This was brought up a few days ago, in the "President" 's policy suggestions...
Instead of stopping people using their CPF to pay for their mortgages, why not reduce the prices if HDB flats and not peg them to market prices with land prices? Then Singaporeans will have more money to save with lower HDB flats prices.
What Would Happen if You Couldn't Use Your CPF Savings to Buy a Home?
In response to President Halimah's call for policy suggestions, economist Walter Theseira suggested disallowing the use of CPF savings for home purchases. The measure was proposed in order to address inadequate retirement saving. This could be a logical concern, as putting a significant amount of one's retirement into home may leave them with too few remaining assets to retire comfortably, especially given the uncertainties around the 99-year HDB lease.
This proposal would likely have a massive impact on the housing market—over the past decade, around S$82 billion was withdrawn from CPF accounts in order to purchase HDB flats. Given the scale of this proposal, it is worth asking: how would homeowners and prospective homebuyers be affected?
How Does The Current System Work?
Currently, the Public Housing Scheme (PHS) allows individuals to use their CPF Ordinary Account to pay for a part of their HDB flat purchase. However, homebuyers are limited in the amount that they can withdraw from their CPF savings for the purchase of a HDB lease. Limits are based on the number of years remaining in the lease at the time it is purchased.
How Would This Proposal Affect the Real Estate Market?
In the short-term, we expect that housing prices would drop as result of proposed rule. The rule will likely prevent many prospective homeowners from being able to afford to purchase homes, as they would have significantly less money to contribute to the purchase. The decreased ability to buy a property should lead to a decline in market demand, which should in turn cause a decrease home prices.
For example, we can approximate the scale of change with some basic calculations. In 2017, $7.4 billion was withdrawn for the purpose of purchasing new and resale HDB flats. There were 22,077 resale applications and approximately 17,500 new units in 2017. Assuming average resale values of S$450,000 and average BTO prices of S$310,000, the S$7.4 billion withdrawn in 2017 represents about half (48%) of the total HDB market transactions (S$15.4 billion). Although these are rough estimates, roughly 20% of this might be supporting the actual home value, while the other 30% is being used to pay interest on home loans. In the long run, it seems reasonable to expect that HDB prices could drop by 10-20% as developers acquiesce to consumers' reduced purchasing power while prospective buyers take longer to build enough savings to buy a flat.
Good News for Prospective Home Buyers?
Overall, this proposal appears that it would be a net-neutral event for prospective home buyers. On one hand, these individuals may have to save longer in order to purchase a home since they will not be able to access their CPF savings. On the other hand, a drop in housing prices could offset their reduced ability to purchase homes. Additionally, these individuals will benefit from having additional retirement savings since their CPF will be able to compound untouched over a long period of time.
Bad News for Existing Homeowners
However, this proposal definitely could have a negative impact for current property owners. If all buyers in the market are less able to afford current real estate prices, the market forces tend to adjust the prices lower until people can afford flats without the help of their CPF accounts. This would ultimately mean a reduction of wealth for those who already own HDB flats.
Additionally, current homeowners may face another negative consequence. Currently, individuals re-selling their HDB flats must refund their CPF account based the principal amount withdrawn for their HDB flat purchase, as well as the amount of accrued interest that the savings would have earned if they had not withdrawn from the CPF account initially. If property values drop significantly, these homeowners will have much more difficult time meeting this refund requirement.
How to Make a Smooth Transition
The proposal would certainly incentivize increased personal savings and promote wealthier retirement, which could be a financially responsible goal. In order to make this transition easier, however, there are a few concepts to consider.
First, because existing homeowners must refund their CPF account based on the amount withdrawn for purchasing a home, declining home prices could put them at significant financial risk. One way to make the proposed rule more palatable would be to decrease the refund requirements for current homeowners.
Additionally, if HDB leases were extended, policy makers might be able to both buoy short-term home prices as well as mend a long-term structural issue related to HDBs. It could also help the owners of older flats, whose retirement savings could benefit from increased resale value if leases were easily extended beyond 99 years.
The truth behind proposal to prevent CPF for housing
An academic’s suggestion which seemed to propose that the Central Provident Fund (CPF) monies no longer be allowed to be used to buy residential properties, has in recent days stirred the hornet’s nest. Walter Theseira, professor of Economics at UniSIM, made that suggestion in responding to President Halimah’s call for policy suggestions.
Prof Dr Theseira said that the use of CPF savings for housing should be curbed in a bid to prevent the people from over-investing their savings on housing. He noted that people typically over-invest on housing as a way of “unlocking their CPF funds” and that installing measures to limit the use of CPF monies for housing could help the people conserve their savings for retirement and health.
He said: “My view is that the CPF system tries to do a little too much, and we should consider focusing CPF on retirement and health…I do believe there is some over-investment in housing, which creates retirement risks if housing values do not grow, and this over-investment is because Singaporeans see housing as a way of unlocking their CPF funds.”
One such measure the authorities could instate is slashing CPF contribution rates, Theseira suggested.
This would mean that workers would receive more take-home pay that they could allocate to housing. “A CPF system focused on retirement and health would require lower contribution rates, and allow people more choices in using their higher take-home income on housing, investments, business, and family.”
While Theseira advocated for a redesign of the CPF system “so that people no longer need to pay for housing out of CPF, by cutting contribution rates to focus on retirement and health,” he added that he is unsure what the right contribution rate should be.
His views on the redesign of the CPF system drew sharp criticisms from the members of the public. Some were initially even confused that it was President Halimah who had made that suggestion in her call that there were ‘no sacred cows’.
After the public uproar, the professor took to his Facebook to clarify that he did not argue for CPF to be removed completely or even for the housing component of CPF to be removed completely – since it may help people save for their first home.
Theseira said: “What the right contribution rate should be, I cannot say. Perhaps some housing component remains important to help people save for their first home. Nor would I argue to remove CPF, because mandating retirement savings remains important, even for (especially for?) people who believe they can do a better job on their own. But this is a topic for another day.”
Elaborating, the economist asked: “What choices would we make if a different policy was in place? What trade-offs would we accept if we designed policy? It’s easy to make fun of policymakers, and it’s also easy to critique policy. Finding workable solutions that promote the public interest is a lot harder, but more than ever, we need to work together to help improve policy in Singapore.”
Prominent commentator on economic policies, Chris Kuan, said that Theseira’s views on CPF usage are generally sound.
Kuan explained: “This bring Singapore back to normality in terms of what social security is used for and will go a long way to minimise the large trade-off between paying for housing and saving for retirement and healthcare. It will also reduce the known tendency of Singaporeans of over-extending housing affordability and hence driving up prices because of the instant gratification they received over CPF being released to pay for property when that gratification can only otherwise be realised decades into the future.”
“There is always that easy argument that the whole problem of the trade-off between housing and retirement is due to HDB affordability and that tiresome mantra that all it takes is just make HDB affordable. Well, making HDB affordable from this point forward is the easy part. The difficult part is how to make HDB affordable without destroying the housing equity and hence retirement proposition of current HDB owners. That is the intractable part of the problem.”
“I always held that the huge increase in CPF assets due to the high contribution rates are too much of a temptation for the government,” Kuan, a former international banker, said.
Adding: “What better way to use it up than let public housing prices rise – it increases the government reserves which is essentially a very large transfer of wealth from households to the state and slow down the accumulation of government indebtedness.”
Although highly unlikely, if Theseira’s proposal was accepted by the Government, it would mean that housing prices will drop drastically. This is because without CPF, many home buyers will be deterred by the large out-of-pocket down-payment that they would have to pay for their prospective homes. This would in turn lead to a decline in demand in the residential property market, driving down prices significantly. A scenario which would be prevented from happening at all costs by policymakers who have vested interests in a healthy real estate market.
What the forefathers has given Singaporeans the flexibility to buy homes with their CPF money in the past, and now these people are thinking of removing this scheme?
The evolution of CPF
a) CPF and housing – the twin pillars of retirement adequacy
To help workers save for retirement, the CPF was established on 1 July 1955. Workers contributed part of their monthly income to their CPF to build up their retirement savings.
In 1968, the government introduced the Public Housing Scheme, allowing Singaporeans to pay for the mortgages of their HDB flats using their CPF savings instead of having to use their take-home pay. This increased the affordability of housing and provided many Singaporeans with a home. Home ownership became a key pillar of retirement security as it relieves Singaporeans from having to pay rental fees out of their retirement funds during their senior years.
Edited by DACH, 15 May 2018 - 11:38 PM.