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.

The European Union expanded too fast and will probably fail, Lee Kuan Yew said back in 2012

This is a re-post from The Straits Times.

As the world struggles to make sense of Brexit, there has been renewed public interest in the future of Britain and the European Union(EU). One Singaporean who had tracked Europe’s great effort at integration over many decades was the late Lee Kuan Yew.

In the years following the European debt crisis which began unfolding in late 2009, Mr Lee was asked on several occasions for his views on the EU. He weighed in, speaking with clarity, depth of understanding and keen insight.

In September 2011, Mr Lee predicted at a dialogue the collapse of Europe’s currency union and said it would be “a very painful business” but that a one-tier Europe was too hard to achieve. At that time, the European debt crisis was some two years old, having been taking place since end 2009.

Mr Lee, Singapore’s founding prime minister, was speaking at a dialogue to mark the seventh anniversary of the Lee Kuan Yew School of Public Policy. He said European leaders would try very hard to keep the euro zone from collapsing as that would be “an admission that their aspiration of one Europe is not achievable”. “But I do not see it being saved. But they’ll try and keep it going.”

When asked by a participant if Singapore would buy the bonds of debt-ridden European countries, Mr Lee said Singapore’s gross domestic product was a fraction of the European Union’s, and thus it is “in no position to rescue the Europeans, nor do I think that buying their bonds will necessarily rescue them”.

He pointed to the currency union among the 17 EU countries as the problem. “A fundamental problem of the euro is that it makes everybody, every European country, march to the same drummer whereas each country has its own tempo and you cannot expect the Greeks to march like the Germans, so the problem will not go away.

“Eventually, I’m not sure when because it would be an admission of the aspiration being out of reach, a two-tier Europe or even a three-tier Europe is possible but a one-tier Europe with different spending habits, thrift habits and discipline is too difficult to achieve.”

The euro came into existence in 1999 in the hope of increasing economic cooperation and growth in Europe, while shoring up the EU’s presence on the world stage. But as several euro zone countries faced debt crises, the currency union came under fire because it forced other European countries to bail out the troubled member nations, as well as denied policymakers the flexibility of monetary policy as a tool to fight recession.

Mr Lee also said he did not think the Chinese were interested in “rescuing Europe for the sake of Europe. They’re interested in buying euro bonds cheap and hope that it will give a good return”.

Reports at that time estimated that up to one-quarter of China’s reserves may be euro-denominated. When moderator Kishore Mahbubani, dean of the Lee Kuan Yew School of Public Policy, said that a strong EU would be in China’s geopolitical interests, Mr Lee disagreed. He said: “No, no, no. It’s easier to deal with 27 weak European countries than to deal with 27 united European countries.”

In May 2012, Mr Lee met his old friend Helmut Schmidt for three days in Singapore to discuss China’s rise, Europe’s crisis and key issues in the East and West.

Mr Lee was then 89 years old and Mr Schmidt, who was chancellor of West Germany from 1974 to 1982, was 93.

Both men were interviewed by German newspaper Die Zeit during the visit and they were asked if, in the light of Europe’s history of feuds and hostilities, including two world wars, the European Union was inspite of its flaws a great achievement. Below is the exchange between the two former leaders and Die Zeit journalist Matthias Nass.


Lee: No, I do not view the European Union as an inspiration for the world. I view it as an enterprise that was conceived wrongly because it was expanded too fast and it will probably fail.


Lee: We cannot achieve integration in the same way, that is for sure. But what we can draw from this is the growing insight into our common interests, free trade zones, and then we can build up on it step by step. The problem in Asia is China’s dominant position.


Lee: Free trade and a feeling of belonging together; we do not fight each other. We settle differences, that is a fact. We meet regularly; we do not threaten each other.


Schmidt: In theory, you may be right, but in reality, we need leadership figures. We need people like Harry Lee or Jean Monnet.

Mr Lee also dwelt at length on Europe’s future in the book Lee Kuan Yew: One Man’s View of the World, published by Straits Times Press in 2013. Below is an excerpt from it.

“In the last two to three years, European leaders – including David Cameron, Nicolas Sarkozy and Angela Merkel – have separately declared that multiculturalism has failed in their countries. In other words, the Turks who have settled in Germany have not become Germans, nor have the Algerians and Tunisians in France become French. Increasingly, Europe sees these people as indigestible. Race is at the root of this inability to assimilate, although religion, culture and language are also factors. But it is also not possible for Europe to stop the inflow because these immigrants meet a pressing domestic need. So we may well see European governments letting in immigrants when they can, only to hit the brakes when electoral cycles come around and far right parties outflank their moderate opponents with angry rhetoric. However you look at it, they face a catch-22.

When Europe emerged from the devastation of two world wars, the idea of European integration seemed most natural. Here was a continent of countries that held many things in common. They had all lived through the Renaissance and the Enlightenment and had come away with one European culture, a similar way of thinking about themselves and the world. Christianity was the dominant religion. Going further back in history, these countries shared a heritage from the days of the Roman Empire, which gave them a certain uniformity in the way they organised society. Yet, for all their commonalities, what came to the fore dramatically in the 20th century were their disagreements and their separateness, as they were led by their worst angels to engage in brutal, internecine and protracted wars resulting in the death of millions. Integration, then, became a central mission for European leaders. It represented their best hope for enduring peace. It was the clearest way for the countries to build on their similarities, set aside their differences and bind the fates of their nations closer to each other so that they would never again have to suffer such horrible consequences that were, arguably, of their own making.

Having decided that this was an important project, they went about building the necessary institutions. They signed the Treaty of Paris in 1951, establishing the European Coal and Steel Community, the pioneer of the EU. In 1957, the Treaty of Rome, which proposed the creation of a common market, and common agricultural and transport policies, was agreed on. The community later evolved into the European Union and was expanded to include 27 states after the end of the Cold War. Of those states, 17 adopted a single currency, the euro.

Integration holds great promise apart from just peace. A Europe that achieves singularity in purpose would have much greater economic clout and, more significantly, a much bigger voice in international affairs. Put simply, it would be a more powerful Europe. If the Europeans were to deepen its integration efforts and go on to have one finance minister, and perhaps even to having one foreign minister and one defence minister, their augmentation in hard-power terms would be enormous. Consider the people of the United States of America. They are basically Europeans who have been transferred to another continent and have dropped their tribal loyalties and their different languages. If Europe integrates to the same extent and becomes the United States of Europe, there is nothing the Americans can do which they cannot do. Europe as one entity is more populous than America (500 million versus 310 million) and has an economy one-sixth larger than America’s. Such a Europe would certainly be in the running for the world’s leading superpower.

Alas, all the signs point to the impossibility of integration. They have so far failed to make a single currency work and are not likely to progress to a single foreign policy stance or a single military. They have individual histories, each going back many centuries. Each nation is proud of its own traditions. Above all, they want to keep their languages alive – there is glory and literature behind it. America decided to start afresh and create a new literature, but Europe will not be able to do so. Even though English is already the second language in all the other countries, those on Continental Europe will never accept it as the single working language.

What then will be Europe’s place in the world? They will be smaller players on the international stage. In the face of dominance by the major powers such as the US and China, and maybe later on, India, Europe will be reduced to the role of supporting actor. Most of the European countries will be treated – quite rightly – as ordinary small states. Germany might be able to carry its weight alone, thanks to its population and its economic success, although it will not want to raise its head above the parapet because it is still filled with guilt for having killed six million Jews during the Holocaust. The British will retain some influence because of their special transatlantic relationship with America.

But otherwise, Europe cannot hope to count for much at a table where the US, China and India are seated, even if some European leaders may still be reluctant to admit it because of their historical sense of self-importance and their long experience in playing the game of international affairs. In the end, you are comparing nations of 40, 50 or 80 million against 1.3 billion Chinese and 1.2 billion Indians. The Chinese, especially, will find that a fragmented Europe makes life easier for them. They can deal with each country individually, rather than in a group. Each European country will be more dependent on the Chinese than the Chinese are on them. This will be even more so as China’s economy moves towards being driven by domestic consumption.

Europe’s declining international voice, however, will not result in its living standards falling by the same magnitude. If it can survive the break­ up of the euro, it goes back to what it was. Europe loses its voice in the world, but the countries in it have a high standard of education and skills and can make a good living. There will be some decline, but each country will reach a steady state at its own level of competitiveness. The Europeans will lead lives that are happy enough.

I write more in sorrow than in derision about Europe’s inevitable decline. I do not want to run Europe down. The Europeans are a very civilised people. Yes, they were colonialists – the French, the Belgians, the British and the Spaniards. But the French had their mission civilisatrice to transfer their civilisation to the Africans. And on the whole, the British left institutions behind them, including in Singapore. We had the rule of law, we had statutes, we had the English language and we were wise enough not to change any of that. They have helped us to grow. Their institutions were already working. What I did was to make sure that we did not subvert the institutions but reinforced them.

The Belgians, in stark contrast, left Congo in a mess. They extracted the raw materials and when the time came to leave, the place just broke up into tribal warfare. Congo is still in trouble today. In Guinea, Charles de Gaulle was so angry with Ahmed Sekou Toure, who was a forceful freedom fighter, that they ripped off all the electric and telephone wires before they left. Guinea has still not recovered from that. They did not do that to all French colonies but they did that to Guinea because Sekou Toure baited the French government. Thus, Sekou Toure inherited a non-working system, which he never got back into working condition. These things make a difference.

If the British had left me with a French or Belgian situation, I am not sure I would have been able to build it up to today’s Singapore. The British left in good grace. The main building of the Istana was occupied by the last Governor, Bill Goode, who handed it over intact, everything in order. He took me around and introduced me to the butlers and so on before leaving. From here he went to North Borneo for a while and then retired. We should be thankful for their system and their graceful exit.”

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!

Why The Average Investor’s Investment Return Is So Low

According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames.  The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow!


The above is just one of the many studies that revealed the plight of Joe investor.  While institutional investors are reaping market returns; individual investors, because of agency and behavioral issues etc, suffer mediocre growth in their assets.  Similar studies in Singapore based on our CPF accounts exposed comparable dilemma.

Expected Returns of the Straits Times Index ETF

The SPDR STI ETF is a buyable security that is representative of Singapore’s Straits Times Index.  The ETF has low costs and is priced at about 1/1,000 of the index.

In this article, I’ll attempt to estimate the expected returns of this ETF if held over the long term, assuming that the economics and valuations of the stock market in the future do not differ much compared to today.  The followings are the fundamentals of the ETF as of today:

Distribution Yield 2.74%
Price/Cash Flow 9.50
Price/Earnings 13.27
Number of Holdings 30
Price/Book Ratio 1.28
Weighted Average Market Cap SGD $26,991.30 M


At the current P/E ratio of 13.27, the ETF has an average valuation compared to the historical norms.  The estimated net asset value per share is about $3.2 with an expense ratio of 0.3%.

Expected returns (per share) = dividends – expenses + capital appreciation

The dividends per share are 2.74% of $3.2, which is equal $0.088.

The expenses per share are 0.3% of $3.2, which is equal $0.010

Since the price/earnings is 13.27 and price is $3.2, earnings per share equals 3.2/13.27 = $0.241.

After the ETF pays out a dividend of $0.088, it will add to itself a retain-earnings of $0.241-$0.088 = $0.153.  Assuming that the market prices retained-earnings at a ratio of 1.28 (just like today’s P/B ratio), the addition to book value of $0.153 will cause a capital appreciation of $0.153 * 1.28 = $0.196.

As per the equation above, expected returns (per share) = 0.088 – 0.010 + 0.196 = $0.274

Assuming that years down the road, P/E remains at around 13.27 and P/B around 1.28, in percentage terms, the expected annualized return will be 0.274/3.2 = 8.6%!  This is pretty close to the ETF’s performance of 8.39% since its inception in April 2002!

A Tale of 2 Cities

HKnSGgdp1960 HKnSGgdp2012


Look at the above 4 charts which are particularly telling about the rivalry between the twin cities of Hong Kong and Singapore over the period that stretches from 1960 till 2012.

Over this period of time, both have improved economically by leaps and bounds but at different rates relatively speaking.  In 1960, Singapore’s economy was only 49.2% of its bigger Chinese-majority sibling.  However, by 2012, Singapore’s output was larger at 104.3% of its Asian counterpart.

Population wise, Singapore is 53.5% of the more populous Hong Kong.  By 2012, it’s grown to 74.2% of its neighbor.  If we do the math, relatively speaking, Singapore is 1.529 times more prosperous over Hong Kong in 2012 than in 1960.

The growth rates of Singapore over Hong Kong are impressive – wither laissez-faire economy over free-market managed economy?