How the CPF led to property speculation
By Dominic
I think we have to agree but what we mean by 'choice'. Filbert seems to think that as long as there is no overt coercion, any choices you make are based on your own free will, so you ought to take full responsibility for it. For instance, if the government decides to force all males to do NS, and that's not enough to force you to migrate at the expense of great financial and psychological trauma - well, too bad, you chose to stay in Singapore. If the government makes you learn your 'official' mother tongue instead of another language and you refuse to go into private schooling which would cost 50 times more, well that's your choice. If you speak up against the government, knowing that you could be sued for defamation even if you were making legitimate objections, hey, that's your choice. After all, you knew the costs involved when you decided to make those silly remarks about aid to Indonesia, or investments in China. So because you were a free agent, and you knew the rules, it was entirely your fault. No matter what the rules were, and no matter whether you had a choice to play by them.
I'm no philosopher, but something seems wrong with that.
Let's say you have a government which says, "You have to save a certain proportion of your money, and you can either a. leave it in your CPF account and get nominal returns of 2.4% which won't be enough for your retirement or b. invest it in real estate and there might be a chance that your property will appreciate, and besides we encourage you do to this with rebates and first-time buyer policies, and so on."
Under option a., you will have barely enough for retirement. Under option b., you get a house, and if house prices fall, you still won't be doing so well retirement-wise, but there's a relatively good chance that your property will appreciate, and you could possibly sell it off and make a bundle. You might even do well enough so that you can go beyond your Minimum Sum and pay for a nice retirement holiday. What would you choose?
So everybody rushes out and buys property, raising property prices and confirming initial optimistic hunches. Many buy two, even. Huge speculation in the real estate market escalates. By the way, you aren't restricted by how much you can spend on housing - you can run your Ordinary Account to zero if you wish. You can buy second properties with your CPF. You also don't have to buy non-residential housing, any office space would do! By the way, that also drives house prices up for everyone else, raising the cost of living substantially.
Of course, some people enter the market at the wrong time, make the wrong decisions etc. It's not so bad if it's just the unlucky gamblers who are bumming out, but when most of your ageing cohort is playing the same game as well? So much for a central "retirement providing" fund.
So the real problem comes when you make those choices, a. and b. Maybe the government shouldn't be the uber-insurer so that it guarantees that no matter what happens whether you choose a. or b., but it should make option a. rather more attractive so that people have to think really hard about selecting option b. In other words, you should be really confident about being able to take on this additional risk - comfortably - before buying that piece of prime land. Now we have more options available to us: unit trusts, equity, and so on, so we might choose option a. so that we can earn bigger and better returns, and have a diversified portfolio. But what about the generations before us? The CPFIS only came into being in 1997. That option just didn't exist in the past.
So the real issue is in designing a system that works, and giving people the right incentives that will ensure people do not simply have it in their best interests to take the riskiest option by default. The system should also consider other crucial domestic markets - such as the housing market - and ensure that a retirement scheme does not create distortions because of perverse incentives. This is especially so when the government controls a huge chunk of the supply of residential housing, and, through the CPF, influences the demand strongly. The Singapore government also technically owns all land in Singapore (all land is technically on lease .) A lot of the 99 year lease holdings are expiring soon with rather marked uncertainty as to what the government is going to do, so in private property markets clearing the air might nudge these property prices up a little.
I think we have to agree but what we mean by 'choice'. Filbert seems to think that as long as there is no overt coercion, any choices you make are based on your own free will, so you ought to take full responsibility for it. For instance, if the government decides to force all males to do NS, and that's not enough to force you to migrate at the expense of great financial and psychological trauma - well, too bad, you chose to stay in Singapore. If the government makes you learn your 'official' mother tongue instead of another language and you refuse to go into private schooling which would cost 50 times more, well that's your choice. If you speak up against the government, knowing that you could be sued for defamation even if you were making legitimate objections, hey, that's your choice. After all, you knew the costs involved when you decided to make those silly remarks about aid to Indonesia, or investments in China. So because you were a free agent, and you knew the rules, it was entirely your fault. No matter what the rules were, and no matter whether you had a choice to play by them.
I'm no philosopher, but something seems wrong with that.
Let's say you have a government which says, "You have to save a certain proportion of your money, and you can either a. leave it in your CPF account and get nominal returns of 2.4% which won't be enough for your retirement or b. invest it in real estate and there might be a chance that your property will appreciate, and besides we encourage you do to this with rebates and first-time buyer policies, and so on."
Under option a., you will have barely enough for retirement. Under option b., you get a house, and if house prices fall, you still won't be doing so well retirement-wise, but there's a relatively good chance that your property will appreciate, and you could possibly sell it off and make a bundle. You might even do well enough so that you can go beyond your Minimum Sum and pay for a nice retirement holiday. What would you choose?
So everybody rushes out and buys property, raising property prices and confirming initial optimistic hunches. Many buy two, even. Huge speculation in the real estate market escalates. By the way, you aren't restricted by how much you can spend on housing - you can run your Ordinary Account to zero if you wish. You can buy second properties with your CPF. You also don't have to buy non-residential housing, any office space would do! By the way, that also drives house prices up for everyone else, raising the cost of living substantially.
Of course, some people enter the market at the wrong time, make the wrong decisions etc. It's not so bad if it's just the unlucky gamblers who are bumming out, but when most of your ageing cohort is playing the same game as well? So much for a central "retirement providing" fund.
So the real problem comes when you make those choices, a. and b. Maybe the government shouldn't be the uber-insurer so that it guarantees that no matter what happens whether you choose a. or b., but it should make option a. rather more attractive so that people have to think really hard about selecting option b. In other words, you should be really confident about being able to take on this additional risk - comfortably - before buying that piece of prime land. Now we have more options available to us: unit trusts, equity, and so on, so we might choose option a. so that we can earn bigger and better returns, and have a diversified portfolio. But what about the generations before us? The CPFIS only came into being in 1997. That option just didn't exist in the past.
So the real issue is in designing a system that works, and giving people the right incentives that will ensure people do not simply have it in their best interests to take the riskiest option by default. The system should also consider other crucial domestic markets - such as the housing market - and ensure that a retirement scheme does not create distortions because of perverse incentives. This is especially so when the government controls a huge chunk of the supply of residential housing, and, through the CPF, influences the demand strongly. The Singapore government also technically owns all land in Singapore (all land is technically on lease .) A lot of the 99 year lease holdings are expiring soon with rather marked uncertainty as to what the government is going to do, so in private property markets clearing the air might nudge these property prices up a little.
posted by Koh at 2/01/2005 08:56:00 pm
2 Comments:
I agree 100%, especially about the choice regarding A and B. However, what many commentators have failed to point out is the reason as to why the Govt encourages the selection of B. Im beginning to think that ordinary Singaporeans are simply financing their present consumption with their retirement funds. If option b was not allowed, i can imagine the property market would be much poorer, a sizable % of people will be renters, and the pockets of both the Government and the property tycoons would be hit badly.
I actually went to do some research on the policies and regulation in Singapore.
Apparently, you cannot invest all the funds in your ordinary account (OA) on housing. Regulations were set in a press release by Minister of National Development that you can only use the available Ordinary Account (OA) balance after setting aside the Minimum Sum cash component.
For 2nd and subsequent properties, only the CPF savings in the OA in excess of the Minimum Sum cash component can be used and the amount of CPF savings that can be used for their purchase is capped at 100% of the valuation limit of the property
With regards to investing your CPF into non-residential properties, the government has already decided to phase out the Non-Residential Properties Scheme (NRPS) which initially allowed you to invest in non-residential propoerties with your CPF. As of 19th July 2005, the government has decided to phase out the NRPS by 1 July 2006. As of 1st July 2006, CPF members are disallowed to invest their CPF savings in non-residential properties.
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