Wednesday, September 24, 2014

Cap use of CPF monies for housing

Linking CPF monies to housing makes Singaporeans’ retirement funds vulnerable to the cyclical patterns of the property market. 


SEPTEMBER 24, 2014

At a recent seminar, Associate Professor Lum Sau Kim from the National University of Singapore (NUS) noted that the use of Central Provident Fund (CPF) monies for housing payment had constrained retirement adequacy.

“If so much of CPF funds are dedicated to housing, then we have poorly diversified household portfolios ... the nest egg that we have will be vulnerable to housing sector shocks and greater risks,” she said.

This raised an important question on whether the use of CPF savings for housing has been too liberal and whether it is time to impose limits to enhance Singaporeans’ retirement adequacy.

There are pros and cons to linking CPF to housing. The benefit is clear, for without the provision to use CPF to fund property loans, far fewer Singaporeans would be able to buy a home. Currently, home ownership rate stands at about 90 per cent, among the highest in the world.

However, on the flipside, linking CPF monies to housing makes Singaporeans’ retirement funds vulnerable to the cyclical patterns of the property market. For instance, when the property market contracts and valuations plunge, CPF members who are retiring and intending to unlock some or all of their housing assets to fund their retirement could be heavily hit.

Even if property prices surge, they may not be able to afford another home after selling the current one — unless they move in with family or friends. So while they might be sitting on an S$800,000 property, they may well have much less in the bank for their daily needs.

The Government is clearly keen to address Singaporeans’ concerns on retirement adequacy. The recent revision to the Lease Buyback Scheme — where Housing and Development Board (HDB) flat owners sell back part of the remaining lease to the Government — is a case in point.

But I believe the crux of the problem is the way Singaporeans use their CPF monies to buy property.

Many Singaporeans are currently pledging most, if not all, of their Ordinary Account contributions to housing, an illiquid asset. This might not be the most prudent approach to retirement planning. Even if there is a lack of viable investment vehicles in Singapore for retirement planning, a retirement portfolio needs to be well-diversified and not one that places most, if not all, eggs into one basket. There should also be a cash savings component in the portfolio that caters for a rainy day such as a medical emergency.


In a 2012 paper, NUS economic professors Chia Ngee Choon and Albert Tsui suggested that while it may be an uphill task to delink housing financing from CPF completely, more measures can be implemented to ensure that younger Singaporeans buy only homes they can afford. This is a viewpoint that has garnered support among retirement-planning professionals in the private sector.

The professors’ housing consumption sensitivity analysis indicated that there is a strong trade-off between housing consumption and retirement adequacy. For example, a median male earner (monthly salary of S$2,500) who enters the workforce today and goes on to buy a four-room HDB flat will have a net Income Replacement Ratio (IRR) of 70 per cent. But if he buys a five-room flat instead, his net IRR dips to 58 per cent, a staggering 12-percentage-point differential.

IRR is defined as the percentage of working income an individual needs to maintain the same standard of living in retirement he had enjoyed while still active in the workforce. The lower the IRR, the worse off the retiree will be in his golden years.

To expand upon the professors’ prudent approach, a cap could be imposed on the amount of Ordinary Account funds that is made available for housing purchases. For example, a 50-per-cent cap on the use of CPF funds to finance housing will ensure more savings will be set aside for retirement.

Let’s use the same median male earner with a monthly salary of S$2,500 to illustrate this. Let’s say he wants to buy a new four-room HDB flat and needs to take a 30-year-old loan of S$300,000 at an interest rate of 1.5 per cent. If the 50 per cent cap is applied, his household will have to come up with an additional S$6,155 per annum in cash payments for the flat. This transfers into almost S$513 per month, or about 25 per cent of his take-home pay of S$2,000. This percentage would not be considered onerous and would drop as his income grows along with career progression. The upside for him is that he would get S$15,000 more in retirement income every year when he retires at 62.

The policy rationale allowing Singaporeans to draw heavily on their CPF funds to pay for housing in the past is understandable as the priority was to make Singaporeans homeowners and to give them a stake in the nation’s future. But with greater life expectancy and an ageing population, the need to help Singaporeans enjoy retirement adequacy suggests it is perhaps time to rethink this policy.

If young Singaporeans, confident of their future earning power, want to buy a bigger first home, they should by all means seize that opportunity. But the caveat is that they should plan their finances carefully and not depend primarily on their CPF accounts.

A cap on the use of CPF for housing could provide the balance necessary to fund property ownership, but not at the expense of retirement funds.


Marcus Kok is principal pension consultant at PwC Asia Actuarial Services.

[Yes. As argued in this post as well. 

Firstly, we should make a distinction between the BTO market and the resale market. Prices of BTO flats used to be pegged to the resale market. However, Minister Khaw has disengaged that peg and used the income of the family as the upper limit for how high the BTO prices can be (4 times annual salary). 

This means that the government can easily control how much CPF is used for BTO homes - just lower the prices.

The problem is the resale market where prices are set by the market. And the market is being fed by the CPF. 

The problem is also that the CPF money is "not real" to the CPF member. There is no immediate opportunity costs to using the CPF money, and so CPF members bid up the prices of resale flats.

However, this is not necessarily a bad thing as the seller of the resale flat will gain from the higher prices. Unfortunately at the expense of the buyer.

The CPF that can be used for resale flat purchases should be limited to a percentage of comparable BTO flats - say eventually 120% of a comparable BTO flat. So if you want to buy a resale flat and the comparable BTO flat in that area is $300,000, you can only use your CPF to pay up to $360,000 (120% of the BTO prices). You can of course pay more if you have and are willing to top up with cash. 

The problem with the proposed 50% cap (if I understood it correctly) is that it is an across the board, blunt instrument. The ones that will be most inconvenienced, if not outright hurt, are the low income. Their incomes and CPF contribution are already so low. If they could use all their CPF to pay for their home, they would have more disposable income. If they are forced to use cash (because of their 50% cap), their financial situation would be even worse, and they may not even buy a flat.

So, no to a 50% cap.]

Mr Khaw said that he wants new flat prices in non-mature estates at around "four years of salary" - what they were before the property bull run of the last six years began. - See more at:

Mr Khaw said that he wants new flat prices in non-mature estates at around "four years of salary" - what they were before the property bull run of the last six years began. - See more at:

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