that everyone will be able to stay employed for the whole 30 years of their lives without decreased wages. Even Government agencies and GLCs are totally biased against older applicants who have passed 40 years old.
This is basically the reason why more and more Singaporeans are unable to fulfill their mortgage payment, ended up having their HDB flats being repossessed, evicted out of their flats. This is no laughing matter. They would have lost everything in the whole process or even ended up still owning HDB money after losing all their CPFs and the flats. At the very least, if they have kept that $190 per month savings in CPF as in Case II, they would still have some funds for retirement in future!
The other problem with this model is that there will be a great possibility of over building of studio apartments in view of an aging population. There will be a peak of this aging population and then it will decline, stabilizing at sometime later. During the peak of the aging population, the resale market may just collapse! This is basically because many people who follow Mr. Mah's direction would have to sell their flats to finance their retirement. Thus, Mr. Mah's hope of having high resale market price by the time of our retirement may be just fat hope.
On the other hand, the HDB may not react sufficiently to provide enough studio apartments to these people because they will be very concerned of over building. It will be a very delicate balance to maintain. By HDB's track record back in 2007 and 2008, it doesn't seem to be very nimble in estimating demand.
The situation would be great demand on studio apartment but there are competing resources now. HDB would have to build and cater to TWO big groups of people, the young couples and the retirees. If we do not have more PRs to buy up the resale flats from these retirees, we will be in trouble! There will be a huge oversupply of flats in the market.
Thus, the "downgrading" option is not economically sound at all. What about "reverse mortgage"? How much money do the government of the day needs to fork out to satisfy this system? Especially for an aging population when the PEAK of retirees begins to surface? Is that sound at all for the financial system to put in so much money to finance an "unproductive" investment?
How about the renting out option? First of all, there must be enough demand. If we do not have enough foreign workers working here to rent the flats during the peak of aging population, we are doomed. Furthermore, more PRs would prefer to buy their own flats and rent them out as well! Could anyone guarantee that there will be so many foreign workers around? If that is so, our own Singaporeans may just face depressed wages as well! The problem of affordability of HDB will come back to haunt us again especially so when we need the wage to grow as fast as the flat prices to grow at the rate of 2.6% per year.
Thus I think the suggestion of using HDB flat as "retirement financing" is really a very dangerous one. It has no basic sound economic foundation to start with. It is just based on some "ideal situation" scenario which is totally unrealistic. The premise of the "ULTIMATE PLAN" of PAP's retirement financing for Singaporeans is totally flawed. This system cannot work at all.
The better bet is the second case scenario whereby flats are sold at lower prices and Singaporeans could continue to save their money in CPF to be used for future retirement financing. To bank on Mr. Mah's policy direction on High HDB price for Future Retirement Financing is a very dangerous move. There are so many variables to take care of. There are just too many unrealistic assumptions made but possible scenarios arising from the aging population not taken care of. His plan that aims to solve one problem, will eventually create more problems for Singaporeans and future government.
Goh Meng Seng