We all know the govt. runs various scams. There is COE, ERP, GST, etc. However, their most profitable scam by far is the symbiotic relationship between the HDB and CPF. This axis alone is responsible for the greatest wealth transfer swindle in modern history and the draining of entire generations of hard earned Singaporean savings.
Background
Once upon a time, when HDB was first started in the 1960s, flats were really sold at close to cost and followed the model of true subsidized housing. In the 1970s, flats were sold on a cost basis, in other words with no mark up by the HDB. You could buy 3 room flats for as little as $15,000 and 5 room flats were $30,000. In the 1980s, HDB started to include land costs into the pricing, for what reason, no one knows as HDB dwellers do not own the underlying land. Prices than when as high as $140,000 for an executive flat. In the 1990s and 2000s, we saw the start of the sharp rises in price when HDB went to a construction cost plus “market “ price for land valuation resulting in the $400,000 plus flats you see today. We will exam the reason for this later.
In the first couple decades of the HDB’s existence, you also had to sell the flats back to HDB at the price that you bought from them, if you decided to change residence. This prevented speculation from profit taking on the flats. At its peak, with a population under 2 million, the HDB was building as much 30,000-40,000 units a year. These were the golden days when HDB was truly affordable.
The HDB’s formula was very simple. Acquire land from private owners for a fraction of the cost using the Land Acquisitions Act which restricted what the Govt. can pay in compensation to the land owners (my readings have indicated 25cents on the dollar), than rezone the land to allow for higher density. Tender the construction of the blocks with the winning companies using cheap labour (usually Thai or Bangladeshi workers), cheap material, and all financed by cheap money from the CPF. On top of this, architectural costs were minimized (and they can add up to 10% of a project’s cost) by using the same cookie cutter designs. Cheap Land + Cheap Labour + Cheap Materials + Cheap Architectural costs + Cheap Financing = An affordable dwelling……………….as long as the savings were passed on to the end user.
Fast forward to the 1980s, and the PAP realized that it had a serious problem on its hand. This was the growing mountain of CPF funds under administration. When CPF originally started up in 1955, the contribution rate (total) was as little as 10%. Now look at how high it is. Coupled with the higher average incomes over the decades, this higher contribution rate results in hundreds of billions of $ that the govt. collects in CPF contribution every year. In the last 5 years alone, CPF contributions have averaged $22 billion and it’s still trending up. These contribution represents a liability to the govt. i.e. they have to pay it back to the contributors when they retire. As you know, the PAP is not interested whatsoever in releasing these billions of $ to Singaporeans. They have already used these funds to start their GLCs, Temasek, etc. and in many cases have lost substantial amounts of the fund.
The Swindle
So, the question became, “How do we, the Govt., minimize our liability in the form of CPF, and at the same time increase our investing assets in the form of the 2 sovereign wealth funds?”
So, some scholar game up with the brilliant swindle. What if we decoupled the HDB’s buy back at cost scheme for flats, resulting in the immediate price increase and than using this price increase as an excuse, we artificially raise the prices of HDB flats drastically. At the same time, we allow the use of CPF not only for down payment, but also for monthly payments on the flats, thereby depleting the flat dweller’s CPF account and dramatically reducing our CPF liability exposure.
So, how it works is that now, HDB has raised its pricing to way beyond what it cost to build the flat. A flat that cost perhaps $150,000 to build is now “sold” for $450,000. The extra $300,000 is profit for govt. Imagine that you are the buyer of such a flat. You use 20% as the down payment straight from your CPF OA account. That’s $90,000 out of your CPF account right away. And you take a bank loan for $360,000 at 2.5% amortized over 25 years, that is $1613 per month in payment. Let’s say that like most Singaporeans, you take the monthly loan payment out of your CPF. After 10 years, you have paid $193,500 in interest and principal. Remember, this is $193,500 that you will not have any more in your CPF. It has gone to the govt. which used an overvalued flat to extract this from you. And don’t forget too that the original $90,000 down payment is also not available, meaning in the first 10 years, you have used up $283,500 from your retirement savings on a flat that is not yours, a flat that you are only renting long term from the HDB!!! Worse of all, after the first 10 years, you still owe $242,000 on the original purchase price. In one fell swoop, the govt. has now successfully transferred 75% of your current and future retirement funds into a 99 year prepaid rental flat that you don’t own. Thereby, reducing their liability to you and at the same time selling you an expensive trinket. How devious is that?
But wait, you say, I can always sell my flat when I retire and use the money from the sale to fund my retirement. This is the lie that the PAP tells, and let’s examine that.
a) Well, if you sell your flat, where are you going to live? If you bought your flat 25 years ago for $150,000 and sold it today for $600,000, where will you stay? You can down size to a smaller flat, but even those will cost you upwards of $300,000. SO, what do you net out after you buy a replacement flat to live? Remember, you have to live in a flat until you die, as nursing homes according to certain Ministers are too expensive unless you relocate to Johor state. And forget about renting too. It’s very expensive and will rapidly deplete the capital gains you have made from the above transaction. Don’t forget too that CPF has fixed it such that you can only use your CPF for the monthly payments on a HDB 99 year prepaid rent, but does not allow you to use it on monthly short term rent (12 months or so). If you retire and sell your flat, and decide to rent, you must pay for the rent from after tax and non CPF sources of funds. Which means you can’t or you have to go back to work. Its than a waiting game until you get to the age when you can withdraw all the CPF. So, if you do downsize to another flat, the amount that you net out will not be much, and probably not enough to fund the retirement for you and your spouse.
b) Consider too what happens when your flat gets older. Some banks are not giving loans to flats that are older than 25 years. The HDB themselves severely restrict loans given to flats that are 34 years and older. This means that when you want to “monetize” or sell your flat for the purpose of funding your retirement, you will find that many potential buyers cannot get a satisfactory bank loan, or even a bank loan at all to buy it from you. This will result in your flat being less desirable to buyers and hence it will command a lower price than what you had thought possible. In addition, you are dependent on the prevailing housing market conditions. Housing moves in cycle. If you are selling during a down turn, you will get less for it. If you want to wait till the market comes back up, than you have to postpone your retirement. You have therefore been placed in a position where you have to speculate on real estate and where there is no certainty at all of what amount your retirement fund will have. This is the opposite of what a prudent pension or retirement fund should be. It should be a fund where you know exactly how much is in there so you can budget and plan for your retirement. This is not possible if you have to rely on the value of your HDB flat at a certain point in time in the far future.
c) Selling your HDB flat to fund your retirement is possible if you bought it 30 years ago. Today’s new flats can cost $400,000 plus and a resale easily exceeds $600,000. Exactly how much does it have to appreciate as it gets older for you to take a sizeable capital gains from its sale into retirement? You pretty much have to sell it for over a $1 million to fund a retirement. What are the odds that a 30 year old flat will sell for $1 million when that time comes?
My solution:
Firstly, adopt the mindset of what your HDB flat represents. It does not represent home ownership, because you don’t own it. It is a 99 year prepaid rent. You have basically locked yourself into a very long term rental contract with the HDB, and paid for this privilege by putting up the entire 99 years worth of rental money up front.
Now there are some advantages to this. Namely:
- You do not have to ever move, if the landlord decides not to renew your tenancy.
- You are not subject to annual rental increases from your landlord
- You have an ability to assign your use of your flat to another person for money, i.e. reselling your flat
Secondly, if you recognize your flat as simply a rental unit, then you have to pay for it from your operating income. Not from your retirement funds. Just like you would not make payments on your car from your retirement funds, you would not pay for your rent from your retirement funds either. Shelter is a daily living expense. The quandary here is that the PAP allows you to use your retirement fund to pay for living expenses. In fact they encourage it by deliberately giving you a low rate in the Ordinary account, and hence discouraging you from keeping any money in there. In fact, a retirement account that allows you to keep taking money out of it for your shelter expenses is no retirement account at all.
Thirdly, if you recognize this, you must then start your own retirement account. This will be an account where you control the fund in it and direct it to investments that give you the best yields. The fund could be set up with the help of a financial planner. It will look just like any investments, but in your mind, you must mentally dedicate this to your retirement only. Into this fund, you will replace every dollar that you take out of CPF on a one for one basis. If you have an automatic $1000 a month deduction from your CPF towards your flat’s mortgage payment, you must put in $1000 to this retirement fund controlled by you. You must have the discipline to continue to contribute to it to the same degree that your CPF fund has been depleted. You must also have the discipline to refrain from dipping into it for vacations, education, etc. This is the hardest part. But, the most important part. Universal or Whole life insurance policies can provide this discipline with an investment component as well as a death pay out component. You simply make a monthly payment equal to the amount of your CPF withdrawal and let the insurance policy do the investment part for you.
In any case, there will be an actual retirement fund, controlled and directed by you went you retire. The depletion of your CPF for housing expenses as well as future restrictions on CPF withdrawal will not have the impact on you as it has on many Singaporeans. You can retire when you want and that will depend on your own ability instead of having the PAP dictate to you the terms of your retirement. Game the system this way.
Background
Once upon a time, when HDB was first started in the 1960s, flats were really sold at close to cost and followed the model of true subsidized housing. In the 1970s, flats were sold on a cost basis, in other words with no mark up by the HDB. You could buy 3 room flats for as little as $15,000 and 5 room flats were $30,000. In the 1980s, HDB started to include land costs into the pricing, for what reason, no one knows as HDB dwellers do not own the underlying land. Prices than when as high as $140,000 for an executive flat. In the 1990s and 2000s, we saw the start of the sharp rises in price when HDB went to a construction cost plus “market “ price for land valuation resulting in the $400,000 plus flats you see today. We will exam the reason for this later.
In the first couple decades of the HDB’s existence, you also had to sell the flats back to HDB at the price that you bought from them, if you decided to change residence. This prevented speculation from profit taking on the flats. At its peak, with a population under 2 million, the HDB was building as much 30,000-40,000 units a year. These were the golden days when HDB was truly affordable.
The HDB’s formula was very simple. Acquire land from private owners for a fraction of the cost using the Land Acquisitions Act which restricted what the Govt. can pay in compensation to the land owners (my readings have indicated 25cents on the dollar), than rezone the land to allow for higher density. Tender the construction of the blocks with the winning companies using cheap labour (usually Thai or Bangladeshi workers), cheap material, and all financed by cheap money from the CPF. On top of this, architectural costs were minimized (and they can add up to 10% of a project’s cost) by using the same cookie cutter designs. Cheap Land + Cheap Labour + Cheap Materials + Cheap Architectural costs + Cheap Financing = An affordable dwelling……………….as long as the savings were passed on to the end user.
Fast forward to the 1980s, and the PAP realized that it had a serious problem on its hand. This was the growing mountain of CPF funds under administration. When CPF originally started up in 1955, the contribution rate (total) was as little as 10%. Now look at how high it is. Coupled with the higher average incomes over the decades, this higher contribution rate results in hundreds of billions of $ that the govt. collects in CPF contribution every year. In the last 5 years alone, CPF contributions have averaged $22 billion and it’s still trending up. These contribution represents a liability to the govt. i.e. they have to pay it back to the contributors when they retire. As you know, the PAP is not interested whatsoever in releasing these billions of $ to Singaporeans. They have already used these funds to start their GLCs, Temasek, etc. and in many cases have lost substantial amounts of the fund.
The Swindle
So, the question became, “How do we, the Govt., minimize our liability in the form of CPF, and at the same time increase our investing assets in the form of the 2 sovereign wealth funds?”
So, some scholar game up with the brilliant swindle. What if we decoupled the HDB’s buy back at cost scheme for flats, resulting in the immediate price increase and than using this price increase as an excuse, we artificially raise the prices of HDB flats drastically. At the same time, we allow the use of CPF not only for down payment, but also for monthly payments on the flats, thereby depleting the flat dweller’s CPF account and dramatically reducing our CPF liability exposure.
So, how it works is that now, HDB has raised its pricing to way beyond what it cost to build the flat. A flat that cost perhaps $150,000 to build is now “sold” for $450,000. The extra $300,000 is profit for govt. Imagine that you are the buyer of such a flat. You use 20% as the down payment straight from your CPF OA account. That’s $90,000 out of your CPF account right away. And you take a bank loan for $360,000 at 2.5% amortized over 25 years, that is $1613 per month in payment. Let’s say that like most Singaporeans, you take the monthly loan payment out of your CPF. After 10 years, you have paid $193,500 in interest and principal. Remember, this is $193,500 that you will not have any more in your CPF. It has gone to the govt. which used an overvalued flat to extract this from you. And don’t forget too that the original $90,000 down payment is also not available, meaning in the first 10 years, you have used up $283,500 from your retirement savings on a flat that is not yours, a flat that you are only renting long term from the HDB!!! Worse of all, after the first 10 years, you still owe $242,000 on the original purchase price. In one fell swoop, the govt. has now successfully transferred 75% of your current and future retirement funds into a 99 year prepaid rental flat that you don’t own. Thereby, reducing their liability to you and at the same time selling you an expensive trinket. How devious is that?
But wait, you say, I can always sell my flat when I retire and use the money from the sale to fund my retirement. This is the lie that the PAP tells, and let’s examine that.
a) Well, if you sell your flat, where are you going to live? If you bought your flat 25 years ago for $150,000 and sold it today for $600,000, where will you stay? You can down size to a smaller flat, but even those will cost you upwards of $300,000. SO, what do you net out after you buy a replacement flat to live? Remember, you have to live in a flat until you die, as nursing homes according to certain Ministers are too expensive unless you relocate to Johor state. And forget about renting too. It’s very expensive and will rapidly deplete the capital gains you have made from the above transaction. Don’t forget too that CPF has fixed it such that you can only use your CPF for the monthly payments on a HDB 99 year prepaid rent, but does not allow you to use it on monthly short term rent (12 months or so). If you retire and sell your flat, and decide to rent, you must pay for the rent from after tax and non CPF sources of funds. Which means you can’t or you have to go back to work. Its than a waiting game until you get to the age when you can withdraw all the CPF. So, if you do downsize to another flat, the amount that you net out will not be much, and probably not enough to fund the retirement for you and your spouse.
b) Consider too what happens when your flat gets older. Some banks are not giving loans to flats that are older than 25 years. The HDB themselves severely restrict loans given to flats that are 34 years and older. This means that when you want to “monetize” or sell your flat for the purpose of funding your retirement, you will find that many potential buyers cannot get a satisfactory bank loan, or even a bank loan at all to buy it from you. This will result in your flat being less desirable to buyers and hence it will command a lower price than what you had thought possible. In addition, you are dependent on the prevailing housing market conditions. Housing moves in cycle. If you are selling during a down turn, you will get less for it. If you want to wait till the market comes back up, than you have to postpone your retirement. You have therefore been placed in a position where you have to speculate on real estate and where there is no certainty at all of what amount your retirement fund will have. This is the opposite of what a prudent pension or retirement fund should be. It should be a fund where you know exactly how much is in there so you can budget and plan for your retirement. This is not possible if you have to rely on the value of your HDB flat at a certain point in time in the far future.
c) Selling your HDB flat to fund your retirement is possible if you bought it 30 years ago. Today’s new flats can cost $400,000 plus and a resale easily exceeds $600,000. Exactly how much does it have to appreciate as it gets older for you to take a sizeable capital gains from its sale into retirement? You pretty much have to sell it for over a $1 million to fund a retirement. What are the odds that a 30 year old flat will sell for $1 million when that time comes?
My solution:
Firstly, adopt the mindset of what your HDB flat represents. It does not represent home ownership, because you don’t own it. It is a 99 year prepaid rent. You have basically locked yourself into a very long term rental contract with the HDB, and paid for this privilege by putting up the entire 99 years worth of rental money up front.
Now there are some advantages to this. Namely:
- You do not have to ever move, if the landlord decides not to renew your tenancy.
- You are not subject to annual rental increases from your landlord
- You have an ability to assign your use of your flat to another person for money, i.e. reselling your flat
Secondly, if you recognize your flat as simply a rental unit, then you have to pay for it from your operating income. Not from your retirement funds. Just like you would not make payments on your car from your retirement funds, you would not pay for your rent from your retirement funds either. Shelter is a daily living expense. The quandary here is that the PAP allows you to use your retirement fund to pay for living expenses. In fact they encourage it by deliberately giving you a low rate in the Ordinary account, and hence discouraging you from keeping any money in there. In fact, a retirement account that allows you to keep taking money out of it for your shelter expenses is no retirement account at all.
Thirdly, if you recognize this, you must then start your own retirement account. This will be an account where you control the fund in it and direct it to investments that give you the best yields. The fund could be set up with the help of a financial planner. It will look just like any investments, but in your mind, you must mentally dedicate this to your retirement only. Into this fund, you will replace every dollar that you take out of CPF on a one for one basis. If you have an automatic $1000 a month deduction from your CPF towards your flat’s mortgage payment, you must put in $1000 to this retirement fund controlled by you. You must have the discipline to continue to contribute to it to the same degree that your CPF fund has been depleted. You must also have the discipline to refrain from dipping into it for vacations, education, etc. This is the hardest part. But, the most important part. Universal or Whole life insurance policies can provide this discipline with an investment component as well as a death pay out component. You simply make a monthly payment equal to the amount of your CPF withdrawal and let the insurance policy do the investment part for you.
In any case, there will be an actual retirement fund, controlled and directed by you went you retire. The depletion of your CPF for housing expenses as well as future restrictions on CPF withdrawal will not have the impact on you as it has on many Singaporeans. You can retire when you want and that will depend on your own ability instead of having the PAP dictate to you the terms of your retirement. Game the system this way.
