CPF and HDB: 10 Real Dirty Tricks.
Roy Ngerng of Heart Truths, today published an article to expose the raw deal Singaporeans get from HDB and CPF. He makes many valid points, most of which I have made before on www.sonofadud.com. Unfortunately in his overeagerness to convict the PAP of fraud he makes an elementary error and simply gets it quite wrong. Whilst the error does not invalidate the fundamental point about the raw deal it does allow the PAP IB Brigade to seize on it and draw us away from valid criticisms.
Roy’s fundamental error also distracts from the fact that CPF amounts to a regressive tax on lower-income Singaporeans and that the government uses its control over land to ensure that we overpay for a wasting asset which should belong to us rather than them, once we’ve paid for it. This is the real dirty trick.
What are Roy’s mistakes?
He makes the point that CPF requires us to pay interest on any withdrawals we make from our accounts both when used to purchase housing and also to service the loans. This is in addition to the normal interest we have to pay on any housing loans that we take out. So far so correct.
To digress a little: Having to pay interest on our own money is itself unusual. If this were a private savings scheme or pension fund then of course it would be up to us to decide how much money we wished to save. However this is a mandatory scheme. Despite the fiction fed to foreign think tanks that Singapore has a laisser-faire economy this mandatory scheme is in fact a stealth tax on our citizens.
This interest only becomes payable when we sell the HDB unit. Roy’s error (whether intentional or not) is in saying that this interest is lost to the government. It is in fact interest that is paid to ourselves and it is not true that we lose it. The accumulated interest remains in our account and can subsequently be withdrawn for new property purchases though interest will again be payable on the fresh withdrawal unless we have reached an age and have enough in our accounts to withdraw our money without having to pay it back.
It is true though that the government makes it difficult for us to withdraw what should be “our” money. It should be unnecessary if Temasek and GIC are making the returns they claim.That in itself means we should be asking the government why it is so desperate to hang on to our money if its funds are making so much?
It is also difficult to understand why we have to pay interest to ourselves on money we withdraw. From the government’s point of view making us pay back our borrowed CPF contributions is plugging a loophole that Singaporeans could use to withdraw most of their CPF. One way they could do this is by purchasing a property and then immediately selling it. But the government does not have to pay interest on those borrowed contributions so why should we have to pay ourselves back for borrowing our own money?
Another error that Roy makes is to say that it was WP’s Mr Giam who suddenly discovered the hidden scandal of HDB’s 99-year leases. In fact giving HDB leaseholders the freehold of their units was part of the Reform Party manifesto in GE 2011. Before that I believe my late father advocated a similar policy in Parliament. “The Problem with HDB Part 2” on my blog was concerned with the fact that HDB flats would be worthless when the lease expired. To quote:
“However there has been a fundamental mispricing in the HDB market in which decreasing time to expiry of the lease has not been taken into account. HDB properties can be taken back by a future government at the expiry of the lease for no compensation. Yet properties with sixty years or less to expiry trade at very similar prices to new flats with ninety-nine year leases in the resale market. This is completely different from how leaseholds on private property are valued in Singapore. This is also completely different to how leaseholds are valued in any other country in my experience.
The buyers have been sold the fiction that an asset that has to be handed back to the government in at most ninety-nine years, and in many cases much less, will somehow ignore the laws of economics and keep on appreciating forever. Let me repeat that there has been a fundamental mispricing in the HDB market.
Singaporeans have been told by PAP ministers and in particular LKY over and over again never to sell their HDB properties, as they can only go up in value. No government that I am aware of has made such an explicit promise and it can only be characterized as highly irresponsible. If a financial investment had been promoted in this way by a broker or corporation without any mention of the risks and investors had subsequently lost money, the buyers would be entitled to compensation.”
So here are the hard truths (or hard questions) about CPF and HDB which I first wrote about some three years ago. Some of these hard truths Roy has covered but all of them have been written extensively about before by me (see links below):
- Why do we still need a compulsory savings scheme if Temasek and GIC are doing as well as they claim? The PAP claim that Temasek is self-funded yet the government continues to inject assets (like Changi Airport Group) for free into Temasek. Even this capital injection is vastly undervalued allowing Temasek to use the valuation surplus to conceal that the majority of its investments like its panic rescue of Olam do not meet its internal rate of return hurdles.
- Why has the PAP repeatedly broken its promises to allow Singaporeans to withdraw their CPF in full? First we were supposed to be able to withdraw it in full at 55 then this was postponed. Now we have to buy an annuity through CPF Life, which is a bad deal for Singaporeans as the government can alter the payout every year if it has done badly, or if life expectancy changes. In effect Singaporeans have written a free put to GIC. We do not directly share in its returns if it does well but have to bear the losses if the value of its assets falls below that necessary to repay CPF holders.
- CPF is a tax since it pays holders well below what they could earn in the market for investments that were locked in for similar durations and only could be withdrawn under limited circumstances. This tax was significantly higher in the past when global interest rates were higher but still provides a big “endowment effect” which boosts GIC’s returns.
- Furthermore CPF is a regressive tax since it is capped at an income level of $85,000 per annum The top earners in Singapore pay vastly less of their income in CPF than do those on low incomes. Even though they also get less Employer contributions it is likely that much of the Employer contributions are borne by the employees themselves in the form of lower wages.
- CPF is not paid by expat workers and the hypothetical market value of a $ of CPF contributions is significantly less than a $ of disposable income. This gives foreign workers an unfair advantage over Singaporeans and allows them to undercut Singaporeans in the labour market.
- Why is it necessary for there to be a PAP monopoly over the supply of housing? This, combined with mass immigration inflows, results in Singaporeans massively overpaying for 99-year leasehold housing of inferior quality.
- I discussed above the mania that seemed to afflict Singaporeans because of irresponsible promises by LKY and the PAP that HDB was an asset that would constantly go up in value. I pointed out that the SERS scheme, in which Singaporean swap their old flats for new smaller ones with a fresh lease in much higher-density estates had encouraged this illusion. To quote again from my previous article, “The problem is that there is a fundamental conflict of interest between the government’s roles as provider of supposedly low-cost housing for the masses and as monopoly owner of at least 80% of the land in Singapore. This is why the PAP government has had a vested interest in pumping air into the housing bubble. Until now they have been happy to maintain the fiction that the length of the leasehold does not affect HDB valuations. This is because with the deliberate creation of huge excess demand for housing the HDB finds it profitable to acquire existing HDB blocks from their owners and pay them compensation which is close to the price of new BTO flats. That is because they can vastly increase the density of housing on that area by doubling or tripling the size of blocks and building them closer together.”
- However, as I explained above and Khaw Boon Wan admitted in his Parliamentary answer to Mr Giam’s question, the viability of the SERS scheme depends upon the redevelopment potential of the site. In other words, as long as redevelopment continues to be profitable for HDB which in turn is dependent upon other factors like continued population inflows and high economic growth rates.
- KBW stated for the record that if SERS does not make economic sense then the government will allow the leases to expire meaning that HDB owners will get nothing. At some point (certainly when the majority of estates have less than fifty years to run but probably much earlier) the factors that have inflated the HDB bubble will go into reverse. Singaporeans can expect a big fall in HDB prices particularly for older estates where the lease has fewer years to run. This is a ticking time bomb which could have serious adverse consequences for all Singaporeans leaving the majority who are financially naïve or too trusting of the PAP government with negative equity.
- We do not need to make unsubstantiated accusations of fraud , as Roy does, to demonstrate that Singaporeans are getting a bad deal from allowing the PAP to have control over housing and our savings. Owning the freehold of our properties and the freedom to decide how to save are essential elements in creating a property-owning democracy. A property owning class is the basis for a strong middle class and the government ownership of land and housing is the single biggest obstacle to the creation of a strong middle in Singapore. That is why you see such a disparity between the 10% of plutocrats at the top and the 87% of the rest who have the pleasure of the government as their landlord. With a strong middle HDB housing could return to its original function as social housing for the truly needy and provide a valauble safety net.
Sadly every article I write seems to end the same way. So here I go again! Until we start standing up for our rights we will continue to get the kind of raw deal that citizens of any democratic country would see through and not tolerate.