This has probably got to be the most talked-about statement in the Singapore Parliamentary budget debates right now. I don’t think many people doubt the truth of the statement that Finance Minister Tharman said but unfortunately, he didn’t spell out the assumptions.

Good thing then, that the good minister in charge of the policy, Khaw Boon Wan spelt it out in an article in the papers today (link here):

But he said Mr Tharman was referring to a two-room Built-To-Order (BTO) flat.
That’s because such a flat would cost a first-time applicant – who earns S$1,000 – about S$40,000, after subsidies.
The mortgage payment, said Mr Khaw, can be fully paid through the applicant’s CPF, without incurring any additional out of pocket money.

There you go.

I’m curious though. How affordable would this be for a family earning a combined income of $1000 a month. By affordability  I mean that they not only have enough for day-to-day survival* but also enough in the event of unfortunate circumstances and long-term retirement needs.

So I calculated how much and how long a family with income of $1000 a month needs to repay off the $40,000 that is the cost of a 2-room flat. This was easily done with the help of the mortgage loan calculator from CPF. It makes one big assumption that the housing loan rate is 2.5% throughout the tenure of the loan (big IF here since the loan rate is pegged to CPF OA + 0.1% i.e. it floats. I don’t expect things to stay the same for 20 years and neither should any reasonable being since there is no promise to in the first place.)

Ta-dah~! (click for bigger image)

So basically, a household earning $1000/month can pay off for their flat (assuming it costs $40,000) in 22 years with 20% (or $200) of their monthly income and all these can be paid off by their CPF contributions (refer to table here). All bets are off if interest rates rise.

The next question that a policy planner has to ask is: is 20% of their monthly income spent on housing too onerous for a family that earns $1000 a month? This is where I have no answer because there are so many schemes that take so many forms in place for helping low income families. Usually these take a targeted approach too e.g. rebates for utilities, allowances to help with educational expenses etc etc. The permutations are so numerous (because a family earning $1000/month may qualify for some but not all these schemes) that it is difficult to make fair judgement here.

My personal gut feel is that most families that are talked about in this scenario will take up the flat since it uses their CPF monies and frees up whatever monies that are used on housing at present (presumably rent) for day-to-day expenditure.

Will they  face greater problems in the future? I say, yes, because assuming there is no income mobility, these families will then spend all their CPF monies, earned during the arguably most productive period of their lives, on housing. The extra disposable income gained from the reduction of out-of-pocket expenses on housing will probably be used on some manner of day-to-day consumption (since it’s not likely that they have a place to park it for returns that are inflation-beating).

In my opinion, policies need to be created that take considerations like this in mind. If buying a flat on $1000 per month household income impairs your ability for a secure financial future, then in my opinion, the policy is not a sound one and should be chucked in the bin like a draft that has errors.

By the way, I have a good suggestion to a lot of Singaporeans’ wishes- How about pegging the CPF-OA interest rate to inflation?

*Although a family on monthly household income of $1000  might be helped along by some other schemes, public or otherwise.