Can 'we' afford that HDB flat?

I read with interest an article in the Straitstimes on Saturday, 22nd November 2008, "The longest crisis ever?". Much have been mentioned about the economic crisis, credit crunch and technical recession and the article is not really interesting at first glance. However, what really caught my eye was the fact that in each economic crisis that hit Singapore, CPF employer contribution rate was tweaked time and again to save jobs in Singapore.

Hence, as a follow up to my last article on property prices, it brings me to wonder what is the maximum price tag on a HDB flat that a young couple, just starting out, can afford comfortably if it is to be fully financed by CPF funds. i.e. not a cent of cash.

Current CPF contribution Rates and Amount

I began with a hypothetical scenario biased on the side of optimism. If this fortunate couple can only afford a HDB for price $X, surely less capable ones shouldn't be overstretching themselves by getting anything more expensive.

The following table is drafted for a successful, fortunate individual with the following profile:

• Age: 25
• Salary: $4,500 per month (maximum CPF contribution for employee is capped at $4,500)
  
• Average bonus: 2 months (inclusive of 13th month)
• Profile: Able to be gainfully employed until age 62 (earning at least the above)

A few points (and simplifications for more concise analysis) to accompany the above table:

1. Total contribution drops progressively from age 50, from a high of 34.5% to a low of 10% after age 65.
2. Maximum contribution (capped at a salary of $4,500) to Ordinary Account drops progressively from a high of $1,035.40 at age 35 & below to $45 after age 65.
3. The maximum accumulated CPF funds column displayed accumulated CPF contributions up to that juncture, e.g. by age 55, the individual would have accumulated $173,961,71 in the special account.
4. Funds in the ordinary account is not compounded because all of which will be used to pay for the montly HDB loan mortage.
5. Funds in the special and medisave account are compounded annually at 4%.
   

Coincidental Assumptions

• This individual found a corresponding successful and fortunate partner with equal, if not better, earning power and employability
• Both initially earned less than combined $8,000 on application for their love nest
• Both got promoted and earned more than $4,500 each when they began to service their loan at age 25.
  
• They choose to take the maximum allowed 30-year HDB loan.

Under such a scenario, their combined mortage payment power is two times of $378,054.34 or $756,108.68 at the end of 30 years, or age 55.

Using the Total Interest Calculator available on CPF website, $756,000 is sufficient to pay for a principal of $525,000 and interest of $231,642. They can afford to buy a flat that cost nothing more than $525,000 if they only want to finance it solely with CPF funds and not a cent in cash.

CPF contribution rates in major crisis since 1985

The following rates were sourced from either the CPF website or from an article, "The longest crisis ever?". The CPF employer rates were revised down during each crisis and restored (though seldom to the initial rate before the crisis) slowly thereafter.

1. In 1986 (cost outpaced productivity), employer rate was cut from 25% to 10%.
2. In 1998 (Asia Financial Crisis), employer rate was cut from 20% to 10%.
3. In 2003 (SARS), employer rate was cut from 16% to 13%.
   

Historically, CPF employer contribution rates had been slashed (towards 10%) in each crisis to bring down cost and hence save jobs, payment power via CPF ordinary account will hence be threatened in each juncture.

Buy within one's means

Many new 5 room (and even some 4 room) flats launched recently are in excess of $525,000 each. This brings one to wonder whether those young couples who bought them can actually afford them comfortably. Given major risk factors like employer contribution rates and employability as one ages, the chance for a cash top up sometime down the road is quite material.

If new flats are expensive, resale prices are even more prohibitive.

Conclusion

If the above couple was really able to fully finance their flat with their CPF ordinary account funds, they'll have about $273,396.74 each should they retire at 62. Buying a 30 year,2.5% compounding annuity then will translate to a monthly payout of $1,061.97 or equivalent of $510,40 in today's dollar (assuming inflation rate of 2% over the next 30 years), not really a glamorous sum. But since the flat is fully paid with CPF, they should be cash rich by then to retire comfortably...provided they are prudent with their spare cash.

Singapore Dollar to weaken against the US dollar?

I read with interest the recent prediction by Morgan Stanley that Singapore Dollars will depreciate against the US dollar to $1.80 by next year. I decided to explore this prediction further, fundamentally.

Monetary Authority of Singapore Policy (MAS) on Singapore Dollar (SGD)

A check with policy statement of MAS's website shows that MAS manages SGD exchange rate. The following is quoted from the website:

... The objective of Singapore's exchange rate policy has always been to promote sustained and non-inflationary growth for the Singapore economy. Since 1981, monetary policy in Singapore has been centered on the management of the exchange rate. MAS manages the Singapore dollar against a basket of currencies of Singapore's main trading partners and competitors.

The trade-weighted exchange rate is allowed to fluctuate within a policy band, and where necessary, MAS conducts direct interventions in the foreign exchange market to maintain the exchange rate within this band. The exchange rate policy path and the band are regularly reviewed to ensure that they remain consistent with underlying economic conditions. ...

In order words, MAS manages SGD exchange rate directly and regularly review the strength of SGD against major trading partners for sustained non-inflationary economic growth for Singapore.

In fact, MAS reviews the exchange rate policy twice a year and publish them on its website.

Trade-weighted Exchange Rate

It is explicitly mentioned in the policy that the exchange rate is trade weighted. MAS neither reveal the exact currencies in its basket of currencies nor their weightage, thus I decided to compile a list of major trading partners of Singapore and estimate how the various currencies' will affect SGD.


A few points to note on compiling the above table:

1. Other than the interest rate which is current, the rest of the data are full year results for 2007.
2. Estimated trading volume are estimated by totaling import and export to these economies. These data are taken from Statistics Singapore.
   
3. Due to the difficulty (or rather, my laziness) in compiling data for the entire European Union (EU), I estimated EU's data with France and Germany, two large entities in EU that are somewhat representative.

Major Conclusions that can be drawn from the table above

1. Simplistic trade weighted equation?

In the simplest case:

SGD = 0.18 x MYR + 0.15 x RENMINBI + 0.145 x USD + ...

If SGD exchange rate is derived simplistically as above, SGD's strength (or weakness) against any single currency will just depend on that currency against all others in the basket. In other words, SGD should not fluctuate much against major currencies. If so, the recent USD devaluation is less about the strengthening of SGD, but more of a weakening of USD against all other currencies.

2. Strengths of currencies in the basket

Assuming most (if not all) of the currencies in the table are found in the basket and my simplistic trade weighted formula approximates the SGD exchange rate, then the strength (or weakness) of SGD will very much depend on how well these currencies perform.

While many factors affect the strength of a currency, important ones include economic growth, trade balance, current current balance, central bank rates etc. Prolonged current account deficit can be sustained so long as influx of capital continues, either due to high central bank interest rates (high yield attracts capital) or high demand of goods and services (including commodities).

Australia is a case in point. Its account balance is highly negative (even higher than United States in terms of percentage of GDP) but it has sustained so for a relatively long time due to its high interest rate and huge demand for its resources. With the onslaught of global financial crisis (sparking a cut in its interest rate) and ensuing drop in demand of its raw resources, Australian dollars plunge against major currencies.

Looking at the current central bank interest rate and their current account balance of these economies, those with huge account deficit, high interest rate or both are most prone to weaken. These include, United States, Australia and United Kingdom. Together, these accounted for 21.3% of 'my' estimated basket. If these were to weaken against the rest of the 78.7% of the basket, then it is more probable that SGD will strengthen against them.

Conclusion

Though being a major and important trading partner, Singapore don't just trade with United States alone. The basket of currencies is meant to price SGD to sustain Singapore's economic growth. Since US borrow in USD (selling US dominated bonds), they can and are already printing USD as much as they need, it will be quite surprising if USD does not depreciate against major currencies and consequenty against SGD. Unless MAS intervened (directly or indirectly with a policy change) for the sake of Singapore export oriented economy, it is more likely SGD will appreciate against USD.

I bought Courage Marine on 3rd November 2008

About Courage Marine

Courage Marine Group Limited is a relatively young and small dry bulk shipping company serving mostly in Asia and Russia. It currently run about 10 carriers, consisting mainly Panamax and Hanysize series. It transports dry bulk commodities such as coal, cement, iron ore, minerals and wood chips.

Uncle must be crazy I - logical analysis

Dry bulk shipping demand is tied quite closely with demand for commodities. With the bursting of the commodities bubble, the dry bulk index (which measures the demand for shipping capacity vs the supply of dry bulk carriers) had practically collapsed (from a high of above 11,000 sometime in May 2008 to just over 800 now). In fact, shipping rates have fallen below the cost of running the ship!

It might seem surprising, why then did I raise cash to buy into a sinking ship? The reason is actually very simple. Shipping is known to be highly cyclical, with huge trough-to-peak fluctuation across boom bust cycles. Since, shipping is at its doldrums now, what better time than now to buy something at its fundamental bottom (or rather, somewhere near the bottom).

The following chart compares Courage Marine's share price with BDI index for the last 5 years. It can be seen that Courage Marine's share price (top chart) tracks BDI index (bottom chart) quite closely. The former can easily be a proxy purchase of the BDI index.



The BDI index is 829 as at 7th November 2008, just another 829 points to go before shipping becomes free. Thus I would assume that the current share price of Courage Marine already factored in the current depressed shipping rates.

Uncle must be crazy II - fundamental analysis

If I'm so sure I am getting in near the bottom of the shipping cycle, what makes me think Courage Marine can survive until the shipping boom? There are several strengths in Courage Marine that I see could help it ride out this winter:

1) Debt free shipping play:

The current economic crisis centres around a severe tightened credit atmosphre where banks are not willing to lend to businesses and are driving financing cost sky high. While many shipping firms are highly leveraged and any failure to refinance their debt will mean their demise, Courage Marine on the other hand consistently maintained a healthy balance sheet with net cash position. Courage Marine can practically hibernate without much of a problem.

2) Second hand vessels:

It is part of its business strategy to acquire and run only second hand vessels. While these vessels have higher operating and maintainable cost, the group can count on the experience and expertise to keep these cost low. The lower capital cost of investment required and resultant lower depreciation of these vessels resulted in higher profit margin. It is the aim of the management to renew its fleet with younger second hand vessels when the opportunity arises. Given its healthy cash horde of about USD 54.8 million (or about 7.5 SGD cents per share) after taking into account recent acquisition and disposal of vessels, they are in a good position to acquire new and good vessels should a fire sale by other shipping firms occur.

3) Small and nimble

By industry standards, Courage Marine is a very small player with less than 10 vessels. They could easily ride on excess demand via spot market or idle their ships when demand plunge suddenly like the current situation.


Conclusion

As I had said in earlier post, I would try to avoid leveraged businesses until this credit storm blows over for fear that they are unable to secure debt refinancing. I had already averaged into First Ship Lease Trust and that's about the maximum risk I'm willing to take.

The current stock market tumoil continues to open up opportunities to buy into sound businesses at attractive prices and acquiring Courage Marine to take advantage of the eventual trough-to-peak flunctuation in shipping cycle is just the beginning. I am still waiting for my year end bonus, if any, to continue my buying spree.

Property Sale - Anytime Soon?

Rationale

I had stayed in Queenstown all my life. After getting married, I found that I could not afford a HDB flat there and moved to Sengkang. In fact, during the time I'm looking for a flat, a new 4rm flat in Queenstown actually cost much more than a new EA in Sengkang. It has always been a dream for me to move back to Queenstown. It is so much more convenient there, no jams, no ERP... With the subprimed induced stock market crisis that is now spreading into the real economy, I might realised my dream of moving back sooner than I thought.


HDB supply and prices

A check with the HDB website seems to indicate that about 8000 (BTO) units are planned each year. A further look at the price index of HDB resale flats shows that HDB prices tend to be sticky. At each of the last few crisies, e.g 1997, 2000, the price takes about a quarter or two to come down. Thus it is quite understanble that the resale price index actually rose 4.2% in 3Q 2008 from the previous quarter even though Singapore already went into technical recession.

Thus the recent DBSS at Bishan where a 5rm can fetch up to $739,000 could easily mark the peak for new HDB flats. At $525 per square foot for a 99 year lease hold property, one can easily find a full (but resale) condomium in reasonable locations.


Private property supply and prices

A check with the URA website shows that there are 10,007, 6,049 and 8,450 units under construction and scheduled to be ready by 2009, 2010 and 2011 respectively. Most of these projects are located in the central regions. A further look at the residential price index shows that private property came down faster compared to HDB prices, but still slower then the stock market and technical economic downturn. The index for 3Q 2008 declined from 2.2% to 5.3% from a quarter ago.


Outlook for private (landless) property

I already had a HDB flat and the last thing I will do is to sell it and 'upgrade' to a private property. I'd rather buy another one if the price is right. (HDB flats bought with HDB loan are shielded from creditors in the worse case scenario of bankruptcy). Looking ahead, I am optimistic the prices of lower end, 99 lease hold projects in reasonable locations will come down to 'earthly' levels for the following reasons:

1. A sheer number of projects due for completion within the next 3 years
   
2. The local banks are turning cautious in granting loans for property purchase
3. The economic downturn could affect those who live beyond their means and could not substain the hefty monthly installments of the property bought during the housing bubble in 2007.
   

Conclusion

I will be monitoring the private property transacted price on URA's website closely for potential bargain hunting over the next few years. Hopefully, my dream can be realised before 2012, else I will be rooted to Sengkang ... might not be a bad thing afterall.