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.

Case I

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.

Case II

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


cy said...

good analysis, esp with numbers thrown in!

Is HDB retirement financing a Ponzi Scheme dependent on attracting more plankton to feed the fish?

Fievel said...

they are only saying hdb is a form of retirement income now because the current picture suits the story.

these guys are amazingly inept for such highly paid professionals.

Anonymous said...

"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."

You have not answered the question: "What is in it for existing home owners with mortgages to service? What will become of them if HDB prices start to fall?"

Ignoring this flaw in your proposal and dwelling on the flaws of MBT's policy will not win you my vote.

auntielucia said...

To bang on Mr. Mah's policy direction on High HDB price for Future Retirement Financing is a very dangerous move.

the word is "bank" not bang... geddit?

Anonymous said...

The talking point program has served no purpose in which i see Mr. Mah is trying to control or in fact, manipulate the whole situation. He is directing questions that he could answer, with stern finger pointing to other guests. Anyway, thinking much about it, the entire HDB policies is so flawed. I am not yet a house owner but i yearn to become. And to fulfill this dream, i will have to rally and use my vote against the ruling party. Because that's the only way we can continuing living as a human and not some toyota car assembling machine.

Anonymous said...

yesterday a copy of comments of this topic from TOC website to Reach forum has deleted by Reach Admin.

Anonymous said...

anon 1:58

he can't answer you because, there is no way to reverse home prices or the system without screwing up the entire economy and people's lives.

so his proposition is equally flawed if not...worse than pap's highfalutin plan

however, his concerns are not without merits. making political promises such as asset enhancement and monetization of flats etc is the easy part. delivering the promises with seemingly insurmountable obstacles ahead, as goh had pointed out, is the hard part.

at the end of the day, MBT must convince the people that if they put their money in this place and call it their home, they must be assured that the policies will work out for their long term financial interests - from cradle to grave.

and that, i believe, it's achievable(yes, it can e done), but not without further twitching of the policies.

so, my bet is still with pap for now(keeping finger crossed)

Anonymous said...

Yes i totally agree that HDB pricing are getting higher. And after 30 years, i do not think that the price of resale housing will increase either. So, if HDB were to continue their policy, more younger generation like me will not be able to afford any HDB flat at all! i think HDB really need readjust some of their policies

Anonymous said...

You have not answered the question: "What is in it for existing home owners with mortgages to service? What will become of them if HDB prices start to fall?"

Know this. What goes up will come down. And so will HDB prices. HDB is now like a game to see who can get out first before the inevitable happens. And voting for the PAP won't prevent the inevitable. And if you are the one caught when the music ends, well your eyes are open.

family man said...

Thank you. I always suspected that with the HDB policy, we will not have enough for retirement. Thanks for showing it with the numbers. For those who says if we reverse reduce the price now, it will affect the current home owners, as a HDB owner,I say it is a good move. If I want to sink my roots here, I can only rejoice that my sons and daughters will get to own a piece of Singapore at a price they can afford. And that can only mean good news.

Anonymous said...

What about the latest Uni fees rise? The Sad Lee Hsien Loong never think what the left hand don't know what the right hand is doing.
If Singapore Citizens are important, make education free for all university students / poly students - up to the level of the cheapest uni course - eg Art and Social Science.

Does the PAP govt know that with the fee increase, how much more the Singapore population will shrink? Do they really care? Or are they more concerned about GDP growth to increase their Performance Bonus?

Anonymous said...

Follow this guy path of simplistic analysis, your wives may end as maids in your neigboring countries and your daughters may have to sell her flesh in the internet to pay school fees.

Goh Meng Seng said...

I shall reply once and for all, by putting up my reply to Sammyboyforum:


I think you still cannot grasp the issue well.

Whether we implement my plan now or not, the future resale market will plunge. The reasoning is very simple

1) If we go by MBT's idea that older Singaporeans can sell off their flats or downgrade to monetize their flat for retirement financing, there will be MORE people selling than people buying. This is so due to the aging population; more elderly people than younger couples. Simple Economics of supply and demand.

2) With a lesser lease of 50 or 70 years (depending when you sell), the value of your flats will plunge. Who says property prices will always go up? This is a 99 lease HDB flat!

3) So what if the resale market price is so high now? Can you sell it now and live somewhere else? Nope.

4) Ultimately, I have explained so clearly, those who are restricted to buy resale HDB will not be able to switch to buying new flats from HDB. The impact of this plan is very limited to the resale market.

5) PAP has been stressing that don't put all the eggs in one basket. If you are going to use ALL your CPF (ordinary account) to "invest" in a 99 year lease hold HDB and hope that it could sell at higher price later to finance your retirement, you are betting on the risky thing.

6) First you must make sure that you will always have the same job with same or better pay for the whole 30 years.

7) Secondly, you must make sure there is enough PRs in future to buy your 70 or 50 lease HDB.

8) The more prudent strategy is to keep certain portion of your CPF as savings for retirement.

9) This can only be done by reducing the price of HDB flats.

10) For those who have bought at high price, blame PAP. But we cannot let this thing go on for our children.

Thus, the implementation of the sales at cost price is the best bet you can have for retirement financing for your future generations. You and me are screwed, so to speak.

Goh Meng Seng

Anonymous said...

This is too simplistic an answer.

If it is true, then you people will not be complaining about rising HDB prices, how they compare to years gone by when it costs only a five digit sum.

If you believe that prices will automatically come down, then why make so much noise? It will come down right?

For those who think they are doing their children a favour, it is a selfish mentality, caring only about your kids and not those who would very well be homeless when banks react to lower prices and make 'margin calls'.

And what makes you think that you will get to enjoy your CPF savings from lower home prices? Can the opposition guarantee that CPF life and whatnots will be abolished?

GMS' arguments for retirement are just as flimsy as MBT's.

Anonymous said...

"Know this. What goes up will come down. And so will HDB prices. HDB is now like a game to see who can get out first before the inevitable happens. And voting for the PAP won't prevent the inevitable. And if you are the one caught when the music ends, well your eyes are open."

Sorry to disappoint you but this is stale information I have known since eons ago.

Sorry to disappoint you a second time, but I have already got everything worked out, whether prices go up or down.

And that has nothing to do with whether I vote for PAP or not.

But just by harping on housing prices because you want to bring MBT down at Tampines will not get you very far.

Anonymous said...

The silent majority is not the stupid majority.

You can give all the implausible and improbable reasons for why the current FT/HDB policy is correct.

Ther two are intertwined as

1) The liberal FT policy drives up the prices of HDB and other property.

2) The liberal FT policy depresses wages.

At the end of the day if it hurts them, people will figure it out no matter how clever the propaganda is.

Anonymous said...

to be fair, goh premonition may come true if sg loses its attraction to be one of the best city(in the world) to live,work and play.

barring from any "bad luck", if the gov can get the formula right for this city, the demand for our humble flat, which then becomes an asset or potentially can become one, will keep prices up or stable,

the humble home, which you work all your life to "build", can *potentially* finance your retirement years - and you don't even have to move out of your home.

possible only if it is a TRUE asset for our citizens.

i expect more housing policy changes to come - sooner or later.

Anonymous said...

Goh's highfalutin idea is to wipe out hundreds of billions of dollars off the market and plunges the entire nation into poverty or make everyone much poorer.


Only one way to go is forward.

Face whatever problems ahead and resolve it.


Anonymous said...

could have been written in a more succinct way.

Great ideas though.

Many people didn't realise the truth as revealed by this article.


Anonymous said...

If we had restricted PRs/FT to renting, this problem would not have been this severe.

The essence of the problems, the govt didn't want to realise the monies back to people.

They want to trick us again and again.

To the person who thought plunging the market is bad, I think it is especially bad for the PRs.

HKer had a few big plunge and survived well.

The parties that lose out is the banks and the govt.

Anonymous said...

Goh Meng Seng has good ideas but he can be very long winded. The following is a summary of what he is trying to say:

1) Under the current system, first time HDB home owners have to pay a very high price because HDB flats are priced based on the price of resale HDB flats.
2) HDB flats should be priced based on the cost it takes to build them rather than the price of resale HDB flats.

This simple message has been twisted by the PAP Internet Brigade into

1) Goh Meng Seng wants to collapse the price of HDB flats

Logically, this cannot happen. This is because to buy a flat from the HDB, you have to fulfill

1) Citizenship/Ownership requirements
2) Family nucleus requirements
3) Occupancy requirements which prevent first time buyers from immediately selling their flats in the resale market

Goh Meng Seng also talks about the idea of using your HDB flat to finance your retirement. This is a BAD IDEA because

1) The price of resale HDB flats can fall.
2) Other than selling the HDB flat, there are no other means on monetizing it. Previous attempts to monetize HDB flats via reverse mortgages failed.

Hence unless you have second property or are planning to emigrate from Singapore, it would be foolish to rely on your HDB flat as a means of providing for your retirement. Unfortunately many Singaporeans are FORCED to do so because they have spent ALL of their earnings on their HDB flat.

A vote for Mr Mah would therefore mean a CONTINUATION of the current policy of INFLATED prices for flats bought DIRECTLY from the HDB.

A vote for Goh Meng Seng would mean HDB policy REFORM so that you pay based on the COST of building the HDB flat.

Anonymous said...

On what can be done to help the present victims of Mr Mah's HDB policy, I am afraid that the answer is probably "very little".

The task of correcting the present system to make a better future is daunting enough.

It is a STUPID arguement that we should continue with the current broken system as it is only "fair" that future generations must suffer in the same way as previous generations.

If Singaporeans want to hold someone accountable, then they should "target" Mr Mah and vote him out of office.

Michael said...

Thanks a million, Aurvandil. Good summary.

I have stopped listening to this government way of doing things when their policies hurt me. And I agree with the previous anonymous poster that to do a reversal in policy would make the government lose money. And that is what they do not want. After all this while, Mah is still putting his performance bonus first and young and future Singaporean children second. It is unbecoming that a minister should opportune "kiasuism" among some Singaporeans (arguably a value that this government has inculcated as a shody form of moral education) as a reason why he does what he does. On one hand, Mah wants to argue that his policy is a hard UNPOPULAR choice he supposedly needs to make. On the other hand, he panders and ingratiate the present HDB home 'owners' (no one owns a property that is rented to you for 99 years, that's why Mah says it's a uniquely Singaporean phenomenon) for the same policies he is inculcating. Does this bespeak of a consistent intention? Or a Mah who is politically maneouvering himself out of the heat he has gotten himself into? Mah is not answering questions. He is campaigning for the 80% HDB 'owners' to vote him in.

It is not right for a man to be shrewd for the wrong reasons. At a time, when Singaporeans are trying to struggle to build a family and a home, the government HDB policy is shooting present and future Singaporean lives in the foot. How do you expect the population to reproduce itself with such a policy? Mah would have scored better had he taken accountability.

Anyhow, this is my last wish for Mah Bow Tan: Please give a short speech after the Tampines GRC loses its seat. And remember to keep it short. He is fighting a losing battle as he mishandled this present CNA interview.

jamesneo said...

In my opinion, it is better to have a soft landing than a hard landing. Why have Singaporeans not learn from the mistakes of USA, Japan and Ireland of the danger of overinflated price of the HDB. The next three housing bubbles that will burst is in UK, China and Australia.
The US people also thought that they can use their homes for asset enhancement with a unrealistic optimism during their boom time and look at the plunge in prices of their homes now.

I will inherit half a flat from my parents in the future but i also wish that the flat prices stabilize at a price lower than now.
The era of low interest rate is coming to an end soon and if you are stucked with a variable home loan, the interest payment on your mortages would soar.

What is my advice to home owners that bought high and using bank loans. Switch quickly as soon as possible to a HDB loan if possible(which for now is at 2.6% interest rate. Singapore is not likely to go bankrupt in 10years as yet so a HDB loan is still safe for now) and get a flat that is at most 4 times your annual salary. The savings you get from paying less for your mortgages can be put into investment such as ETF.

As an educated person one should go and understand economics 101 yourself and know that the economical situation in US, EU and china is not as rosy as reported now. A further recession with an even greater whammy will occur there in 2010-2012 and the effect on Singapore will be even worse the next time. Over the next 30 years, the cycle of boom bust will accelerate there especially if the developed economies continue to use easy money methods(printing money instead of solving the fundamental problem of excessive debts. To people who are optimistic that Singapore will be spared from the continuous onslaught of at least 5 recessions within the next 30yrs, i will pray that you did not over commit yourself in debts and you can ensure you have a stable and well paying jobs fro the next 30yrs.