Me & My Money Series (Sunday Times)

[CY09]

Hi MW,

If one could use hindsight, we would have told CPF board that it was unwise of them to allow people to use a large proportion of their CPF OA for equity investments before the dot.com crash.

What is required of individuals is that to practise financial prudence on their part by acquiring financial knowledge/literacy. We have a population of highly educated people who have the huge potential of replicating this intelligence in financial matters (unfortunately they are not doing so now)

Personally, I find the current CPF system of controlling what we can invest a bit ridiculous (since often what CPF approves goes through the process of "inspected by 4" as what Peter lynch writes, examples can be seen in ETF/unit trusts/ILPs, and the previous CPF approved shares scheme which has been scrapped). In addition, the populace too will not accept the fact our current system restricts further the usage of CPF-OA. This move will likely be a political disadvantage for you-know-who. To conclude, many Singaporeans are not financially knowledgeable and have a tendency to over leverage/stretch themselves financially. However there is a limit to how much the govt can control people's consumption habits as well.

[opmi]

BTW who has a negative number for CPF Investment 'Net Amount Used'?

[smallcaps]

BTW who has a negative number for CPF Investment 'Net Amount Used'?

-23k
Mostly thanks to Unisteel...and value investing of course!
But likewise I no longer use OA for stock investments but for property instead. The 35% rule is really a pain IMO.

[Muck]

If one could use hindsight, we would have told CPF board that it was unwise of them to allow people to use a large proportion of their CPF OA for equity investments before the dot.com crash.

I don't think cpfb had any say. If memory serves me right, it was the MAS that liberalized the industry and opened access to our CPF funds (in 1998 I think) to attract fund managers to set up shop in Singapore. It was a strategic move to grow the nascent fund management sector in Singapore. Nation first before self, as has been said...

[davidsim]

Hi Musicwhiz,

I dont think it is weird that out of 10 interviewees 9 will swear by real estate. I believe for most interviewees who are between 30 and 40 would have bought their first property after the 1997 AFC. Between then and now real estate prices have doubled and in some cases tripled. Given the high leverage (80%) present in this asset class it is inevitable that anyone who seems like a skilled investor by the layman definition (i.e. made a lot of money) must have made it from real estate. There simply is no other easily replicable way.

Just think if your property doubles in 10 years the CAGR of your asset is 7%. With 80% leverage that CAGR becomes 26%. Something which any investor will struggle to match.

This does not take into account property allows you to unlock your CPF OA funds which is a good 23% of gross pay (due to employer contributions).

Hi David,

Thanks for the reply and info. Haha actually I was already expecting a reply along these lines when I wrote my comments, as I was aware of the steady appreciation in real estate (especially in the last 6-7 years) since the AFC.

But I do have three points to bring up:-

1) Time Frame - It depends on your time frame of reference when you refer to CAGR. If someone had invested in property in say 1995-1996 period, and was hit by the full brunt of the crisis in 1997, then his CAGR till now may be very low (perhaps 1%-2% CAGR?) because he bought high. This also applies to equities to be fair, if you choose a period such as early 2009-present you will see an amazing return.

2) Finance Costs - We must remember that interest rates used to be very much higher in the late 90's and early 2000's. Hence, the finance costs paid could be substantial with respect to the loans taken up to finance the properties and would erode part of the computed CAGR. Though leverage magnifies the ROE on the property, we must also account for the cost of financing in the computation as we are only looking at the market price at purchase versus market price at present. This does not apply to equities unless you are on margin.

3) Replicable in Future - This was actually opmi's comment. In the 17 years since the AFC, real estate has managed a very respectable CAGR due to many reasons - foreigner influx, development of more land in remote areas for sale, overall prosperity of Singapore, GDP growth and inflation all helping to push prices up all over the island. But looking at the next 17 years (or even just 7 years for that matter), can this be replicated? Can we always assume real estate can appreciate greater than inflation?

Personally, I don't think it's a good idea to allow CPF OA to be used to purchase real estate. This has two effects - it boosts the prices of real estate as people are more willing to leverage when they use their CPF, and it also means people have less to retire on in their CPF OA as they deplete most of it on housing.

Thanks!

Hi Musicwhiz,

Hmm I guess my point was more of if you are going to have to pick a "successful investor" in by the layman definition in his 30s or 40s then because of what has happened in Singapore the person would more often than not say his best investment is real estate because there really is no better asset class. So it is definitely not weird (i.e. unexpected/ unusual) that 9 out of 10 interviewees swear by the asset class. I am well aware that returns are always bright and flashy but risk remains invisible and can forever remains so and I fully agree with points 1, 2 and 3 you have brought up.

With regards to point 3 it is extremely difficult to say what will happen. In my opinion asset prices are not actually directly related to any of the factors you have mentioned but rather to the money supply. E.g. More foreigners in Singapore does not directly equate to high property price. They do need to

1. borrow the money (i.e. increase money supply) and
2. be willing to pay those ever increasing prices.

I believe the Singapore economy as it is right now cannot support the same real estate price growth. However, if the government does manage to pull off its plans to move towards an economy which produces high value services then I think it could be possible as you are looking at a doubling in the amount people earn and thus quintupling (based on 80% leverage) what they able to borrow and pay. This coupled with the general increase in population would allow the property price trend to continue into the future.

I am sceptical about this but the fact is we did somehow grow from a small fishing village to the advanced economy we are today.

Cheers

David.

[Musicwhiz]

Hi Musicwhiz,

Hmm I guess my point was more of if you are going to have to pick a "successful investor" in by the layman definition in his 30s or 40s then because of what has happened in Singapore the person would more often than not say his best investment is real estate because there really is no better asset class. So it is definitely not weird (i.e. unexpected/ unusual) that 9 out of 10 interviewees swear by the asset class. I am well aware that returns are always bright and flashy but risk remains invisible and can forever remains so and I fully agree with points 1, 2 and 3 you have brought up.

With regards to point 3 it is extremely difficult to say what will happen. In my opinion asset prices are not actually directly related to any of the factors you have mentioned but rather to the money supply. E.g. More foreigners in Singapore does not directly equate to high property price. They do need to

1. borrow the money (i.e. increase money supply) and
2. be willing to pay those ever increasing prices.

I believe the Singapore economy as it is right now cannot support the same real estate price growth. However, if the government does manage to pull off its plans to move towards an economy which produces high value services then I think it could be possible as you are looking at a doubling in the amount people earn and thus quintupling (based on 80% leverage) what they able to borrow and pay. This coupled with the general increase in population would allow the property price trend to continue into the future.

I am sceptical about this but the fact is we did somehow grow from a small fishing village to the advanced economy we are today.

Cheers

David.

Hi David,

Haha thanks, at the risk of turning this thread into a property one which may be OT, I shall pen down some of my thoughts about what you mentioned.

No doubt I 100% agree with you that most people (baby boomers) would have made their fortunes on real estate in the last 20-25 years. This is an indisputable fact. However, as mentioned the risks are not quantifiable and will never be fully known because we are only hearing the success stories. Call it survivorship bias if you must - the stories of people who went bust and bankrupt investing in real estate will never be heard in this "Me & My Money" column.

Risks are also not quantifiable with respect to "Black Swan" events - AFC and GFC were some of them. If people had made money from real estate even if they knew nothing about it, does that qualify them as "savvy"? You may say there is an element of dumb luck and also from the secure knowledge that our economy can only grow and real estate prices can only increase. But if it had been otherwise, a lot of people would have lost their pants because of it.

With respect to rising property prices and the future, I believe this hinges on two factors:-

1) Propensity/Ability to Leverage/Spend - This is tied in with the wealth effect and households' Balance Sheets and Cash Flow capability. With many households flipping properties in the past years, their Balance Sheet has been strengthened with cash and coupled with a strong economy and very low unemployment, people are both able and willing to gear up. This, therefore, will be positive for property prices in the future.

2) Anticipation of Real Estate Appreciation - This is more in regards to psychology. Though people have the ability/propensity as mentioned in (1), they must also have the confidence that prices will rise and the economy will grow in order to plonk money down and be willing to wait for the appreciation to occur. This is more sentiment-driven and can change dramatically if significant external shocks or events occur.

I would think that (2) may have a stronger long-term effect than (1). (1) may help real estate prices to find a floor of some sort but the effects of (2) may be strong enough to tip real estate over the edge and into a correction/recession.

Of course, for now, there are no such dark clouds on the horizon.

And oh yes, Singapore is somewhat of a miracle economy. Not sure if we can pull it off again in the next 20 years, haha. We also have politics to consider.

[davidsim]

Hi Musicwhiz,

Hmm I guess my point was more of if you are going to have to pick a "successful investor" in by the layman definition in his 30s or 40s then because of what has happened in Singapore the person would more often than not say his best investment is real estate because there really is no better asset class. So it is definitely not weird (i.e. unexpected/ unusual) that 9 out of 10 interviewees swear by the asset class. I am well aware that returns are always bright and flashy but risk remains invisible and can forever remains so and I fully agree with points 1, 2 and 3 you have brought up.

With regards to point 3 it is extremely difficult to say what will happen. In my opinion asset prices are not actually directly related to any of the factors you have mentioned but rather to the money supply. E.g. More foreigners in Singapore does not directly equate to high property price. They do need to

1. borrow the money (i.e. increase money supply) and
2. be willing to pay those ever increasing prices.

I believe the Singapore economy as it is right now cannot support the same real estate price growth. However, if the government does manage to pull off its plans to move towards an economy which produces high value services then I think it could be possible as you are looking at a doubling in the amount people earn and thus quintupling (based on 80% leverage) what they able to borrow and pay. This coupled with the general increase in population would allow the property price trend to continue into the future.

I am sceptical about this but the fact is we did somehow grow from a small fishing village to the advanced economy we are today.

Cheers

David.

Hi David,

Haha thanks, at the risk of turning this thread into a property one which may be OT, I shall pen down some of my thoughts about what you mentioned.

No doubt I 100% agree with you that most people (baby boomers) would have made their fortunes on real estate in the last 20-25 years. This is an indisputable fact. However, as mentioned the risks are not quantifiable and will never be fully known because we are only hearing the success stories. Call it survivorship bias if you must - the stories of people who went bust and bankrupt investing in real estate will never be heard in this "Me & My Money" column.

Risks are also not quantifiable with respect to "Black Swan" events - AFC and GFC were some of them. If people had made money from real estate even if they knew nothing about it, does that qualify them as "savvy"? You may say there is an element of dumb luck and also from the secure knowledge that our economy can only grow and real estate prices can only increase. But if it had been otherwise, a lot of people would have lost their pants because of it.

With respect to rising property prices and the future, I believe this hinges on two factors:-

1) Propensity/Ability to Leverage/Spend - This is tied in with the wealth effect and households' Balance Sheets and Cash Flow capability. With many households flipping properties in the past years, their Balance Sheet has been strengthened with cash and coupled with a strong economy and very low unemployment, people are both able and willing to gear up. This, therefore, will be positive for property prices in the future.

2) Anticipation of Real Estate Appreciation - This is more in regards to psychology. Though people have the ability/propensity as mentioned in (1), they must also have the confidence that prices will rise and the economy will grow in order to plonk money down and be willing to wait for the appreciation to occur. This is more sentiment-driven and can change dramatically if significant external shocks or events occur.

I would think that (2) may have a stronger long-term effect than (1). (1) may help real estate prices to find a floor of some sort but the effects of (2) may be strong enough to tip real estate over the edge and into a correction/recession.

Of course, for now, there are no such dark clouds on the horizon.

And oh yes, Singapore is somewhat of a miracle economy. Not sure if we can pull it off again in the next 20 years, haha. We also have politics to consider.

Hi Musicwhiz,

I acknowledge my reply is definitely OT now but I am unable to resist the temptation of a good discussion.

I fully agree with what you have said above and you have phrased it so much better and elaborated on them.

1. Propensity/Ability to Leverage/Spend = My borrow the money and
2. Anticipation of Real Estate Appreciation = My be willing to pay

As to which has the longer term effect I would disagree with you. In my opinion, Point 1 would be analogous to fundamentals while Point 2 is actually talking about sentiment. However, Point 2 definitely does have a larger and more flashy effect.

Also with Point 2, I believe your view might be a little too narrow as it seems you are approaching it with your total returns defined in SGD terms.

It is important to remember that the returns for foreigners who buy property here are also affected by the SGD exchange rate. Given that the US, Europe and right now Japan have decided to devalue their currencies, it would make sense to overseas investors to invest in the Singapore property market to preserve the purchasing power of their money as the Singapore government does have a policy to gradually appreciate the SGD over the long term.

For investors in China, India and other countries whose governments are not as stable as Singapore (i.e. frequent policy changes) or whose capital markets are not as developed to take in the millions they have, investing in Singapore property is also a way for them to preserve their wealth outside the jurisdiction of their governments' meddling hands.

Also note that ABSD does not apply to countries that have free trade agreements with Singapore. Below is a link to countries that do.

Countries that have FTA's with Singapore

For the near future these 2 factors are going to stay intact but it is going to be very scary if they do end up reversing and the money starts flowing out of Singapore.

Cheers,

David.

[hyom]

"Partly because of my educational background in building maintenance and management, and because I had to resolve the immediate problem of personal debt, I entered the business of property, thinking that is the fastest way to make money."

He rode on the property boom of 1994 and 1995 and managed to recover his losses in just two years.

Being in a hurry to make money usually leads to disaster. A person needs to have some substantial amount of luck besides guts and smarts to make money fast. It is a strategy that better not be copied.

[KopiKat]

"Partly because of my educational background in building maintenance and management, and because I had to resolve the immediate problem of personal debt, I entered the business of property, thinking that is the fastest way to make money."

He rode on the property boom of 1994 and 1995 and managed to recover his losses in just two years.

Being in a hurry to make money usually leads to disaster. A person needs to have some substantial amount of luck besides guts and smarts to make money fast. It is a strategy that better not be copied.

He was likely referring to being a Property Agent. Since he has the "immediate problem of personal debt", the banks may not want to lend him any money...

[hyom]

Being in a hurry to make money usually leads to disaster. A person needs to have some substantial amount of luck besides guts and smarts to make money fast. It is a strategy that better not be copied.

He was likely referring to being a Property Agent. Since he has the "immediate problem of personal debt", the banks may not want to lend him any money...

That's clever deduction I wasn't sharp enough to take that into account. It is amazing how lucrative being a property agent is. I heard that bypassing the property agent for HDB transactions is not really that difficult. HDB even has a website that guides Singaporeans how to go about doing so. Not sure about DIY for private property. Some told me it is even easier because there are fewer rules for private property. If someone has DIY and found the process easy, please do share. If agent fees are worth a few months salaries, I am sure it is worth some amount of trouble to DIY.