Is Monetizing our HDB flats for Retirement Feasible?

[koh_52]

Yesterday, I heard from the news that LKY urged the citizen not to listen to housing agent and sell their flats....hehe, he is trying to solve the unexploded aging population in the next decade...who going to feed them...the idea of 'monetize' your flat to finance retirement.

Well, can we safely claimed that housing prices are not going to come down anymore, with paper money is as good as useless toilet paper and cheap flooding the market???......

Here the comment from Goh Meng Seng , potential opposition candidate, so views might be abit bias:

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.

http://singaporealternatives.blogspot.co...el/Housing

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.

[sgd]

so if we monetize our flat for our retirement then there's no purpose for CPF for our retirement any more so then let's slaughter the elephant and distribute all the meat

[arthur]

A very good post, most ppl would look into the past and presume HDB will rise in future without consideration of the opportunity cost of paying higher for every sucessive Singaporean generation.

As long as this scheme of selling at market subsidy goes on, someday it will implode on itself. Every generation would expect his HDB to rise at least another 50K~ 100K every decade. Extrapolate this to another 50 yrs and when your granchildren are grown up and ready to buy, they find themselves being priced out.

And the consequences are presented in the above article.

Has the general pay increment rise in tandem with HDB flats valuation (not taking COV into consideration)?
Subsidised living spaces are not on same par as private properties.

While the so called general GDP per capita has risen for Singaporeans, where does the statistics end? Do they present the influx of rich getting PRs? How about the demographics into races, ages?

Eg: 99 ppl in the room earn $1 per yr and a new guy comes in earning $100. Suddenly the GDP per capita rise from $1 to $1.99. An increase of almost 100%.

THe opportunity cost of having much more in the CPF and ability to invest in sound instruments and reaping the rewards are great.
If we are to pour all our savings into just the subsidised rented from HDB property (chk out your purchase agreement with HDB), the risk of any sub-prime will knock us all back into stone age, worse than the Americans.

Who is to say Singapore will not suffer anything similar in the next 50 yrs?

[yeokiwi]

Well, my humble opinion.
The probability of a subprime happening in Singapore is pretty low. The largest property developer in Singapore is HDB and HDB has almost infinite holding power. From 2000 to 2006, HDB was holding lots of empty flats and there wasn't any sign of subprime. I suppose many of you had seen those empty blocks of flats in Jurong, Seng Kang and other new towns. If the same situation happens in Hong Kong or other major cities, it probably will lead to price crash in properties.

From 1997 to 2006, there were significant price drop of the properties' prices but with the HDB holding on to the excess flats and refused to sell at any prices, it basically supported the entire property market.

Singapore property market is rather unique. The government is the main player in the property market and the main supplier of the "affordable" flats. They are holding on to most of the land in Singapore and they can prop up the property price by reducing the flat supply or reduce the price by increasing the flat supply.

In the recent years, HDB is not doing Singaporeans a favour by building enough flats. With a tight housing market, it causes the properties' prices to rise and now, we are stuck in this price range. Since market valuation is used to price the new flats, it is quite unlikely to see a much lower flat prices unless there is an exodus of the foreigners.

[arthur]

Singapore property market is rather unique. The government is the main player in the property market and the main supplier of the "affordable" flats. They are holding on to most of the land in Singapore and they can prop up the property price by reducing the flat supply or reduce the price by increasing the flat supply.

In the recent years, HDB is not doing Singaporeans a favour by building enough flats. With a tight housing market, it causes the properties' prices to rise and now, we are stuck in this price range. Since market valuation is used to price the new flats, it is quite unlikely to see a much lower flat prices unless there is an exodus of the foreigners.

I would see this in another POV.

Since it has often been said that the market valuation should not fall unless there's an exodus of foreigners, then perhaps we can look at this in a deeper sense.

There are roughly around 60% citizens in this country with 40% PRs and FWs. Pls dun quote me on this, the Sing Stats wld provide a better breakdown.
Out of this 40% foreigners, how many are obligated to keep singapore properties intact and not sell should another recession that decimate our foundations come along?

We have been blessed with a good leadership in the past and due to incomptency of surrounding countries coupled with global economics rising in Asia, Singapore rose to what we are today.
Our nation was born in the right time with the right infrastrutures and in the right geographical position.

In the coming decades, do we see ourselves able to reinvent ourselves to greater heights? Its good to look into the past and see every pretty littly things that happened but when we see our little ones, would they be able to afford the kind of housing pricing rise with the kind of pay increment the middle income have?

Not all of us are born with extraordinary talents, or with sliver spoons passed down from our parents. Those who don't will be segregated into lower classes.

Shelters, food and clothing are 3 basic foundation of Maslow hierarchy, if a citizen find himself priced out of such necessities, there will be not a pretty sight on the street.
We have draconian laws here, perhaps for a good reason. But depriving someone of housing is not a good electoral winning way.

The recent housing policy seems to suggest using housing as a retirement fund, thus implying housing prices to increase in future, akin to an investment retirement fund.
So do our children have no rights to buy housing and be able to pay back in <15 yrs? Must they pay for 30yrs? Or maybe follow the Japs paying the housing loan in 3 generations?

Our government seem to run out of ways to regenerate the economy. We proved not to be able to go into entreprenurship, which personally, is our best bet of drawng FDIs and keeping locals in decent jobs.

Thus we go into financial, serving others in casinos, into education, healthcare, etc.
These are all service industries.
Sectors which depend highly on global economy cycles. We are not proving to be able to evolve to high tech industrialised countries like even Sweden.

A country which is highly dependable on global economy will suffer badly everytime there is a recession.
A country which has strong industrialsed background or innovative society will survive due to the talents within that can regenerate growth within the country.

Jus think what would Singapore be like if one Steve Jobs was born here and Apple products are launched here?
We have our Sim Wong Hoo, who in spite of no govt subsidies went on to great heights then. We need more of him, technocrats who can create next wave of society goods.

Can we have these ppl? No. Bcos our education system will smack you in kindergarden if you were to paint the cow purple in a drawing (due to the Cadbury commerical) True story.

Why I am raising this up (or toking nonsense if some of you disagree) is because there will come a time when we make a wrong bet and be unable to stand up again. Not may come a time but will come a time.

Who knows when? next decade or next century?

That's when all the HDBs prices in the world will not be more than a single piece of paper value and floods of foreign liquid capital flow out of the country not to return.
Thats when the subprime memories come back.
The rich will leave that day and the poor will have to pick up the tatters. Hopefully our descendants will be strong enough to overcome all odds and restart this nation again.

(Read Mexico history and see the transformation from 1900s to 2000s)

WE are in a pinch situation. On one hand we cannot be too outspoken, must be going by the books, law by law. On the other hand, we have the govt encouraging entrepreneurship.
Do they come hand in hand?

HDB prices are reasonable? Perhaps we yet hit the critical limit.

Cheers.

[Ben]

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.

I feel that this is a too simplistic view by Mr Goh MS. It assume that a person will use up ALL (or almost all) his lifetime CPF just to service the housing loan. A lot of things will change over the 30 years. In normal circumstances, a person income will increase gradually over the years and thus his/her CPF contribution will also increase. For a start, he/she may use up all her monthly CPF contribution on housing loan. But as his/her income increases, the gap between CPF contribution and loan payment will begin to widen, and so at the end of the loan payment, he/she should still have balances in the CPF accounts. Besides, if a person is careful with his money, than he should also have some cash saving other than the CPF balances to fund his retirement.

Of course, there are many other factors to consider, such as the person may be out of job for some time in his working life, or the person may be a low skill worker and his salary will largely remain the same for a long time. Therefore, careful planning is essential. A person should not bite more than he can chew, ie, he should look at his finances, plus his projected earning ability before committing to buy a flat. A lot of people are in financial difficulties mainly because of over commitment.

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Shelters, food and clothing are 3 basic foundation of Maslow hierarchy, if a citizen find himself priced out of such necessities, there will be not a pretty sight on the street.
We have draconian laws here, perhaps for a good reason. But depriving someone of housing is not a good electoral winning way.

If Singapore is reduced to such a stage where common people are deprived of basic needs, I am sure the current govt, or any govt, will be overthrown. However, it is hard for me to see such how such scenario will happen in the near future, thought I cannot say it won't happen.

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A country which is highly dependable on global economy will suffer badly everytime there is a recession.
A country which has strong industrialsed background or innovative society will survive due to the talents within that can regenerate growth within the country.

I think Singapore will be forever dependable on global economy. We are just a little red dot, and no matter how we grow our population, it will not be big enough for us just to depend on domestic consumption. And because of the limited land size, plus high operating cost, we can only complete if we move into high value mfg or soft skill industries, such as financial, services etc. Having said that, I feel that our service level still have a pretty long way to go.