HDB flat price: Rise, Stagnant or Fall? (You must know)

HDB flat price is depending on supply vs demand. Demand is dependent on Singapore economy. Well, let says Singapore continues to prosper. Supply stays normal.

It is Singapore government's dilemma.

Let's do a simple math.

HDB median sublet rental for 5RM (Ang Mo Kio): $2,700 (Q2,2012, HDB website)
HDB median resale price for 5RM (Ang Mo Kio): $620,000 (Q2 2012, HDB website)
Private bank interest rate: 1.50% p.a.
Assuming loan of 80% of valuation for 30 years, using PMT function which I discussed before.

At current state, if you buy a 5RM flat. The monthly installment is $1,711.80 (parameter for PMT function is as shown below).

Interest Rate
1.50%
Year
30
Flat Price
$620,000
Loan (80% of price)
$496,000
Monthly Installment
$1,711.80

So, if you are a foreigner, you are paying about $1,000 more than your installment if you rent a flat. Well, do you want to pay installment or rent? If you have no problem with your job in Singapore, you have to rent anyway (especially you have family).

When rental is equal (more or less) to installment, you will stop thinking to purchase a flat. Two scenarios for rental equals installment:

(1) Flat price increases
(2) Interest rate increases

If interest rate stays, the flat price will only increase to the point rental is equaled installment.

Interest Rate
1.50%
Year
30
Flat Price
$1,000,000
Loan (80% of price)
$800,000
Monthly Installment
$2,760.96

Tada! One million dollar HDB flat.

This is hard mathematics. If consider supply vs demand curve from external, the price won't be hitting $1M but perhaps we discount 20% which is $800,000.

So, the scary part. What if interest rate increases? The most certain is cashing out money from HDB flat (property) which triggers economic spiraling downwards. Price of property will be hit because no one (or perhaps local Singaporean) can withstand this installment.

Interest Rate
5.10%
Year
30
Flat Price
$620,000
Loan (80% of price)
$496,000
Monthly Installment
$2,693.03

As a result, more and more HDB flats will be transferred from hand of locals to foreigners. Compare apple to apple, local Singaporean is no way up to the level of how foreigner controls their expenses.

In general the scenario of rising interest rate is not favourable to both local and foreigner. So what can the government does it cool down property market and manage interest rate. Yes, typical interest rate is very sensitive to global interest rate. In order for the government to maintain such interest rate, it is not easy. It will creates more and more inflation which hits residents (especially those who can't control their expenses).

The most effective way out of this issue is increasing productivity which government is emphasising now. Well, it is not what we want to discuss today. :-)

CPF - Accrued Interest

If you have a good understanding of CPF, you will know that CPF functions as "saving for old days". Some interprets CPF as "money locked by government" but it is a wrong understanding. Apparently Singapore government policy is to have its citizen/resident to take care of himself/herself when they grow old. This will saves budget for supporting old citizens/residents. In returns, the personal income tax is rather low here in Singapore. You can refer to Wikipedia if you are interested on this information.

In order for this policy to be effective, the government has to "force" its residents to save. You can blame it to those undisciplined residents if you are not happy with CPF.

Back to today's topic.

Do you know that the money you withdrew from CPF for housing is subjected to interest? No, it is not that the government is cruel but this policy is to prevent residents to spend unnecessarily (or abuse the system) because you only need to return the "accrued interest" if you sell your house before 55 yo by the % of the money you withdrew from CPF.

The calculation of accrued interest in rather complicated for laymen but the CPF portal has calculated for you. It is under My Statement >> Property > Accrued Interest.

Anyway, you probably can make some bucks if you invest smartly with such low interest rate period. However, it is advisable to calculate your risk of your property investment carefully. If you read about what I wrote somewhere here before, you know sometimes it is not good to speculate on property without calculated risk.

I hope you understand what is Accrued Interest and spend your CPF money wisely.

CPF - Minimum Sum 2

I wrote an article about CPF Minimum Sum seven years back.

Well, back then not much people concern about this amount. But it has been a hot issue recent two years. It was projected that the minimum sum will be raised to $120,000 by 2013 based on the inflation rate on 2005. Unfortunately, it is more than what we expected. Thanks to the imported inflation rate, this number will be haunting CPF members in coming future.

The world is not only about the red dot. There are much more greater nation out of this country and the economic uncertainty has already taken place and gave impact to everyone. The government has been trying to control the inflation rate of this country but it is not an easy job and I can say there is not much solution left but to accept.

At this rate, inflation will continues and CPF minimum sum will be adjusted higher than projected. So, what is the catch?

Young professional who stretched too much to buy high priced property with their CPF money will be first affected. You will remember I keep emphasising on the consequences of draining CPF for high priced property. The keyword here is "stretched too much". If you can afford it, you are welcomed to buy. If you catch my post previously, I mentioned before property will be good but only applies to second property.

I mentioned the situation when you don't have sufficient fund for minimum sum in my first post. On top of that, you will need to pledge your property.

Explanation of property pledging for Minimum Sum from CPF website:

You can choose to pledge your property up to 50% of the Minimum Sum. In the event that the property is sold or otherwise disposed of, you are required to refund the Minimum Sum deficiency, or the principal CPF withdrawn for the property plus the accrued interest*, whichever is lower. The Minimum Sum deficiency is the CPF Minimum Sum applicable to you when you reach 55 less the balance in your Retirement Account (excluding the interest earned).

Well, once you pledged your property for minimum sum you are required to refund CPF a certain amount from sales of property including interest. Even if this is really intimating CPF members but the move is really to protect retiree's well-being.

Not to throw wet blanket, but don't really expect to get all your CPF money out before you die. This is really for your own benefit.

CPF - Using Medisave in Malaysia

Can I use my medisave elsewhere than Singapore? Yes you can.

With introduction of medisave usage in Malaysia, CPF members will have more choices.
News link: http://www.healthxchange.com.sg/News/Pages/Medisave-can-be-used-in-12-Malaysian-hospitals.aspx

Current overseas participating medical group:


HEALTH MANAGEMENT INTERNATIONAL
Referral centre:
Balestier Clinic and Health Screening Centre

Facilities in Malaysia:
Regency Specialist Hospital (Johor Baru), which provides a door-to-door return transport for up to four people for $80
Mahkota Medical Centre (Malacca)

PARKWAY HOLDINGS
Referral centre:
East Shore Hospital

Facilities in Malaysia:
Gleneagles Intan Medical Centre, Kuala Lumpur
Pantai Hospital, Kuala Lumpur
Pantai Hospital, Cheras
Pantai Hospital, Ampang
Pantai Hospital, Klang
Pantai Hospital, Ipoh
Pantai Hospital, Ayer Keroh
Pantai Hospital, Penang
Pantai Hospital, Batu Pahat
Pantai Hospital, Sungai Petani

My guess is more to come as Singapore government needs to cater for different needs.

There are some intelligent policies on using of medisave out of Singapore, Mahkota Medical Centre has a good FAQ for this purpose.

CPF - Best Investment

CPF is the best investment? There are a lot of "advisors" asked you to invest your CPF money. Should you be investing your CPF?

Hell no to advisors! Why pay them commission? Risk co-exists with gain in any investment. If you are going to pay people to invest your CPF money, then it is a no-no. Keep it as retirement saving. Anyone can claim that they are some kind of investment guru in good times. When bad time comes, they blame it to the economy. CPF board has already assessed risk for each investment scheme so they limits the investment you can do by using your CPF money. The government don't want to take care of you when you are broke after you retire. This is Singapore's system, face it.

What is the best investment for CPF?

Yes, you can still invest. The best investment for CPF is paid up all your housing loan. Keep your first house debt away if possible. This is ensure you can get another bank loan for second property (if you can achieve it). There is good debt, there is bad debt. Property investment is still considered good debt but don't speculate.

Only second property will reaps profit if you invest properly. The first property is your house, your roof.

Remember the golden rule of thumb, do not overkill yourself by draining your CPF money on first property. It won't reap you any profit. If possible, start your property purchasing from HDB because you lose all privilege by buying private as first property.

CPF - Contribution Rate

Employee Age (Years)	Contribution Rate (for monthly wages ≥ $1,500)			Credited into
	Contribution by Employer (% of wage)	Contribution by Employee (% of wage)	Total Contribution (% of wage)	Ordinary Account (% of wage)	Special Account (% of wage)	Medisave Account (% of wage)
35 & below	16	20	36	23	6	7
Above 35-45	16	20	36	21	7	8
Above 45-50	16	20	36	19	8	9
Above 50-55	14	18.5	32.5	13.5	9.5	9.5
Above 55-60	10.5	13	23.5	12	2	9.5
Above 60-65	7	7.5	14.5	3.5	1.5	9.5
Above 65	6.5	5	11.5	1	1	9.5

Above is info extracted from CPF website on the date of this article is published. Take this figures as reference.

What is CPF to us?

In fact, not all of us know how to use it correctly. CPF is an amount of money set aside "forcefully" for retirement. Unless you have your own saving, otherwise don't clear up the account on risky investment. You may think inflation may be higher than CPF interest rate but the intention of CPF interest rate is to adjust against inflation (not to gain interest rate).

Let's set aside for now.

The key point here is to understand contribution by both employer and employee reduces by age. The percentage of contribution is credited into different account is also based on age. Investment or loan installment should be considered accordingly. Think also unemployed bad days or one of you is unemployed. Installment of $2,000 is very serious when you are unemployed.

CPF for Housing? Investment?

Read from an advertisement on the newspaper:

YOUR AFFORDABLE INVESTMENT
Typical 3 Bedroom (Compact)


Sale Price $736,000
LESS
5% Downpayment (cash) $36,800
Balance 15% (CPF/cash) $110,400


Housing Loan (80%) $588,800
Monthly Instalment* $2032.07


Monthly CPF Contribution to Ordinary Account^ $2,300


Cash Top Up per month $0
Potential Monthly Rental Income $3,000

Footnote
* Loan of 30 years based on interest rate of 1.5%
^ For couples aged 35 years and below with total combined household income of $12,000

First of all, you need to read carefully. Your affordable "investment".
Young (professional) couples tend to buy this for the first property. This will drain up all the CPF money from ordinary account. In fact, young professional should be educated good enough to understand a retirement without CPF. The first requirement is to have your own saving. Unfortunately, most if not all Singaporean couples with such financial status will buys a car. CPF drained and retirement without saving is double blows.

Secondly, read loan of 30 years based on interest rate of 1.5%.
What about 5%? The monthly installment immediately grows to $3,161 which you need to top up another $861. The historical interest rate high is more than 9% which grows your monthly installment to $4,738. So, top up another $2,438 per month.

Thirdly, read aged 35 years.
CPF contribution decreases based on age group. I bet you don't know about this. The older you grow the more contribution goes to Special Account and Medisave Account. So, now you understand how to read the fine footnote.

So, spend your CPF money smartly.