Are public housing prices crashing?

We would remember a recent newspaper headline which announced that the government was looking at how to reduce BTO flats' prices by 30%. Wah! 30%?!

What would happen to all the people who bought their BTO flats recently? Should potential flat buyers wait to buy cheaper flats in future? Are we going to see public housing prices crashing?

I just read Minister Khaw's blog on the matter and he said:

"...if we offer such a low-cost housing option, it must come with restrictions to differentiate it from the existing BTO flats...

" Obviously, if we offer such an option, these restrictions of a longer minimum occupation period, or shorter lease or no resale in the open market will only apply to the new buyers, and will not apply to existing flat owners..."

I personally feel that a tier of meaningfully less expensive public housing is a good idea. People would have a choice of whether to buy a cheaper flat which they could not sell in the open market for a profit or a more expensive flat which they could possibly make money from in future.

The motivation for having less expensive public housing made available should be to meet the housing needs of certain groups of Singaporeans. I agree that these flats should not become money making tools for their owners.

Read Minister Khaw's blog:
Sleepless over possible HDB price reduction.

Inflation adjusted retirement income plan.

I like easy-to-understand financial products. I am not very good with numbers and I got flummoxed by complicated structured deposits offered by the banks before. 

Totally confusing.

I also get very confused by complex insurance products. My insurance agents know not to offer me anything that is too complicated. 

I usually tell them not to call me and that if I need something, I will call them.





I have bought products from AIA, Prudential, Great Eastern Life, NTUC Income, Aviva and AXA before and many are still in force. There was UOB Life as well but it was bought over by Prudential.

Today, I came across a product by AXA which claims to be an inflation adjusted retirement income plan. 

Sounds good, doesn't it? 

Intrigued, I decided to have a look see.

However, one look and the initial good feeling is gone:

OK, if you think I am going to start on how we can get better returns by doing our own investment, that is not what I am going to do. I am just going to share an observation which is I just don't think that the product lives up to its claim of being inflation adjusted.

In the example, the product says that there is a 3.5% increase in guaranteed annual income payout year after year from age 65 to 80 but does it provide us with inflation adjusted returns on our capital? 

This is my first impression when someone tells me that a plan is inflation adjusted.

In the example above, a total of $285,300 was contributed over 15 years or $19,020 per year. 

Then, there is a waiting period of 5 years (accumulation period) before a yearly payout over the next 15 years kicks in.

Almost 47% of the payout is non-guaranteed. The guaranteed portion amounts to S$463,500.





Assuming that inflation is lower than 3.5% per annum and that it is a more normalised 3% per annum, that $19,020 paid at age 45 would have to be $34,352.22 to keep its purchasing power intact at age 65. 

In the example, age 65 is when the first guaranteed annual income is received. Instead of $34,352.22, it is only S$ 24,000!

Each payment from age 65 to 80 would have to be at least $34,352.22 in order not to lose any purchasing power, year on year.

The nice chart with the lengthening bars over the next 15 years hides the fact that from age 65 to 75, the purchasing power of the payouts in those years are much reduced. 

Only at age 76 would the guaranteed annual income exceed $34,352.22. 

So, the first 10 years of guaranteed annual income are not able to compensate for inflation!





I don't need the annual payout to grow 3.5%. To me, that is a gimmick to give an appearance that the payouts are inflation adjusted. Just give me $34,352.22 every year as this would truly be inflation adjusted, assuming a 3% inflation rate per annum.

The total guaranteed annual income over a 15 year period should, therefore, be $34,352.22 x 15 or $515,283.33 to make the offer palatable. 

This is 11.17% more than what is guaranteed by the insurer.





Of course, they can say that there is a non-guaranteed component of $407,260 which could be paid out at age 80. 

Well, not only is 80 a long way to go, we need greater certainty at retirement and non-guaranteed just doesn't cut it.

This product is a no go for me.

Related posts:
1. Will I retire happy?
2. Good wife worries...