CPF HDB PAP - How Using CPF "money" to buy Homes is Addictive and Wrong

[Drafted Feb 2024]

Convenient Lies, Inconvenient Truths: Opinions Regarding Sensitive Issues - C.L.I.T.O.R.S.I.

It is not the policies you disagree with that are evidence that you are being controlled. It is the policies and practices you embrace wholeheartedly. And love!

So... property prices are rising and people are complaining and so the govt should listen to these people, and do something to lower property prices, right?

Sorry to disappoint you but, no.

Ok, you say. Maybe not ALL property prices, but million dollar HDB flats doesn't make sense right? The govt should at least control the prices of HDB flats right? Especially resale flats right?

No. 

HDB has build around 1 million flats and sold these flats to Singaporeans. HOWEVER, there are people who are thinking of buying a flat and they are facing high prices. Let's say there are 50,000 of these people - young couples looking for their first home. If the govt makes policy that limits the price of resale flats, 1 million home owners and their families will be made poorer. But 50,000 new home buyers will be happier. What do you think will happen at the next election?

Money is a wonderful invention. 

If you have $20, you can use it to watch a movie, buy yourself a good dinner, maybe save yourself some time by taking a cab instead of public transit, or get a present for someone you love. Or many other options.

But spending money has an "opportunity cost". If you use it to take a cab, you would have less to spend on dinner, or on your loved ones, or you may have to forego that movie. 

So what if you have "money", but you can ONLY spend it on, say, Movies. 

That, you might say, is not "money". That is like a coupon our a voucher. You cannot, for example use that "money"/voucher to buy a good meal. (Unless the hawker or restaurant agrees to accept your movie voucher as payment.)

Well, that's fine with movies. The prices are fixed. And the supply is greater than the demand (in most instances).

But what if the supply is less than the demand?

Say you have $250,000. But it cannot be used for ANYTHING other than to purchase VALUABLE GOODS A (whatever "Valuable Goods A" is). Basically, what you have is a coupon or voucher for "VALUABLE GOODS A" (VGA). If you spend all the $250k on VGA, there is no opportunity costs. Because you could not use the $250k coupon/voucher on anything else. 

So would you?

Say you want to buy a VGA. And it is in short supply. But based on historical records, you know that that particular VGA is worth about $100k. And you offer $100k. 

But some other buyer also wants that VGA. And he offers $120k. Do you walk away? Or do you counter his offer with a higher offer, say $150k?

Then he counters with $180k. Do you raise your offer to $200k? After all, you have $250k and you cannot use that $250k for ANYTHING ELSE except VGA. Even if you raise your offer to $250k, there is no opportunity costs to you.

So that's what you do, and you get the VGA for $250k. Higher, much higher than the previous valuation of $100k. You overpaid. But it's not REAL money. 

Not to you. Not for now. Not for a long while.

Do you see how the above explains the rising prices of resale flats and private property?

The first mistake

Allowing the use of CPF for buying resale flats and private property was the first mistake.

Not that most people realised that it was a mistake. Or even thought that it was a mistake!

Until it created a problem.

Like most "honest" mistakes, it started out innocently, and harmlessly enough.

1 Sep 1968 : Public Housing Scheme introduced. CPF allowed to be used to purchase flats directly from HDB.

This scheme allowed CPF members to use their CPF balance to purchase a HDB flat direct from HDB. 

Allowing people to use their CPF to buy flats direct from HDB was a brilliant idea and was not a problem, per se. The prices for new flats were (at that time) set by the HDB, and were reasonable, and predictable. It was completely within the control of the HDB.

And HDB, being gormless public servants (“gormless” is used here affectionately), did not try to profit from their service. They REALLY wanted to build homes and create value for the people.

No. The FIRST MISTAKE was when CPF balance was allowed to be used to buy RESALE flats. From HDB flat owners.

1 Jun 1981 : Residential Properties Scheme, which allows members to use their CPF savings to buy private homes, was introduced.

How did this create a problem? Here's a scenario:

Say you want to buy a resale flat. You have saved up some money and you can put down a cash deposit of say $5000 on the full price of $50,000. However, there is another buyer, and he can offer $6000 deposit on the full price of $60,000. And… you are S.O.O.L.
Then, the new rules allow you to use your CPF to pay for the resale flat! And you have $20,000 in your CPF! So you bid up the price to $65k, with a deposit of $6,500 which you can well afford (because, CPF balance of $20,000)!
EXCEPT… the other buyer also has money in HIS CPF, and he bids up to $7,000!
Long story short, you eventually bid up the price to $200,000 because you can use your CPF to put a down payment of $20k. And whether you win that bidding war depends on how much the other buyer has in his CPF account.

[Note that the above is a truncated version of how things actually worked out. Likely when CPF was first allowed, prices of resale flats before had an “anchoring effect”. If you knew others had paid $100k, then $200k would seem excessive to you. At least initially. But as the prices climb - $100k, $120k, $150k, $180k – then eventually the “anchor” price would have shifted. You would be an idiot to pay $200k for something others had paid only $100k for. But if someone else had paid $180k, then $200k is just you recognising value before the pack.]

So after Resale Flat prices started to rise due to the inflationary effect of CPF monies, HDB felt like they must be gormless to continue to sell flats at (cost) subsidised rates. So some "not-so-gormless" HDB officer (or perhaps, "more-gormless-than-usual") suggested, "maybe we should peg our selling price to the market rate based on Resale Flat prices?"

And then the circle was complete. 

Resale Flat prices, boosted by the "no-opportunity-cost" CPF money, was now used to decide the prices of new HDB flats which are now not cost subsidised, but Market subsidised. 

So what should we do?

Reduce the amount of CPF money that can be used to purchase resale HDB flats.

Not drastically and immediately. Maybe for a start CPF money may not be used to pay for more than 150% of the median value of a resale flat (however that is defined.)

This means that if you wanna bid $1m for a flat, you better have then cash to do so, and not depend on your CPF balance to finance your largesse.