Archive for November, 2012

Appraising NUS study concluding CPF sufficient for young Singaporeans

November 22, 2012

I refer to the NUS Department of Economics study concluding that CPF is sufficient for the retirement needs of young Singaporeans joining the workforce today [1].

Adequate income replacement doesn’t mean adequate income
The study strives to show that pre-retirement earnings can be adequately replaced in retirement. But it says nothing about whether ours is one of high pre-retirement earnings replaced by high retirement income or low pre-retirement earnings replaced by low retirement income. Inadequate pre-retirement earnings, no matter how adequately replaced, will still be inadequate retirement income.

30th to 70th percentile covers only 40% of young cohort
The study concludes that CPF is sufficient for the retirement needs of the 30th to 70th percentile range of young workers today. The 30th to 70th percentile range encompasses only 40% of the young worker cohort which leaves us wondering how the other 60% will cope. Just because the 30th to 70th percentile range can cope doesn’t mean the 71st percentile can cope. The study emphases that the 30th, 50th and 70th percentile young couples must buy 3-room, 4-room and 5-room BTO flats respectively in order to have sufficient CPF for retirement. Beyond the 70th percentile however, couples could exceed the income ceiling and therefore not qualify for BTO flats. So the whole premise of couples buying BTO flats in order to have sufficient CPF falls apart for this group of people falling outside the 30th to 70th percentile range who would then be forced into the HDB resale market or even the condominium and executive condominium markets. The study shows that by buying just one BTO flat size bigger than recommended, retirement income falls to 56%, 58% and 48% respectively for the 30th, 50th and 70th percentile couples respectively which are dangerously close to the 53% minimum recommended by the World Bank. The fall will be even greater when couples are forced into the resale or condominium markets.

Possibly only half of middle income cohort covered
The study is modelled on the situation of a 30-year old male and a 28-year old female forming a family unit and purchasing a BTO flat because the median age of purchasing BTO flats is 30 for males and 28 for females. If the median age at which a male citizen buys a BTO flat is 30, it means that for the cohort of 30 year old males, only half of them would have bought a BTO flat, half of them would not have. As the latter half delay marriage, their incomes rise and they may end up not qualifying for a BTO flat so the whole premise of sufficient CPF based on purchasing BTO flats falls apart for them. As such, the study’s claim that the 30th to 70th percentile range of young workers has sufficient CPF to retire doesn’t refer to each and every one in that range but possibly only half of them. Thus, perhaps only half of the 40% middle income cohort or just 20% of the whole cohort is covered in the study. A more appropriate conclusion might have been that at least 20% of today’s young cohort has sufficient CPF for retirement.

The study can be improved by taking into account the marriage age distribution to ascertain for each income group, the percentage that would qualify for BTO flats by the time they get married. A rough calculation [2] shows for example that the 68% to 70% income group will hit the BTO income ceiling just two years after the assumed marriage ages of 28 and 30 respectively for bride and groom and by then, only 54% of males and 62% of females would have gotten married. In other words, for this income group, 46% of males and 38% of females will not qualify for BTO flats by the time they get married so the whole premise of sufficient CPF through purchase of BTO flats falls apart for them.

Counting rent
The study also claims that Singapore retirees own their homes unlike their Western counterparts and thus save on rent, so rent that our retirees save on is added to their retirement incomes to be comparable to Western nations. The following table [3] shows the owner occupation rates for several European countries:

2010 2009
Spain 85.00% 85.00%
Norway 85.00% 85.00%
Italy 80.00% 80.00%
Belgium 78.00% 78.00%
Ireland 74.50% 74.50%
Luxembourg 70.40%
USA 66.90% 67.40%
UK 66.40%
Sweden 66.60% 66.30%
Finland 59.00%
France 57.80% 57.80%
Austria 56.00% 56.00%
Netherlands 55.50%
Denmark 53.60% 53.70%
Germany 43.20% 43.20%

Countries like Spain and Norway have home ownership rates comparable to our 88.6%. It is unfair that we add rent to our retirement income but not them. France’s home ownership rate of 57.8% is actually closer to our rate than further from it. So a statement that says for example that Singaporean retirees don’t pay rent whereas French retirees do is 57.8 / 88.6 = 65% false and 35% true only. Of the countries listed, only Germany has a rate slightly further from ours than closer to ours. The assumption that retirees in the West pay rent while ours don’t is highly unsubstantiated.

Furthermore, retirees in the West, even if they were to rent, often has access to cheap social housing [4]:

Social housing as % total housing
Netherlands 32%
Austria 23%
Denmark 19%
UK 18%
Sweden 18%
France 17%
Finland 16%
Ireland 8.70%
Belgium 7%
Italy 5.30%
Germany 4.60%

In contrast, our 46,000 HDB rental flats is just 0.04% of our total housing stock. So if the study truly strives to be comparable, the rent to be added to Singapore retirement income should be cheap subsidised rents, not HDB open market rents.

Our high home ownership rate should also be taken with a pinch of salt. Firstly, our so-called home ownership is only 99-year leasehold whereas ownership in the West means owning the land on which the house is built. Furthermore, many Singaporeans are forced to sell their homes to fund retirement so much so that home ownership rates for retirees could be lower than national average. This is in contrast to the situation in the West where the older generation tends to have higher home ownership rates [5].

Retirees in Western nations are also often given free or subsidised medical treatment. Why does the study not consider deducting medical costs from our retirees’ retirement income to be comparable to Western nations? Why add rent to our retirement income in the name of comparability but not subtract medical costs? The study’s believability can be improved if retirement income adjustments comprise both positive and negative adjustments instead of just positive adjustments only.

Accounting for layoffs
Based on CPF contribution history from 1981 to 2011, the study concludes that those between 25 and 54 are employed 85% of the time and those between 55 and 65 are employed 78% of the time. It is presumptuous to conclude that just because CPF is not being contributed to, a person has been laid off. The person could have become a taxi driver, a private tutor or have taken up some other jobs that don’t pay CPF.

Long run inflation rate
The report uses a long run inflation rate of 1.8% based on the 20 year consumer price index (CPI) from 1991 to 2011. It’s strange that the study traces CPF contribution history all the way back to 1981 to account for layoffs, but only goes as far back as 1991 to calculate long run inflation rate. If we consider CPI from 1980 to 2011, the long run inflation rate is 2.0%, slightly higher than that used in the study.

Other considerations
The fact that over the years, CPF had to be tweaked again and again to meet rising retirement needs makes us wonder how it won’t be tweaked a few more times between now and 40 years later? So how can anyone guarantee that CPF as it is now, without any more tweaks along the way, would definitely meet retirement needs 40 years down the road? If NUS professors are so confident, perhaps they should put their money where their mouth is by guaranteeing our retirement needs 40 years down with their own money.


[2] First, approximately extract wage data from the study’s graphs. Then interpolate wages between the 50th and 70th percentiles to find wages for each percentile between 50 and 70. Add the corresponding percentile wages for males and females to get each percentile couples’ combined wage for all age combinations (males two years older than females as assumed in study). For each percentile, find the age combination at which the HDB income ceiling of $10,000 is reached. Next get the marriage age distribution from Singstats. Must combine Muslim and non-Muslim marriage data. The data is in 5-year intervals so must estimate for each year using cubic spline. Then convert the data to cumulative frequency. Finally, cross reference the age at which income ceiling is reached with the cumulative percentage of males and females that have gotten married by that age.

[3] European Mortgage Federation, Hypostat 2010, November 2011

[4] Housing Europe Review 2012, The nuts and bolts of European social housing systems

[5] CESifo Working Paper No. 3280, Residential mobility of the European elderly, Dec 2010
For this reason it is not surprising to find that very high proportions of elderly households own their home all over Europe (homeownership rate is above 70 percent for those aged 50-79 in most countries)

Not necessary that reduced supply pushed prices up

November 13, 2012

Straits Times reported that the continued rise in resale flat prices despite record number of new flats launched is due to the reduced supply of resale flats as HDB dwellers are more determined to hang on to their flats and rent them out when they upgrade to a private home [1]. That greater determination to hang on to flats was in turn reported to be due to the 2010 cooling measure that prevents private property owners from taking on another HDB flat [1].

Record number of new flats launched doesn’t necessarily mean that demand has been satisfied. Otherwise why would HDB want to deliver at least another 20,000 new flats next year [2] which is more than the 15,000 Singaporean marriages each year [3]? Furthermore, resale flat buyers tend to be those who don’t qualify for new flats or who can’t wait [4] or who cannot accept the far flung locations of most new flats. For these groups of people, new HDB launches may not necessarily quench their thirst for resale flats. So there could still be strong demand for resale flats but that demand has yet to translate to strong resale numbers due to the current high COV prices as sellers stick to higher asking prices [5-1].

It was also reported that low interest rates and healthy HDB rental yields help upgraders pay for private property mortgages [1]. All else being the same, helping HDB dwellers upgrade to private property through low interest rates and healthy rental yields means potentially more flats released to the market which will increase, not decrease resale flat supply. Even if none of these additional HDB upgraders sell their flats, it simply means there is no increase, not that there is a decrease in resale flat supply. Furthermore, while rental yields have improved, private property prices and hence mortgages have also increased so much so it’s not a given that mortgage payment is necessarily easier now than before.

The graph [6] below shows that there was a sharp fall in resale numbers between 2009 Q3 and 2010 Q1 which occurred before the 30 Aug 2010 announcement preventing private property owners from purchasing and keeping an HDB flat. Since resale numbers had already begun sliding before the 2010 announcement, we can’t be sure that the slide after 2010 was not due to the continuation of the same force acting just before 2010 or due to the 2010 announcement itself.

The graph above also shows that between 2007 Q2 and 2012 Q3, HDB resale price kept going up with only the slightest of dips during the recession of 2009 even as resale numbers fluctuated up and down. HDB resale price may not be the price we should look at to understand the rise and fall of the HDB resale market. Many HDB resale buyers are concerned with the cash-over-valuation and to them, being able to afford a resale flat means affording the cash-over-valuation. When we plot cash-over-valuation together with resale numbers as shown in the graph below [7], the ups and downs of both price and quantity transacted start to appear:

The graph above shows that the rise in COV between 2009 Q2 and 2010 Q3 corresponded to a fall in resale numbers between 2009 Q3 and 2010 Q4. High COV in 2011 corresponded with low resale numbers in the same period. So what we see of late may not be out of the ordinary but part and parcel of the endless cycle of ups and downs of COV and resale numbers as one affects the other and is in turn being affected. As it is, COV has been falling since 2011 Q3. When it has fallen sufficiently, we could see resale numbers going up again.

The graph below [8] shows that resale numbers closely follow the number of PRs added each year:

It is therefore also possible that low resale numbers now is due to the slowdown in intake of PRs which reduces buyer numbers. This reduced PR intake could mean greater selectivity on the part of the government which could mean PRs with better earning powers who can better afford high COVs thus keeping COVs high despite the smaller numbers.

In summary, there could be other explanations to the current low resale numbers but high resale prices despite record launches of new flats. High COVs may have priced out buyers leading to reduced resale transactions. Smaller intake of PRs with better earning powers could have led to reduced resale transactions but higher COVs and hence higher prices. Other explanations include record BTO launches soaking up buyers with limited budgets leaving behind buyers who can afford higher COVs [5-2]; high private property prices force aspiring HDB upgraders to stay put [5-3] and restrictions to the second concessionary HDB loan making it more difficult to cash in on HDB sales [5-4].

[1] Straits Times, Reduced supply pushes prices up, 3 Nov 2012

DESPITE a record number of new flats launched by the Housing Board (HDB), prices of resale units continue to rise – 3.9 per cent so far this year – outpacing both the private market and economic growth.
This, said analysts, is largely due to a reduced supply of resale flats as more HDB dwellers choose to sublet their units when they upgrade to a private home.
Helped by low interest rates and healthy rentals from HDB units, these dual-property owners – of whom there are 33,000, or 4 per cent of all HDB flat owners – can use the rental to help cover mortgage payments on their private property.
Owners and analysts said a 2010 cooling measure – which barred private-property owners from owning both private and public homes – has also made HDB upgraders more determined to hang onto their flats.
Owners of private property who buy HDB flats must dispose of their private home within six months.
However, those who own flats can still buy private property.
And after they have stayed in the flats for the minimum five years, or less in some cases, they can rent out the whole unit while living in their condos.
“We know that once we sell it, we probably cannot buy again,” said housewife Sakura Siow, 38, of her family’s Jurong flat. They moved into a condominium in 2010.
“The rules keep changing for people with two properties so we are scared that we will not be able to come back into HDB if we sell.”
The number of resale transactions has dropped by a quarter since the 2010 measure. In 2010, 32,000 resale flats changed hands. Last year, this fell to 25,000 and the figure for this year is expected to be the same.
At the same time, the number of HDB units rented out has skyrocketed. In 2009, about 24,000 units were approved for subletting by HDB. This has surged to 43,000 as of the third quarter of this year, an 80 per cent increase. This means that about 4.5 per cent of the stock of HDB flats is being sublet out.
Agency bosses said their subletting business has grown by 10 to 20 per cent while resale transactions have shrunk by about the same proportion.
But as resale flat prices have been rising quickly, Propnex Realty chief executive Mohamed Ismail said commissions are still healthy.
While the money agents make from rental deals is less than from resale transactions, Rainbow Cottage key executive officer David Huan said subletting deals are agents’ “bread-and-butter” as commissions come in more quickly than for resale ones.
DWG senior manager of training, research and consultancy Lee Sze Teck expects the bottleneck in the supply of resale flats to ease in a few years, when those who are waiting for their new flats to be built get their keys and sell their old units.
With the Government curbing the number of foreign workers and a huge supply of new flats and private units, analysts expect rental yields to fall in a few years.
The HDB has rolled out a record 27,000 new flats this year, and there are over 100,000 new private residential units and executive condominiums in the pipeline.
For now, dual-property owners like Mr Ryan Sim, 38, are sitting pretty. The micro-processor firm boss moved his family into an East Coast condo and is renting out his Simei five-room flat for $2,900.
“It’s better to keep the HDB flat because there’s more oversupply of condos coming than flats,” he said.

[2] Straits Times, HDB to offer at least 20,000 new flats in 2013, 7 Aug 2012

The Housing Board will deliver at least 20,000 new flats next year. That is the promise National Development Minister Khaw Boon Wan has given to Singaporeans

[3] Straits Times, More HDB flats being built to cater to singles: Khaw, 15 Oct 2012

Mr Khaw replied that the HDB has been building 25,000 flats each year for the past two years, as compared to only 15,000 marriages involving Singapore citizens each year.


“If people can buy Build-to-Order (BTO) flats, they will buy,” said Lee Sze Teck, Senior Manager of Research and Consultancy at Dennis Wee Group. “Resale flats are for those who don’t qualify, or who cannot wait.”

[5] Straits Times, Cash premium for HDB resale flats rises again, 10 Nov 2012

[5-1] As for rising COVs, Dennis Wee Group spokesman Lee Sze Teck said this is due to sellers not budging on asking prices following record transactions recently.

[5-2] Mr Nicholas Mak, head of research at property consultancy SLP International, said the record supply of new flats may have contributed to rising COVs. The new BTO launches have soaked up buyers with limited budgets and those “left in the resale market are actually buyers who can afford to pay a higher COV”.

[5-3] Mr Tan Kok Keong, head of OrangeTee’s research and consultancy, said another possible reason is the rise in private property prices which has caused aspiring HDB upgraders to stay put.

[5-4] greater restrictions linked to a second concessionary HDB loan, implemented in 2010, which requires buyers to use 50 per cent of the cash proceeds of the sale of their existing flat to buy the next.

“These buyers are left with little to cash out from their first investment as they have to plough 50 per cent into the second flat, and use the remaining amount for cash premiums and agency fees,” he said.

[6] Resale numbers are normalised to fit into the same graph. It is not the numbers per say but the fluctuations of those numbers that is important.

[7] When normalised, the shape of the graph of median COV against time looks nearly identical for most housing estates (except for Bukit Timah and Central of which numbers are too small). The same shape is obtained regardless of whether it is 3-room, 4-room or 5-room flats. Averaging the normalised COVs gives us an accurate picture of how median COVs have fluctuated over time.

[8] PR numbers are only available annually and have to be duplicated into fours to fit into the quarterly graph. It is not a plot of PR numbers but increase in PR numbers from the previous year as the incremental PR number is deemed to add pressure to resale flat demand. The number is also normalised to fit into the graph.

S’pore offers China middle-road model to democracy

November 3, 2012

Dear Straits Times,

I refer to the 1 Nov 2012 letter “S’pore offers China middle-road model to democracy” by Mr David Grant [1]. There is a mismatch between the title and the contents of the letter. The title refers to democracy whereas the contents of the letter mainly refer to capitalism. Democracy and capitalism are not the same thing. The former belongs to the political realm while the latter belongs more specifically to the economic realm. China is a good example of a nation that doesn’t have democracy but that has embraced capitalism.

Mr Grant is wrong to assert that Asian societies have rejected laissez-faire capitalism when Hong Kong continues to be a champion of laissez-faire capitalism. He is also wrong to refer to Asian capitalism as though it is some homogenous way of conducting economic affairs across Asian societies. The laissez-faire capitalism of Hong Kong contrasts sharply with Singapore’s state-led capitalism which in turn is different from the capitalism of Taiwan-South Korea-Japan dominated by large, home grown multinationals. China’s model is a mixture of state-led capitalism and home grown champions like Huawei. There is thus, no such thing as a single middle-road Asian capitalism model but a variety of models with mixtures in between.

Long before Singapore could claim to be a pioneer of strong governance, many Western nations, particularly the Nordic countries were already bastions of strong governance. Moreover, the strength of our governance rests upon strong colonial institutions and civil service inherited from the British. Lack of corruption does not imply lack of corruptibility. Despite everyone having a chance to succeed, our inequality index is amongst the highest in the developed world.

China’s focus on Singapore is understandable considering its wish to maintain the marriage between authoritarian politics and capitalist economy. Singapore is no more unique than fellow East Asian economic miracles of Hong Kong, Taiwan and South Korea in as far as economic success is concerned. It is only unique in its continued hold on authoritarianism even as fellow East Asian miracles have progressed on democratically.

Given our own yawning income gap, it is unlikely China can learn anything from Singapore’s experience to solve its growing wealth gap. It will also be foolish to think that our success in kerbing corruption can be easily transplanted to a country so much bigger than ours. It is questionable if our own people, if asked to manage China’s corruption, would succeed.

The shift from income tax to consumer tax would not have worked let alone be considered best practice without government transfers. Seen from that perspective, it actually causes more pain than good for the people that necessitates soothing from government transfers. While middle income earners pay very little or no tax, they pay a lot more for housing, COE, ERP and so on. They don’t just pay 7% for the car they own; they also pay 20% import tax + registration fee + 100% additional registration fee + COE + road tax. An example below [2] shows that 72% of what they pay for a car goes straight into the government’s pocket.

The secret is not that all citizens are stakeholders but what kind of stakeholders are they. Are they equal shareholders or are they merely employees? While avoiding the supposed trap of paralysis, we ended up with the trap of galloping off the cliff every once in a while.

If we compare countries by the ratio of politician’s pay to per capita GDP [3], the chart toppers are Kenya, Singapore, Indonesia and South Africa. It seems like the so-called ‘best practice’ of paying politicians top dollars belongs mostly to Third World countries. Paying politicians top dollars so that they don’t resort to corruption is like paying the robber or the thief top dollar so that they don’t rob or steal. Where does it end? If they want sexual favours from IT sales consultants we give them vouchers to Geylang?

China is already having lots of investments from United States and Europe without adopting Singapore’s system. Its system works fine and it doesn’t need to look to Singapore to learn how to attract investments. Its purpose of learning from Singapore is to see how it can continue to hold on to power even as its economy matures.

More than just strong leadership, the West requires cultural adjustments to credit consumerism complemented by rise in wages and living standards in the East to bring about balance.

[1] Straits Times, S’pore offers China middle-road model to democracy, 1 Nov 2012
THERE are basically three types of government in modern capitalist democracies: the laissez-faire capitalism practised in the United States, the socialist system of Europe, and the guided capitalism being developed in Asia.
Asian societies are quickly rejecting the laissez-faire and socialist systems and developing something more down the centre.
This has shown great benefit in countries like Singapore, a pioneer of strong governance, lack of corruption and a meritocratic system, where everyone has a chance to succeed based on hard work and talent.
Of critical interest recently is the focus of China on the “unique miracle in the world” that the Singapore system has become, and its hope that the Republic’s experience can help China solve its growing wealth gap, corruption and weak rule-of-law issues (“CCTV goes big on S’pore with 10-parter”; last Friday).
One of the many best practices from Singapore’s experience is the adoption of a consumer tax and the concurrent elimination of income taxes.
In the article (“Prices have gone up, so have expectations”; Sept 27), Prime Minister Lee Hsien Loong noted that middle-income earners probably pay very little income tax or no income tax at all.
In summary, it was noted that the typical middle-income household in Singapore pays 7 per cent goods and services tax and car taxes if it owns a vehicle.
This system also provides cash subsidies for those in the lower-income bracket.
The secret to the Singapore success story is that all citizens are stakeholders and everyone contributes.
In this way, Singapore has largely avoided the democracy trap paralysing many Western societies.
Another best practice that could be adopted in China would be to increase the pay of government employees and politicians, further reducing the temptation to take advantage of the system.
The concern those in the United States and Europe should share is that if China adopts the Singapore system, it would lead to increasing investment and opportunities throughout Asia, providing early adopters of the guided capitalist system with a huge advantage.
All of these changes will continue to require strong and capable leadership, something that the West is sorely lacking.
David Grant

Example for a 1,497 CC Toyota Vios 1.5E auto

OMV 20% custom duty 7% GST “ARF
(100% OMV)”
Regn Fee COE Total cost Selling price
$11,117 $2,223 $934 $11,117 $140 $68,000 $93,531 $113,888