Taken from Straits Times/Newpaper
A cash crunch is coming
But careful planning will loosen up the money for home-buying in
future
BY LARRY HAVERKAMP
Feb 15, 2005
HOLD on to your cash. A colossal cash crunch is coming. Plan for it
now or you may default on your obligations.
Why expect a cash crunch? Ten reasons are listed below. Each will
make home purchase more difficult.
1) Minimum sum. It increases through 2013 and indirectly reduces
the amount available for housing by restricting the money in your
ordinary account that can be used for housing.
2) The 120 to 150 per cent valuation limit. It increases through
2008 and reduces the amount of CPF you can use for housing financed
though bank loans.
3) The Available Housing Withdrawal Limit (AHWL). It limits use of
your CPF money for housing until you have met the minimum sum
requirement. AHWL restrictions increase through 2013. (see report
below.)
4) Required cash downpayment for HDB bank loans. It will increase 2
per cent per year from 4 per cent now. It levels off at 10 per cent
after Jan 1, 2008.
5) Home-related charges. These include service, conservancy and
other charges relating to the use of the property, including stamp
duty and other taxes.
None can be paid for with CPF savings. All must be paid for with
cash.
6) Employers' CPF contribution. It has dropped from 20 per cent in
1998 to 13 per cent now. It means incomes declined 7 per cent with
all of it coming from the CPF ordinary account, thereby reducing
money available for housing.
7) Don't forget the salary ceiling for CPF payments. It has been
lowered from $6,000 per month to $5,000 now.
Its final drop to $4,500 will occur after Jan 1, 2006. It means
that monthly earnings over $4,500 will NOT receive CPF
contributions. This reduces CPF balances as well as incomes.
Increased Medisave contributions. Once you hit 55,
you must meet the 'CPF minimum sum' requirement. Including the
inflation adjustment, it rises to about $130,000 by 2013, half of
which may be pledged with property.
After satisfying that, you must meet your Medisave minimum sum
which is $5,000 now and hits a ceiling of $25,000 in 2013.
Like the minimum sum, it reduces your CPF ordinary account that
would have been available for housing.
9) Rising interest rates. Interest rates are expected to rise as
the economy improves. This will increase monthly mortgage payments
AND causes you to hit the valuation limit sooner.
10) Car loans have eaten into available cash. Why? Because car
prices are falling due to cheaper COEs.
Banks have also sweetened the package with 10-year loans, no
downpayment and cashback deals.
Many banks also give referral rebates to dealers, part of which
gets passed to the buyer.
All this has proven irresistible to buyers and produces a large
cash obligation lasting for the 7 to 10-year term of the
loan.
It isn't easy to reduce since a unique feature of car loans is you
are penalised if you repay the loan early.
WHAT TO DO?
These rules max out in 2013. Until then, they will reduce your CPF
ordinary account and cash balances.
Everyone expects this to make it harder to buy a home. I don't
think so.
Here's why: First, the CPF Board's rules are beneficial as they
will help to keep home prices low and affordable.
Second, there is a way for you to buy as big a flat as before. But
you MUST cut back other investments, especially those requiring
long lock-ins.
Examples are guaranteed funds, structured investments, regular
premium ILPs and life insurance (including whole life, endowment,
education policies) and all funds charging high initial
commissions.
And unless you can really afford it, don't buy a car.
Instead, put that money into a home. Here's why:
(i) A home offers high long-run returns, in excess of 6 per
cent.
(ii) A home is usually held for the long-run, thereby reducing the
risk of loss.
(iii) A home is one of the few purchases you can live in and enjoy
while you invest.
(iv) A home offers high leverage since you can borrow up to 80 per
cent of the home's value. Leverage amplifies returns.
(v) A home, especially a large one, fits with recent tax changes
that offer huge incentives to have up to 4 children. (A family of 6
needs a larger flat.)
Looking back to the 1970s and 80s, people who invested in 3-room
flats gained more than those who rented.
Four-room flats appreciated more than 3-room, and five-room flat
prices rose more than 4-room.
History shows us that the larger the housing investment, the
greater the returns.
My advice: A home is a wonderful investment. Downsize it if you
must. But downsize all other investments first.
3 rules that will use up your cash through 2013
Here are three little-understood rules that will increase cash
requirements for housing over the next three to eight years:
1) First is the CPF withdrawal limit (CPF-WL). It is 120 to 150 per
cent of the valuation limit (VL). It applies to private and HDB
flats financed with bank loans.
The restriction depends on when you buy your home. It hits a
maximum for homes purchased after Jan 1, 2008. Then the amount you
pay from your CPF ordinary account cannot exceed 120 per cent of
your VL.
2) The VL is the lower of the purchase price OR the valuation of
the property.
The VL translates to roughly 20 per cent payment in cash (depending
on the interest rate and term of the loan) to be paid over the term
of the loan.
If a homeowner has a 25-year mortgage and reaches the VL after 18
years, it will require early repayment of the mortgage unless he
meets AHWL (see below). To allow the CPF member time to arrange
cash payments, the CPF Board gives the CPF member 3 months notice
prior to the VL being hit.
3) If you have hit the VL but not the CPF-WL, all is not lost. You
may still be able to use your CPF ordinary account IF you have
satisfied the Available Housing Withdrawal Limit (AHWL).
This rule applies to all except new HDB-financed flats. It requires
you to meet a minimum sum requirement.
AHWL requires 80 per cent of the gross CPF savings in your Ordinary
and Special Accounts in excess of the prevailing Minimum Sum
(currently $84,500) OR the available Ordinary Account balance after
setting aside the Minimum Sum cash component, whichever is lesser.
(Gross savings include savings already withdrawn for housing,
education and investments.)
The minimum sum stands at $84,500 now and increases to $88,000 on
July 1. It keeps rising until July 1, 2013 when it tops out at
$120,000. But that is the minimum sum 'in 2003 dollars'. It must be
adjusted for inflation.
If inflation averages around 1 per cent per year, the actual amount
to be set aside will be about $130,000.
Offsetting this somewhat is the rule that you can pledge your
property to meet up to half of your minimum sum requirement. For
example, it will reduce the $130,000 minimum sum to $65,000.