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Sunday, 23 November 2008

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.


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.

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Blogger ntuchartist said...

Hi, mind doing a link exchange with me?


25 November 2008 at 17:33  
Blogger Market Uncle said...

Add a link to your blog. Thanks

2 December 2008 at 22:49  
Blogger Market Uncle said...

When I wrote this article, my main objective is to derive the maximum ceiling in the housing loan a young working couple should take for their first HDB flat, if they wish to pay for it comfortably solely with CPF.

I already assumed the 'best' case scenario with a string of beneficial coincidences (e.g. starting pay exceeding $4,500 and unrevised CPF contribution rates). The MAXIMUM reasonable loan ceiling came out to be $525,000.

A typical couple that just started working for a few years (excluding any support from their parents in terms of down payments etc) can most probably afford less and will have to top up the installments in cash should the employer's contribution rates go down due to economic slow down within their loan period.

Thus I am actually quite surprised so many are willing to take up housing loans way above $525,000 in recent purchase of HDB resale flats or new flats under DBSS.

6 December 2008 at 16:00  
Blogger Patrick said...

Hi Uncle,

Looking at your MedisSave column, the max ceiling is $34,500 in 2008 & $37,000 in 2009. Hence your Total accumalated CPF at age 62 would be definately far greater than $273,396.87

17 July 2009 at 17:10  
Blogger Market Uncle said...

Hi Patrick,
I did the chart sometime back and didn't have the excel sheet now. Without redoing the calculation, the main objective of the exercise is just to proof that cpf contribution is insufficient to pay off huge housing loans quantum and cash top up becomes necessary. And any unforeseen CPF contribution rate cuts will mean even higher cash top ups.

19 July 2009 at 23:15  

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