2-Room Flexi Review

Singapore’s HDB has gone a long way of providing affordable housing for Singaporeans since Singapore’s independence. It started by providing humble, relatively cheap 3-room and smaller flats; nowadays, the newer HDB flats are on the other hand larger and beautifully designed with quality furnishing. I’ve the privilege of visiting my relative’s BTO 3-room flat at Sengkang and I’m impressed, my Jurong 15-year-old flat in contrast looks “rundown”. Compared to other Asian countries/regions such as Japan, Taiwan, Hong Kong and Korean, HDB is a runaway success in the housing arena and Singapore’s home-ownership rate and housing satisfaction are probably near the top of the list if not the top.

Even though HDB housing in Singapore is relatively affordable, in absolute terms, housing is still the largest outlay for most Singaporean families. In a land scarce jurisdiction such as ours, this is understandable and unavoidable. Based on reports, articles and news, I understand that HDB is consistently looking for ways to cut costs and passing the savings to BTO buyers by adopting new technology and processes, making unit sizes smaller and even increasing subsidies and providing new schemes for the disadvantage and old-age families.

With that said, I look with great interest the 2-room flexi scheme. It’s an innovative idea. The aged family could downsize from a larger flat into the 2-room HDB with part of the balance proceeds placed in the CPF annuity scheme (LIFE) to generate lifelong income. The cost of the home is furthered reduced by tailoring to the family longevity profile and reducing the lease. The idea is to provide housing for the retired until the younger of the spouses reaches 95 year-old. I believe the 2-room flexi scheme is a good starting point for those families who want to monetize their larger HDB flats through the downgrading process. However, I believe that this scheme could be further enhanced to squeeze out the redundancy inherent in the assumptions. Let me explain.

The flexi scheme makes provision for the couple to live until 95 year old. However, most Singaporeans do not live till that age to meet one’s maker. In fact, the life table for Singapore tells us that the median lifespan of male Singaporeans is 82 while women live a few years more. That would mean that under the flexi scheme, perhaps 10 years of the lease are wasted and unconsumed. This extraneous lease, if monetized could very well enhance the living standards of the retiree home owners. In my humble opinion, I would think that HDB should provide an option for aged families to purchase “housing annuity” in a similar vein to the financial annuity that CPF LIFE provides. The housing board could be the counterparty in the provision of housing annuity where aged families are allowed to live in their flats for as long as their lifespan dictates. Thereafter, the ownership of the flats will be reverted to the board. This idea will not cost money for the government but could potentially improve the lifestyle of the retirees as the cost basis of HDBs has dropped. Adopting it will be especially beneficial to the families who do not want to leave a bequest or have no descendants. The leases sold to the flexi buyers could be reduced and the retirees get to stay in place for retirement. Like the CPF LIFE annuity, those families who kick the bucket early would subsidize those with more longevity.

How Far will the Current Property Bear Market Go?

First of all, I would like to wish in advance everyone a happy Lunar New Year.

As all my readers who invest in property or are going to know, the recent property bull market has peaked amid governmental cooling measures and HDB’s mass building activities and the market is on its way down.  By most measures, it’s been down for around 10% and nowhere of a bottom is in sight.  The natural question is whether it’ll rebound and if not, how much further down will it go?

My crystal ball in this aspect is unfortunately hazy.  Experience shows that predicting the directions (worst, the magnitude of a single direction) of the property/stock/bond/commodity markets is a fool’s errand and usually does not have a good ending.  However, I feel like I need to embark on this thankless job and do my crystal ball gazing nevertheless.  So, I shall shamelessly fire away!

All those who have lived in Singapore for decades know that Singapore has a tradition of providing affordable housings via the HDB route except around 1997 and recently.  The ramping up of the prices of property has caused the ruling party dearly in the last election and might do further damage on the next if it’s not being handled properly by the cabinet.

The current consensus among the media and market professionals is that there’s still room for the prices to fall.  Witness the recent quiet resale markets where those wanting to buy wait on the sideline for the prices to fall further!  I agree with the consensus given the stream of newly built BTO flats on the pipelines and the fact that the cooling measures are still in place.  I dare even speculate that prices will fall till they’re affordable by most common measures by the public given that the PAP government would clearly want to score this all important housing political point.

So how low a price would it be to be considered affordable by reasonable standards?  I would like to take the reference point from 2006 when the HDB prices reached a bottom (74.9 for the resale price index).  At the 2014 price level of 137.0, HDB has risen by 82.9% over 8 years.  The prices have clearly overreached themselves and are uncalled for.

If an 82.9% rise is unreasonable, what rise will be reasonable?  There’re 2 figures thrown around frequently, one is the inflation rate, the other is the higher income increment rate.  Personally, I would think that properties should more reasonably increase by the higher income increment rates.  There are 2 reasons, firstly, the dwellers in properties usually work around the area where they buy the properties; thus, the prices of properties will reflect the job opportunities of the surrounding areas.  The income derived from the work will then be used to pay for the down payment and mortgage of the properties.  The valuations of the properties are therefore a reflection of how hip the nearby job markets are.

The second reason why properties will track the income is because the surrounding amenities will improve over the years.  If properties were to track consumer price levels, it will mean that the improving surrounding amenities will get cheaper in real terms!  I feel that income is a better measure of the level of the surrounding amenities as the fiscal revenues used to build these facilities are derived from the economy which is tightly tied to the income level of the residents.

In 2014, the median income from work is 3770 and in 2006, the median income is 2449 based on MOM statistics.  Thus, if housing in early 2015 is as affordable as in 2006, the prices of properties should rise by around 53.9% over the 2006 period.

If we assume that the 2006 property prices are the norm, prices should fall by a further 1.539/1.829 – 1 ~= 16%.

Of course, speculating how much prices will fall could be more/less depending on the base period you choose.  If we select 2007 as the base year, the projected fall in prices will be even greater as income in 2007 increases much faster than price over the preceding year.

Considering how noisy the prices of property markets are, the chances of my prediction gone wrong are much higher than right.  So caveat emptor!

Valuations of the Various Stock Asset Classes

Benjamin Graham of value investing fame wrote in the book The Intelligent Investor, “Current price should not be more than 1.5 times the book value last reported.  However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets.  As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5 (This figure corresponds to 15 times earnings and 1.5 times book value.  It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)”

I’m of the opinion that Benjamin’s writings are pretty sage from the perspective of a value investor.  Let’s take a look at the prices of worldwide stocks in the various asset classes based on Mr. Graham’s sayings.  Since Vanguard publishes the two parameters for all of its stocks’ ETF, I shall use this fund company info for this purpose.  As listed on its website:

Asset class P/E P/B P/E * P/B
Global ex-US REIT 10.5 1.1 11.6
Emerging 13.9 1.7 23.6
US Financial 17.5 1.4 24.5
All-world ex US 16.7 1.7 28.4
Small-cap value 21.4 1.8 38.5
All-world ex US small-cap 20.0 2.5 50.0
S&P 500 19.1 2.7 51.6
Small-cap 27.2 2.3 62.6
US IT 21.2 3.9 82.7
US REIT 57.9 2.2 127.4

From the table above, the most glaring contradiction must come from the polar opposite of US and ex-US REIT sectors.  Ex-US REIT is the most value-y while US REIT is priced like it will have tremendous growth ahead (which I don’t think will be likely to materialize).  Perhaps 10 years down the road, we’ll most likely see a profitable delta of ex-US REIT over US REIT, considering the pricing disparity.

Of all the asset classes listed above, only Global ex-US REIT is comfortably within the limits set by Mr. Graham.  Emerging markets and US financial are also close and worth considering to overweigh in one’s portfolio.

Overall, most of the world’s stock markets are overpriced.  Everything is expensive!

Historical Returns of Singapore Residential Real Estate

hdb private

The Singapore government’s HDB (chart 1) and URA (chart 2) have public and private residential property price records dating back for more than 2 decades.  Let us analyse what the price histories have to say.

The recent record highs in the property markets seem to have peaked in 2013.  The first peaks on the charts are in 1997 for both the HDB and private residential projects.  Since there’re no longest-term trough-to-trough records for both HDB and private, we’ll settle by measuring the peak-to-peak annualized returns.

HDBs peak at 206.6 in 2013 and peak at 136.9 in 1996.  The annualized return will be 2.5%.  For URA’s records for private residential, it peaks at about 215 in 2013 and peaks at about 165 in 1997.  The annualized return will be 1.7%.

It seems that both increases for the prices of public and private housing are pretty low and are not much higher than increases in the consumer price indices.  Thus, I would think that the main benefits of owning properties would be for its rental yields or imputed rents if it’s owner-occupied.  Currently, rentals for a HDB are higher than private residential but markets are fickle, so we do not know what holds for the future.  Anyway, the total returns of capital gains and rentals should be reasonable for such a major asset class.

On a side note, for the private residential, if we compare the trough of 100 in 1999 and trough of 135 in 2009, the annualized return will be 3.0%, which is higher.  This is a consolidation but do take note of the shorter time span of only 10 years which might make it to be not as statistically significant.

I’ve one particular fear with regards to my calculations because of my lack of understanding with regards as to how the charts are drawn.  The indices might be derived by holding variables such as floor size, remaining tenure and location constant.  If that’s the case, the price increases I calculated might be a mirage as HDBs and a lot of private housings are based on 99-year tenure.  Brand new housings should thus take a depreciation hit by about 1.01% every year.  This will make your residence a consumption item instead of an investment!

As a final thought, it’s important to note that properties should not be bought at high valuations as you might be forced to sell it on the wrong side of the cycle whether be it due to a chronic unemployment, major illness, decision to migrate or other reasons.  By the judgement of most authoritative experts, now the property markets are too high – Deputy PM Tharman thinks so, so does Minister Khaw Boon Wan.  The slew of property cooling measures is a manifestation of that train of thought.  It’s best to buy Singapore properties when the markets have cooled down and the government will signal this event by removing at least some of the cooling measures.

Residential Real Estate 101


Above is an article from S&P/Cash-Shiller web site at http://us.spindices.com/index-family/real-estate/sp-case-shiller.

The article makes an interesting read.  It proves statistically once and for all the following points that a lot of people intuitive know about residential real estate:

1. Residential real estate as an asset class produces lower long-term returns than stocks.
2. Residential real estate has lower volatility compared to stocks.
3. Residential real estate has low correlations with other asset classes such as bonds, stocks and commodities.  This makes it a great addition to a portfolio as it lowers volatility at the portfolio level.

Do read it!