Affordability

I've always wondered about the Government's yardstick for housing affordability.

The line I've been hearing most often when faced with any complaints is that Singaporeans can always use their CPF to pay for their HDB.

This is what happened when CPF was liberalised for use in housing:

Source from singaporemind.blogspot.com

And yes, housing is still affordable...according to the Government.

With CPF liberalised for use in housing, what about retirement then?

Will there be enough?

A recent article sheds light on this issue:

... a paper presented by National University of Singapore (NUS) social work graduate Ng Kok Hoe, which highlighted that a Singaporean would draw between 8 per cent and 26 per cent of his last drawn salary from the CPF at age 65.
Mr Ng, who is pursuing his doctorate in social policy at the London School of Economics, questioned if this was enough, as other countries seemed to hit 50 per cent or more through their pension schemes.
Mr Ng's paper showed that 68 per cent of annual CPF contribution is spent on housing, while health took up 18 per cent and pensions 14 per cent.

http://www.straitstimes.com/BreakingNews/Singapore/Story/STIStory_508145.html

WHAT?? A mere 14% for pension?!!!


So what happens when you find out that 14% is, after all, not really enough?

An enlightening quote, again from the article, provides the answer.

As to whether the payout was enough, he[Dr. Balakrishnan] said one should not discount the equity tied up in housing. There are schemes which allow Singaporeans to sublet their homes or downsize for cash, letting them 'extract liquidity out of equity', he said.

So basically, from what I can gather, the government has already very kindly done all the financial planning for you!! This is how you can achieve your financial freedom:

If you are young and find housing too expensive, use your CPF to pay for the house.
Once you have retired and you discovered that your CPF is not enough for your retirement, sell your house. Or, to put it more delicately, “extract liquidity out of equity”.

Total assets left after 40/50 years of working life: 0.

Conclusion: Housing is affordable and CPF is adequate. A nice circular argument that supports both points. Masterful.

Next, perhaps we can use another more conventional tool to measure house affordability—the price to income ratio.

This is the US housing price-to-income ratio at the height of the real estate bubble. As you can see, the highest it went up to is around 7.7.

Now, back to our beloved Singapore. From salary.sg, it appears that median income for taxpayers for YA2008 is $52,350.

Since the data is derived from IRAS, please note that this is discounting the non-taxpayers.

Since HDB costing 400k-500k is hardly unusual now, let us complete a simple calculation:
(Note: 500k may not be the median hdb price. This is just a rough gauge.)

Price-to-income ratio: 500, 000 / 52, 350 = 9.55

In other words, even if you do not need food, water or any basic necessities, spending 100% of your income to pay for your house, you will still need around 10 years to pay it off. Even if you spend 50%, you will still need 20 years to pay it off.

If we were to take the median income of all employed residents (including non-taxpayers presumably), the picture becomes even worse.

...the median income for all employed residents dipped by 1.2% from $2,450 in 2008 to $2,420 in 2009...

http://www.mom.gov.sg/Home/Pages/Press_Release/20091130-Singapore_Workforce__2009.html

Annual median income: 2, 420 x 12 = 29, 040

Price-to-income ratio: 500, 000 / 29, 040 = 17.22

Even if you spend 100% of your income to pay for your house, you will need 17 years to pay it off.

Oh, by the way, about this pigeonhole you are so interested in? Please note that you aren't actually BUYING it. To be more accurate, you are simply LEASING it...

I predict that the next step to make housing more “affordable”is to introduce 40-50 year mortgages as the new norm...

The View from the Top

PM Lee 居高临下，傲视群雄...

Fudging Statistics

I don't have anything intelligent to say, but the recent unemployment data made me go digging around for more info. Readers of previous posts will know I'm pessimistic on the state of the US economy, so this post may perhaps just be confirmation bias at work.

We know the Obama administration has an incentive to report low unemployment, in light of the trillions spent in stimulus. The people want to see job growth, and the "jobless recovery" has drawn flak from all quarters.

The "good news" is that recent unemployment data shows that the unemployment rate has fallen to 9.7%.

There are two things worthy of note.

1)This unemployment data(also known as U-3) does not measure underemployment, including part-time workers, discouraged workers, etc. The alternative measure for labour underutilization would be U-6.

2)The unemployment data is "seasonally-adjusted". I don't know how it works or how it is calculated or how susceptible it is to fudging by the administration, so I shall refrain from commenting on it.

However, the released data also provides non-seasonally-adjusted unemployment rates. In non-seasonally-adjusted terms, U-3 has reached a record 10.6%, while U-6 has reached a record 18%.

(Images are from zerohedge)

Is that significant? I don't know, but 18% does sound quite high to me...

Bearish Views

A look at two significant economic powers:

1) Europe
2) China

PIGS in Europe pose a considerable risk. PIGS refer to Portugal, Ireland/Italy, Greece and Spain. All have serious debt problems within their economy. With the strengthening euro, these countries may well have to leave the euro as their currency in order to save their economies. Secondly, because banks in Europe are not as transparent as those of the US, no one really knows how much toxic assets these banks hold, though it is likely that they are as leveraged, if not more, as compared to their US counterparts. A European banking crisis may be the next to roil the financial markets. Finally, it is possible that the pound will have to undergo a significant correction, going down to the level of euro if not lower. After all, deleveraging is going to be a serious hurdle for the UK economy, which has focused on the financial sector as the main engine of growth.

With regards to China, I must firstly admit that I was surprised by the speed and the relatively smooth execution of the “recovery” taking place. My impression of China was that with a burgeoning population and a repressive government, the trade between the government and the people seem to be that as long as the people have jobs, they will not create much social unrest (much like Singapore years ago). Yet, with China’s notorious bureaucracy, it could be that in a bid to create jobs, the stimulus money is being used for unnecessary and wasteful projects, such as constructing buildings no one wants to occupy or tearing down perfectly fine structures . A prime example would be The Great Mall of China. Adding more supply to a world already stretched with overcapacity? I dunno, but it sure doesn’t look like a “solution” to me. Furthermore, with stocks and real estate soaring in China, there seems to be a bubble forming. We all know that Chinese (individuals) have significant savings, yet it is a fact that the more money people pour into shares, the less the earning potential of the companies relative to the price they command. When companies become more interested in making money off their shares than their core businesses, it is a stark warning that a bubble is forming.

On another note, despite all the so-called recovery, I find the markets more fragile than ever. With asset classes mirroring each other in their relentless march upwards, an external shock from reality will be enough to send everything crashing back down. Deleveraging is far from done.

Let us wait for the pop.

US Economy and its debt 2

By pursuing the path of devaluation, the administration is invoking the mind-numbing logic of solving debt problems by issuing more debt.

With the government taking on more than one trillion(that is one million million) dollars of liabilities in this crisis, it appears that the government does not intend to let debt destruction take its natural course. With the bailouts, debt in the system is preserved, not destroyed.

A weakening dollar does make sense. First, it allows both domestic and export industries to become more competitive with foreign-made goods. Second, perhaps just as important, the government can slowly inflate away its debt.

However, one interesting point to take note is to ask yourself how long can the US keep up inflation to wipe away its debt. Who has the most to lose from the US inflation? A breakdown of the debt holdings might shed light on this issue.

It is one thing if “America owes her debt to herself”. However, recent times have proved that America increasingly relies on foreign countries to lend her money. An increasing amount of US debt is being held by foreign powers.

Together, China, Japan and Oil Exporters made up more than half of total foreign ownership. With so much debt being held by foreign powers, the US seems to be nervously whistling past a huge potential landmine by inflating away its debt. Will foreign debt holders really let the US dollar slide with nary a complain? Already, the rumblings of dissatisfaction from China is becoming louder. (By the way, OPEC has, through past history, shown itself to be quite capable of drastic action if their demands are not met eg. oil embargo).

Turning to other issues, one side effect of the weakening dollar and low interest rates is that it becomes relatively cheap to borrow US dollars and invest them elsewhere is risky, higher-yielding assets. This is termed as a carry trade, and it pushes asset/commodity prices higher, as long as the dollar remains weak and interest rate remains low. According to Nouriel Roubini, this is now helping to fuel another asset bubble. To quote him,

“We have the mother of all carry trades…Everybody’s playing the same game and this game is becoming dangerous.”

Once the dollar stabilizes and interest rates rise, it no longer becomes profitable to borrow in US dollars. To cover their short positions, there will be a massive flow of money back into the US, which might spark off another large decline in asset prices. With equities worldwide soaring, it might be good to ask yourself if the economic fundamentals are there before investing. Once the liquidity is drained away, can share prices remain at their current level?

How long can the weak dollar persist? While everything seems fine and dandy now with share prices rocketing, closer examination reveals plenty of hidden risks and uncertainty about the future. While the Fed has kept interest rates low in order to spur business, much of the easy credit seems to have been directed into asset/commodities market, fueling another asset bubble, instead of into the real economy and creating new jobs.

When a government owes a lot of debt, how it decides to pay off its debt is equivalent to how the debt burden is shared. Through deflation, the debt burden is shifted to the taxpayer. Unemployment will be higher, credit is tightened, and the economy will contract. Through inflation, the debt burden is shifted to the savers, where the real value of their savings will plunge in step with the declining dollar. Sad to say, history has shown that typically, the government will choose the path of inflation. While deflation might bring about a swifter and stronger economic recovery, the future is never certain and there is no guarantee the economy will rebound. Meanwhile, the pain is certain to be a lot sharper (Eg. Britain after World War I). Inflation, on the other hand, as long as it is not too drastic, typically reduces the pain of restructuring the economy. Of course, the trade-off is that the pain will persist for much longer as inefficiencies are slowly worked out of the system. As for the savers, about all they can do is to blame their luck and hop around in impotent fury. Life is unfair after all.

结论呢？就是我们一起去吃大便吧。

US Economy and Debt

One of the main causes of the current financial crisis is the fact that too many Americans have become addicted to the debt-fuelled lifestyle. By buying things they cannot afford, putting everything on credit and getting into debt that they are unable to pay off, the financial crisis is exacerbated. Let us take a look at this illuminating graph.

While national income only grows modestly, debt has exploded upwards. How did the US accumulate all this debt? It is due to the easy credit that has become the cornerstone of the relationship between developing China and America. Niall Ferguson, author of The Ascent of Money, termed this relationship Chimerica. China did the saving, America did the spending. China exported, America imported. China lend, and America borrowed. By pursuing an export-oriented economy, China was helping to finance the debt-fuelled American economy. As China poured its surplus back into buying Treasury securities, thus keeping its currency pegged to the dollar, interest rate in the US is artificially lowered. With the economy awash with easy money, America is thus able to pursue a debt-fuelled economy, where banks tend to lend recklessly to individuals and individuals cand spend in excess of their earned income.

Obviously, a debt-fuelled economy is unsustainable and cannot last forever. Debt has to be repaid, one way or the other. How it is going to be repaid will depend very much on what the US intends to do to the dollar.

Typically, when you owe a lot of debt, you will have two routes available to pay off the debt—deflation or devaluation.

Let us first focus on deflation. As was mentioned above, because of Chimerica, America has been awash with easy credit for a long time. This led to asset price inflation(eg. housing market, stocks, etc).

Meanwhile, income does not seem to enjoy the same surge upwards.

Ultimately, debt must be paid off using earned income. A look at the above graphs tells you that this is well nigh impossible unless one of the following happens—income has to rise significantly, or significant debt destruction has to occur. To quote Andrew Mellon, “Liquidate labor, liquidate stocks, liquidate farmers.” After so many years of asset price inflation, we are now due for asset price deflation. Debt destruction will have to occur, hopefully in as orderly a fashion as possible, to bring asset prices down where people can realistically pay them off using earned income.

Unfortunately, such an approach is likely to be a political hot potato. It is almost certainly to involve a lot more pain in the short term, setting off a chain of debt defaults and bankruptcies and increasing unemployment. Certainly, it will face opposition from powerful lobby groups in Congress. Going down this path, the pain will be sharp. However, once the economy has recovered, at least, the rottenness will have been purged out of the system.

Risk and Uncertainty

Not too long ago, I had an argument (discussion?) with two other people, on an issue regarding risk management. I maintained that despite all the actuarial science that insurance companies utilize, they still tend to underestimate risks due to the uncertainty factor. By uncertainty, I refer to events that are unpredictable, events that are not covered by past history, and hence left out in the calculations so integral to the decision-making process. As a result, with the underestimation of risks, insurance premiums are lower than they should be, and companies can go bust quite easily. I cited the example of 9/11 to illustrate my point, where several insurance companies posted enormous losses because they did not factor in the possibility of 9/11 occurring.


Meanwhile, my two contemporaries dispute my point, claiming that insurance companies do know the risks involved, that their actuarial science is impeccable, and their models solid. The fact that so many insurance companies went bust because of 9/11 is not because of a flaw in their calculations or because they failed to factor in uncertainty, but because they are “suay”.


Apparently, according to them, if your model states that there is a one-in-a-trillion chance of this event occurring and this particular event still happens, you are just “suay”. The model is correct. The chance is still one-in-a-trillion. The fact that it happens simply means that you are unlucky.


I disagree. For me, when it is a one-in-a-trillion chance (statistically insignificant) and the event still happens, obviously something is wrong with the model and it needs more work. Risk premiums need to be adjusted upwards. More factors need to be considered.


In the end, none of us succeeded in convincing the other party.


To further substantiate my argument, I would like to borrow an example from The Black Swan by Nassim Nicholas Taleb. Imagine yourself as a turkey on a farm, well-fed and well-cared for all throughout your life. Nothing negative has ever happened to you, and using past history, you extrapolate and think that nothing bad is ever going to happen. Meanwhile, Thanksgiving Day draws nearer and nearer. What is the probability that you are going to get hauled off to the slaughterhouse in the next few days? By using past history, the probability is zero. Nothing bad has ever happened, so why should it happen now? But in actual reality, with each day that passes, the probability jumps exponentially, until eventually, Thanksgiving Day arrives and the unsuspecting turkey is in for a nasty surprise.


Risks are quantifiable. Uncertainty is not. Life is about uncertainty. Please don’t torture reality to fit your “models”.



Or maybe, I’m just a cynical skeptic who doubts everyone and everything.