Reflecting on “Reflections” – A review of Mah Bow Tan’s book (Part 1 of 9)

Leong Sze Hian/

This is a review from a statistical perspective, wherever possible, of the book “Reflections on housing a nation”, launched on 22 March. (You can read it here for free and save yourself ten dollars. – Editor)

In part one of the book, which has nine parts, it states that HDB’s core commitments is:

“Homes for ownership: First, home ownership has been the hallmark of our public housing system.  Today, nine in 10 people staying in public housing own their flats, the highest rate in the world”

Have flat, but no money to retire?

Whilst we have the highest public housing ownership rate in the world, on the flip side, practically every study on retirement, indicates that Singaporeans have one of the lowest retirement income replacement rates in the world, despite having the highest pension (CPF) contribution rates in the world.

So, what’s the point of having home ownership, when many Singaporeans end up being in financial stress in your retirement years?

In this connection, I would like to refer to the recent Committee of Supply debate on the Ministry of Manpower in Parliament.

The Manpower Minister said that:

“For the cohort turning 55 in 2010, over 40% of active CPF members attained their cohort MS (Minimum Sum) set at $123,000.  Of these members, more than half have set aside the full cohort MS in cash.  If we were to add back the amounts withdrawn for housing, the average savings of active members turning  55 in 2010 would be $226,000, with the MS attainment rising to about 60%”

If a Singaporean worker starts work at age 21, with a starting salary of $1,100 a month and his or her salary increase at 2 per cent per annum, at the CPF contribution rate of 36 per cent, if the return is 5 per cent, the accumulated sum at age 65 would be $1,001,290.

So, every Singaporean should be a millionaire when they retire at age 65.

So, why is it that only about 20 per cent of active CPF members can meet the current MS of $123,000 at age 55 fully in cash, about 40 per cent including their property pledge, and about 60 per cent if all the amounts withdrawn from housing are added back?

By the way, there are also 1,646,700 inactive CPF members, out of the total CPF members of 3,291,300 in 2009, (Department of Statistics Labour and Productivity Report) who may have very little in their CPF, when they retire.

Good debt?

Mr Mah also wrote:

“Rather than making people pay “dead rent” with no returns for a roof over their heads, the Government decided early on that prudent mortgages can be a “good debt” that allows every citizen, every family, to have a concrete stake in this country”

Since the HDB does not give regular statistics of HDB loan and bank loan mortgages in arrears, I estimate from the last available statistics that about 40,000 households may be in arrears over three months.

We also do not have statistics on how many households have sold their HDB flats in the open market because they could not pay their mortgages, were foreclosed by banks, compulsorily acquired by the HDB, etc

So, how do we evaluate whether it has been a “good debt”, when we do not have the above-mentioned statistics?

Unlock your flat value?

The minister added:

“In the golden years, we help you unlock the value of your flat if necessary, with schemes such as the Lease Buyback, which allows you to stay in the flat while getting a regular income”

Let me illustrate the issue of Lease Buyback with an example.

In the example cited by the Today newspaper of 2 March, 2009 (“I can’t take the flat with me when I die”)

, a 62 year old male with a 3-room HDB flat, will get $5,000 cash and $5,000 to his CPF, followed by a lifelong monthly income of $530.

In a normal reverse mortgage, the home-owner draws income and is charged interest. On death, the market value of the property is offset against the amounts withdrawn plus interest owing to the financial institution.

Assuming an interest rate charge of five per cent, the sum owing after 30 years is $465,274.

If the value of the flat appreciates at 5 per cent, the market value after 30 years is $1.02 million. So, does it mean that in a sense, the flat-owner may lose $554,726 ($1.02 million minus $465,274)?

Wouldn’t the flat-owner be better off renting out one room for about $450, and retain the equity on the flat?

Historically, I understand that HDB flats have always increased in value as there has always been upgrading to new flats under the Selective En-bloc Resettlement Scheme (SERS), for older HDB flats that reach around 40 years old or lesser.

Another alternative may be to downgrade to a studio HDB flat costing say $70,000, to obtain $166,000 to fund one’s retirement. (Existing HDB flat $236,000 – new HDB studio flat $70,000)

Assuming a rate of return of say 4 or 5 per cent, the $166,000 sale proceeds can give a perpetual monthly income of $553 or $692 without consuming any of the $166,000 capital.

The more flats we sell – the more we lose?

Mr Mah then claimed:

“Homes within our budget: Public housing takes up a big chunk of the State’s budget – $1.7 billion in 2010”

On 7 November, 2009, he explained why the HDB had incurred a $2 billion loss  that year, which was twice that of the previous year. (“Ample supply of housing in private market, says Minister Mah”,  Nov 7, 2009, Channel News Asia).

He said:

“It is making a loss and the Government gives it grants every year to cover the losses, mainly because we’re giving subsidies to people to buy flats to make flats affordable to first timers. That is why we’re making a loss.”

The report went on:

“Mr Mah said the HDB makes a loss each time it gives out subsidies to first-timer home buyers, and when it sells flats lower than their cost price. The reason for the high deficit was because more flats were offered for sale last year, compared to the year before”.

Mr Mah’s remarks seem to contradict the statistics  provided in the HDB’s annual report.

According to the annual report, HDB revealed that “the number of flats sold under the home ownership scheme that year was 4,738, which was 7,253 less than the previous year.

According to its section titled “Key statistics”, the “demand for flats” was 9,870 Home Ownership flats for 2008/2009, compared to 12,449 for 2007/2008; and the “Building statistics – Dwelling units” was 3,154 in 2008 compared to 5,063 in 2007.

All these numbers show that the number of flats sold have declined, rather than increased.

The number of flats sold under the home ownership scheme declined by 60 per cent, “Demand for flats” declined by 21 per cent, and “Building statistics – Dwelling units” declined by 38 per cent, for the previous year.

So, how is it possible then that the reason for the high deficit ($2 billion) was because more flats were offered for sale  that year, compared to the year before” when the HDB statistics show that flats’ building, demand and sales, all declined substantially that year compared to the year before?

Can the Minister clarify his statement on the reasons for the doubling of the deficit from $1 billion to $2 billion for that year?

As for Mr Mah’s assurance that HDB “sells flats lower than their cost price”, the HDB has not disclosed the breakdown of the cost of building flats, despite letters to newspaper forums requesting for this information, almost every year.

The last time this information was disclosed was in 1981, when the then National Development Minister Mr Teh Cheang Wan, disclosed the land and construction cost, as well as the subsidy and selling price, of the various flat types in six districts.

For example, a three-room flat in the central core region, cost $53,700 to construct and incurred a land cost of $40,000, and sold for $57,100.

End of Part 1

Mr Leong has beaten Mr Mah by publishing a book in 2008. It has no pictures but at 186 pages (with Chinese translation), is more value for money. You can buy it here!