Friday, 22 March 2013

How to contain HDB flat prices.

Minister for National Development, Mr Khaw Boon Wan in his budget 2013 speech promised cheaper housing, housing for lower-income singles ($5000 and below). However he also wanted to review the basic premise of public housing.

He raised four key questions:
  • Should Housing Board flats continue to be an appreciating asset or return to being treated simply as a social need?
  • Should the HDB build to meet sophisticated tastes or go back to basics?
  • How to keep flats affordable while continuing to encourage couples to be prudent?
  • How should public housing respond to the needs of an ageing population?
Those are relevant questions for HDB to answer and decide what is its mission for the near and far future.

However the answer to the 3rd and 4th question is simple: restrict the use of CPF for the purchase of HDB flats.

The History of the CPF... and the official watery history on the CPF website (Update: links no longer working. Looking for alternative websites with similar info).

CPF was allowed to be used to buy HDB flats from 1968. This was a good idea then, but it evolved into a juggernaut. The problem is as the CPF contributions rose, and as income (and so CPF) rose, there was all these money in everybody's CPF accounts that they COULD NOT touch, except to buy HDB and property.

People liked to use their CPF because it was not "real" money to them. Money is money because $10 can be used to buy a meal, buy socks, buy a t-shirt, buy a movie ticket, or whatever you want. The value of money is that it is freely exchangeable (fungible?). The limitation of money is that spending it has opportunity costs.

CPF money is not freely exchangeable and there is almost NO opportunity costs - there is actually: retirement, but that is so far in the future, everyone discounts it. You can use it to buy HDB flats (and a few other things, but mainly HDB flats) and private property.  The simple fact is that HDB prices are propelled by CPF savings. The problem is that when you can buy HDB flats with your CPF... No, the problem is that you can ONLY buy property with your CPF savings.

If you track the prices of private property, when you could not use CPF to buy private property, private property prices rose slowly. Previous to 1981, CPF could not be used to buy resale flats. When this was allowed, and there SEEM (to CPF members) to be NO opportunity costs for using CPF money to buy property (the opportunity costs - savings for retirement - is "future discounted"), private property prices booms, property agents income boom, everyone was happy, and the economy grew.

But it was "future" growth brought forward at best.

You want to stop HDB flat prices from rising? Stop allowing CPF to be used for resale HDB flats. OR allow CPF to be used for resale but only up to the costs of NEW flats from HDB.

Resale HDB prices will fall.

COV can still be boosted by irrational exuberance. Or just irrationality. But when no one or few people can meet those ridiculous COV demands, it will eventually fall as well.

But this is a dangerous option if implemented too quickly or too heavy-handedly.

I thought that the government understood this problem when they implemented a limit on the CPF withdrawal to pay for resale flats (AWDL?). The problem was the limit was pegged to the valuation of the resale flat, so as valuation went up, the limit also went up and there was no "brake".

If the allowable limit were set to the HDB BTO flats price, then CPF can only be used to pay up to the BTO price (i.e. HDB concessionary price) for resale flats. This will be an immediate "brake" on prices.

 However, as mentioned earlier, this would be too painful for home owners. So the limit should be set at BTO prices + a premium that would be equal or preferably slightly below what is the current resale market.

[27 Mar 2013 edit: The other policy changes were in 2002 and 2005. In 2002, the deposit for private property was reduced from 20% to 10%. This was further reduced to 5% in 2005, allowing more people to get into the private property market. So if you had saved up $20,000 in 2001, you could have put a down-payment for a private property for $100,000. In other words, you won't have been able to afford it. However, by 2003, your $20,000 would have allowed you to buy a $200,000 private property. And in 2006, a $400,000 property.]

Rein in the resale prices, and BTO prices which are pegged to it will be reined in as well.

The whole problem with the HDB New and Resale market is that they are chasing each other's tail. (In MS Excel, there would be an error message pointing out that there is a circular reference.)

BTO prices are pegged to resale prices in the area. Then new resale transactions will take into account the nearby BTO prices with a premium. Then the next BTO takes reference from the more resent resale transaction. Circular reference.

All the other suggestions are eye-wash. Between freehold and 99 year lease, the difference (according to some reports) is about 20%. That is for an infinity of difference. You think a 60 year lease will be significantly cheaper than a 99 year lease? Take a 30 year old HDB flat. Is the price cheaper?

Basic and premium fittings? How much savings will there be?

The inflation of HDB prices is a "monetary" inflation - too much CPF money chasing after too few HDB resale flats.

Curb that and the problem should be solved.

Brief history of the CPF from this post. (Update: links no longer working. Looking for alternative websites with similar info)

1 Jul 1955 : CPF implemented.
1 Jun 1957 : Members are required to nominate beneficiaries for their CPF savings.
1 Sep 1968 : Public Housing Scheme introduced.
1 Mar 1972 : Pensionable government officers join the CPF scheme.
1 Jul 1977 : Special Account created.
1 Jun 1981 : Residential Properties Scheme, which allows members to use their CPF savings to buy private homes, was introduced.
1 Jan 1982 : Home Protection Insurance Scheme (HPIS) introduced.
1 Apr 1984 : Medisave Scheme/Account introduced.
1 Jul 1984 : CPF contribution rate reached its peak at 50 percent (25 percent from employer and 25 percent from employee).
1 Mar 1986 : CPF began paying market-based interest rates.
1 May 1986 : Approved Investment Scheme (AIS) introduced. Members are allowed to use up to 40 percent of their CPF savings to buy gold, shares, unit trusts and stocks.
1 Jan 1987 : Minimum Sum scheme introduced at S$30,000.
14 May 1989 : Dependants’ Protection Insurance Scheme (DIPS), which is a term-life insurance covering members in the event of death or permanent disability, was introduced.
1 Jun 1989 : CPF Education Scheme introduced. Members are allowed to draw on their CPFsavings to finance tertiary education in Singapore for themselves or their children.
1 Jul 1990 : MediShield Scheme introduced.
1 Jul 1992 : Medisave Scheme extended to the self-employed.
1 Mar 1993 : The Share Ownership Top-Up Scheme (SOTUS) was set up to help CPF members buy shares in government-owned companies.
1 Oct 1993 : The Basic Investment Scheme (BIS) and the Enhanced Investment Scheme (EIS) were introduced to replace the Approved Investment Scheme. Members are allowed to set aside a higher portion of their CPF savings (80 percent) for approved investments.
1 Jan 1997 : The Basic Investment Scheme (BIS) and the Enhanced Investment Scheme (EIS) were merged to form the CPF Investment Scheme (CPFIS).
1 Jan 1999 : Members are allowed to use Special Account savings to help meet their housing instalment shortfalls.
1 Jan 2004 CPF members who turn 55 and are able to meet the CPF Minimum Sum are required to set aside a Required Amount in their Medisave Account when they make a CPFwithdrawal.
1 Jul 2006 : Contributions to the Medisave Account which are in excess of the Medisave Contribution Ceiling are automatically transferred to members’ Ordinary Accounts.
1 Jan 2007 : The cap on the CPF withdrawal limit for the purchase of private residential properties and HDB flats financed with bank loans was reduced.
1 Jan 2008 : The CPF Board began paying an extra interest rate of 1 percent per annum on the first S$60,000 in the combined accounts of each CPF member.
1 Sep 2009 : CPF Life introduced.
1 Jul 2010 : First $40,000 of members’ Special Account balances are not allowed to be used for investments.
1 Jul 2011 : CPF minimum sum reaches S$131,000.

[Note: The Minimum Sum progression over there years can be found here (Up to 2007).
(Update: links no longer working. Looking for alternative websites with similar info)

Wednesday, 13 March 2013

Tweaking the COE scheme.

13 Mar 2013

Most people agree that there is something wrong with the COE scheme. If you ask them for specifics and dig deep, they are universally agreed on the problem of the COE scheme: they can't get one cheap.

Asked for a solution, and you will be amazed by their creative suggestions as to how the COE scheme should be tweaked in order to give them the best chance (or a sure chance) of getting a COE, and if they are particularly inventive, cheaply too.

Friday, 8 March 2013

COE, ERP and the Sunk Cost effect

Tweaking the COE scheme to take into account what we know about behavioural economics.

Quote from this article:
As one driver told me, the high cost of his car makes him feel that he should use it every chance he gets, so he drives to the office every day rather than taking the bus that stops almost at his doorstep.
One unintended and unexpected effect from the COE scheme which was intended to reduce car ownership costs, and shift policy towards controlling car usage, was the "sunk cost" effect (or fallacy). The sunk cost effect is reflected in the quote above.