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14-03-2012, 06:38 AM
Letter from today's ST.
The Straits Times
Mar 14, 2012
'Upgrading culture' propagates property-rich, cash-poor trend
ALLOWING the property-rich but cash-poor scenario to continue contravenes the original objectives of the Central Provident Fund (CPF). Cutting down unnecessary and extravagant expenses in property upgrading could help reverse this scenario.
Last Thursday's letters by Mr Michael Dee ('Protect CPF savings from inflation') and Mr Leong Sze Hian ('Explain the lower payouts of new CPF Life plans') are thought-provoking. As Mr Dee noted rightly, inflation has been going up faster than before - and this is a worldwide trend. Protecting the value of savings is a new challenge for people and the CPF Board. With longer life expectancies, more of us are concerned about whether future CPF payouts are adequate.
Home financing is a key component of our CPF scheme that uses up most of the savings. More liberal use of CPF savings for upgrading and investment on properties was allowed in recent years. We need to ask whether there are abuses of this liberalisation that may result in eroding the CPF savings for some, and whether buying bigger and more expensive homes is a good way for value-hedging.
A substantial sum is spent on taxes, commissions, legal fees, new furniture and renovation or rebuilding when upgrading one's home. It is not uncommon for some to spend $100,000 to renovate a $300,000 flat. The money spent is consumption rather an investment. Even if the property's value appreciates over time, if interest paid and other opportunity costs are taken into account, what is the net gain, if any?
Of course, there are the lucky owners who enjoy capital gains, but most people have only one property; even if they sell that single home, the chances are they would reinvest in an upgrade or more expensive home, and incur more expenses.
We may well be one of the top spenders on property upgrading. The extra upgrading expenses many spend can buy a good home in other countries.
This 'upgrading culture' must be moderated. It is one of the main causes of property price increases, influx of so many foreign construction workers, and low savings for many.
Ng Ya Ken
The Straits Times
Mar 14, 2012
'Upgrading culture' propagates property-rich, cash-poor trend
ALLOWING the property-rich but cash-poor scenario to continue contravenes the original objectives of the Central Provident Fund (CPF). Cutting down unnecessary and extravagant expenses in property upgrading could help reverse this scenario.
Last Thursday's letters by Mr Michael Dee ('Protect CPF savings from inflation') and Mr Leong Sze Hian ('Explain the lower payouts of new CPF Life plans') are thought-provoking. As Mr Dee noted rightly, inflation has been going up faster than before - and this is a worldwide trend. Protecting the value of savings is a new challenge for people and the CPF Board. With longer life expectancies, more of us are concerned about whether future CPF payouts are adequate.
Home financing is a key component of our CPF scheme that uses up most of the savings. More liberal use of CPF savings for upgrading and investment on properties was allowed in recent years. We need to ask whether there are abuses of this liberalisation that may result in eroding the CPF savings for some, and whether buying bigger and more expensive homes is a good way for value-hedging.
A substantial sum is spent on taxes, commissions, legal fees, new furniture and renovation or rebuilding when upgrading one's home. It is not uncommon for some to spend $100,000 to renovate a $300,000 flat. The money spent is consumption rather an investment. Even if the property's value appreciates over time, if interest paid and other opportunity costs are taken into account, what is the net gain, if any?
Of course, there are the lucky owners who enjoy capital gains, but most people have only one property; even if they sell that single home, the chances are they would reinvest in an upgrade or more expensive home, and incur more expenses.
We may well be one of the top spenders on property upgrading. The extra upgrading expenses many spend can buy a good home in other countries.
This 'upgrading culture' must be moderated. It is one of the main causes of property price increases, influx of so many foreign construction workers, and low savings for many.
Ng Ya Ken
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/
