The CFP Minimum Sum (MS) time bomb set by the PAP detonated on 7 June at Hong Lim Park. Another PAP time bomb ie CPF Housing Valuation Limit (VL) looks set to go off soon if the government continues to slumber.
The CPF VL has affected a large but unknown number of HDB resale flat lessees (not owners, stated on HDB Lease). The VL is 100% of the purchase price/market value (whichever is lower). The reason for having a VL is to ensure sufficient retirement funds. However, the VL is simply a shortsighted policy because:
– Upon this limit being breached, typically before the 20th year of a 25 year loan, a disproportionately high amount of disposable income will be required for the balance mortgage installments. (see Table A) It will be insufficient.
– A typical family with 2 growing up children is faced with increasing costs every year. The VL coincides with the stage where expenses may be the highest, ie tertiary education expenses, etc.
Eg. Taking the example of a very cheap 3- rm resale flat, valued at $315,000 with a mortgage installment of $1361, 5% cash payment and stamp duty in cash.
|LOAN = $300,000|
|VL = $315,000|
|WL = $378,000
|Interest rate||Mthly payment||VL reached||CASH||WL reached||CASH|
|2.60%||$1,361||19 years||$93,300||23.1 years||$30,300|
|4%||$1,583||16.6 years||$159,900||19.9 years||$$96,900|
|5%||$1,753||14 years||$210,900||18 years||$147,900|
As can be seen from Table A, the VL is reached at year 19 with historically low interest rates of 2.6%. The WL is reached at year 23 which will still require a small amount of cash.
Should interest rates creep upwards to, say 4%, the VL is reached before year 17, requiring a huge amount of cash to pay the balance of about $160,000. At 5%, a simple 3-rm resale flat is out of reach for ordinary Singaporeans. In view of the huge cash shortfall, the government grant becomes insignificant.
It makes little difference even if accumulated CPF savings have been used to pay upfront.
CPF VL shortsighted policy
Like many other policies, the CPF VL is also shortsighted. Why?
1 Most ordinary citizens can forget about the available housing withdrawal limit (WL) of 120%. To be able to use the additional 20%, the CPF OA must first meet the Minimum Sum limit of $148,000 which has been increasing at 6% for the past 2 decades. The majority of HDB lessees would not be able to meet the MS requirement in future.
2 Allowing the use of maximum CPF for monthly installments in the initial years only masks the high cost of public housing. Another detrimental effect is this artificially inflates public housing prices to stratospheric levels.
3 A couple buying a 3-rm flat are likely to have a family. The strain on their disposable income increases every year is easily anticipated as well as the likelihood of insufficient cash when the VL is breached. The VL policy should not have ignored this.
4 As can be seen from Table A, the VL has created issues with cheap 3 room resale HDB flats. 4-rm HDB flats or bigger ones are even more unaffordable.
Dangerously high housing prices
1 Loans with floating rates are subject to unforeseen interest rate spikes. A rate increase of 2% and above will likely send the property market into a tailspin.
2 That affordability hinges on historically low rates places our real estate market in a precarious position.
The government should not be reactive, always await feedback
MPs should have come across thousands of cases. One such case was recently highlighted on TRS link and already highlighted on HWZ forum 2 years ago. An increasing number of such cases will continue to surface. Unfortunately, just like the MS scheme issue, our MPs are least bothered by an issue which does not affect them one bit.
Our MPs are likely to come up with an insulting suggestion ie downgrade. If that is the quality of our MPs, any Ah Beng or Ahmad could be an MP.
Since the objective of CPF is to provide adequately for our retirement, if it really must be used for housing, the amount for monthly mortgage installments must be significantly reduced. This will remove the artificial inflation of property prices, leading to overall increased affordability.
Once prices are truly affordable, there’s really no need to complicate a simple transaction with formulas like Mortgage Servicing Ratio, Total Debt Servicing Ratio, etc. The government can spend more time on governing instead of perennially tweaking the system. Tweaks are merely short term measures.
Government spends too much time tweaking but solving nothing.
The CPF VL policy penalises tens of thousands of citizens and needs to be revamped. The unsoundness of such a policy could have been easily anticipated since day one.
The VL masks the issue of housing affordability by kicking it down the road. The VL is another CPF time bomb awaiting to explode in the faces of our indifferent MPs.