The HDB-CPF Link: A Scheme that Benefits, or Simply a Big Con?

redwire-singapore-hdb-buildingOnce upon a time, when HDB was first started in the 1960s, flats were really sold at close to cost and followed the model of true subsidized housing. In the 1970s, flats were sold on a cost basis, in other words with no mark up by the HDB. You could buy 3 room flats for as little as $7,000 and 5 room flats were $30,000.

In the 1980s, HDB started to include land costs into the pricing, for what reason, no one knows as HDB dwellers do not own the underlying land. Prices then went as high as $140,000 for an executive flat. In the 1990s and 2000s, we saw the start of the sharp rise in prices when HDB included “market “ price of land valuation to its construction cost, resulting in above $400,000 for the price of new flats today. We will examine the reason for this later.

In the first couple decades of the HDB’s existence, you also had to sell the flats back to HDB at the price that you bought from them, if you decided to change residence. This prevented speculation from profit taking on the flats. At its peak, with a population under 2 million, the HDB was building as many as 30,000-40,000 units a year. These were the golden days when HDB was truly affordable.

The HDB’s formula was very simple. Acquire land from private owners for a fraction of the cost using the Land Acquisitions Act which restricted what the Govt can pay in compensation to the land owners (my readings have indicated 25cents on the dollar), then rezone the land to allow for higher density. Tender the construction of the blocks with the winning companies using cheap labour (usually Thai or Bangladeshi workers), cheap material, and all financed by cheap money from the CPF. On top of this, architectural costs were minimized (and they can add up to 10% of a project’s cost) by using the same cookie cutter designs.

Cheap Land + Cheap Labour + Cheap Materials + Cheap Architectural costs + Cheap Financing = An affordable dwelling… as long as the savings were passed on to the end user.

Fast forward to the 1980s, and the PAP realized that it had a serious problem on its hand. This was the growing mountain of CPF funds under administration. When CPF originally started up in 1955, the contribution rate (total) was as little as 10%. Now look at how high it is. Coupled with the higher average incomes over the decades, this higher contribution rate results in hundreds of billions of $ that the govt collects in CPF contribution every year.

In the last 5 years alone, CPF contributions have averaged $22 billion and it’s still trending up. These contributions represent a liability to the govt, i.e. they have to pay it back to the contributors when the latter retire. Many have suspected the PAP is not interested whatsoever in releasing these billions of $ to Singaporeans and that they have already used these funds to start their GLCs, Temasek, etc. and in many cases have lost substantial amounts of the fund.

Can you sense the con?

So, the question became, “How do we, the Govt, minimize our liability in the form of CPF, and at the same time increase our investing assets in the form of the 2 sovereign wealth funds?”

So, some scholar came up with the brilliant idea. What if we decoupled the HDB’s buy back at cost scheme for flats, resulting in the immediate price increase and then using this price increase as an excuse, we artificially raise the prices of HDB flats drastically. At the same time, we allow the use of CPF not only for the down-payment, but also for monthly payments on the flats, thereby depleting the flat dweller’s CPF account and dramatically reducing our CPF liability exposure.

So, how it works is that now, HDB has raised its pricing to way beyond what it cost to build the flat. A flat that costs perhaps $150,000 to build is now “sold” for $450,000. The extra $300,000 is profit for govt. Imagine that you are the buyer of such a flat. You use 20% as the down payment straight from your CPF OA account. That’s $90,000 out of your CPF account right away. And you take a bank loan for $360,000 at 2.5% amortized over 25 years, that is $1613 per month in payment. Let’s say that like most Singaporeans, you take the monthly loan payment out of your CPF. After 10 years, you have paid $193,500 in interest and principal. Remember, this is $193,500 that you will not have any more in your CPF. It has gone to the govt which used an overvalued flat to extract this from you. And don’t forget too that the original $90,000 down payment is also not available, meaning in the first 10 years, you have used up $283,500 from your retirement savings on a flat that is not yours, a flat that you are only renting long term from the HDB!!!

Worse of all, after the first 10 years, you still owe $242,000 on the original purchase price. In one fell swoop, the govt has now successfully transferred 75% of your current and future retirement funds into a 99-year prepaid rental flat that you don’t own, thereby reducing their liability to you and at the same time selling you an expensive trinket. How devious is that?

But wait, you say, I can always sell my flat when I retire and use the money from the sale to fund my retirement. This is the lie that the PAP tells, and let’s examine that.

a) Well, if you sell your flat, where are you going to live? If you bought your flat 25 years ago for $150,000 and sold it today for $600,000, where will you stay? You can downsize to a smaller flat, but even those will cost you upwards of $300,000. SO, what do you net out after you buy a replacement flat to live? Remember, you have to live in a flat until you die, as nursing homes according to certain Ministers are too expensive unless you relocate to Johor state. And forget about renting too. It’s very expensive and will rapidly deplete the capital gains you have made from the above transaction. Don’t forget too that CPF has fixed it such that you can only use your CPF for the monthly payments on a HDB 99-year prepaid rent, but does not allow you to use it on monthly short term rent (12 months or so). If you retire and sell your flat, and decide to rent, you must pay for the rent from after tax and non-CPF sources of funds. Which means you can’t or you have to go back to work. It’s then a waiting game until you get to the age when you can withdraw all the CPF. So, if you do downsize to another flat, the amount that you net out will not be much, and probably not enough to fund the retirement for you and your spouse.

b) Consider too what happens when your flat gets older. Some banks are not giving loans to flats that are older than 25 years. The HDB themselves severely restrict loans given to flats that are 34 years and older. This means that when you want to “monetize” or sell your flat for the purpose of funding your retirement, you will find that many potential buyers cannot get a satisfactory bank loan, or even a bank loan at all to buy it from you. This will result in your flat being less desirable to buyers and hence it will command a lower price than what you had thought possible. In addition, you are dependent on the prevailing housing market conditions. Housing moves in cycle. If you are selling during a downturn, you will get less for it. If you want to wait till the market comes back up, then you have to postpone your retirement. You have therefore been placed in a position where you have to speculate on real estate and where there is no certainty at all of what amount your retirement fund will have. This is the opposite of what a prudent pension or retirement fund should be. It should be a fund where you know exactly how much is in there so you can budget and plan for your retirement. This is not possible if you have to rely on the value of your HDB flat at a certain point in time in the far future.

c) Selling your HDB flat to fund your retirement is possible if you bought it 30 years ago. Today’s new flats can cost $400,000 plus and a resale easily exceeds $600,000. Exactly how much does it have to appreciate as it gets older for you to take a sizeable capital gains from its sale into retirement? You pretty much have to sell it for over a $1 million to fund a retirement. What are the odds that a 30-year old flat will sell for $1 million when that time comes?

Cornered and no where to run

How successful has this been? Consider that CPF withdrawals are roughly 50% of CPF contributions. This is over $10 billion a year on average being withdrawn. The vast majority of that towards funding HDB related purposes. A retirement fund should only be drawn on when you retire. What the govt has made you do is something that no prudent financial planner will advise. They have made you pay for your current expenses such as housing related expenses with your retirement fund. In addition, the PAP has closed all possible loopholes, hence channeling people like lemmings into this “legal con game”.

For example, by offering a rate of only 2.5% on your CPF (and in earlier years it was as low as 1%), your CPF is being eroded at an alarming rate. This is because the inflation rate is much higher than 2.5%, and is in fact double digit in some years. If the inflation rate was 6% per annum, you have lost 3.5% on real purchasing power. Put in another way, if you have $100,000 today in your CPF, 20 years from now, your $100,000 would be able to purchase only $70,000 worth of goods and services. So what choice do you have? If you left your money in the CPF account, you are guaranteed a loss due to the effects of the higher rate of inflation.

So, the PAP wants you to put it into HDB flats so that at least you have some chance of a capital gains down the road. If CPF paid 10% interest on OAs, who would want to withdraw it to buy flats? Yet, Temasek claims to be earning 17% returns on these same CPF funds that they use to invest. Surely, it’s not unreasonable to give to the original funders 10% return? Singapore Bond yields are typically 2.5% over bank deposit rates, and some GLCs like Keppel have long bonds yielding over 5%. Why can’t CPF pay at least these rates?

Another loophole that they are closing is to make it harder and harder for people to access their CPF. They are moving age limit higher and floating up trial balloons about annuities, all in the name of preventing Singaporeans from accessing what’s left of their CPF that has not been pilfered to the HDB.

Yet another loophole that is used is that the HDB has no intention to honour its 99-year lease agreement. In the first place, the flats are not built to last 99 years. And before the 99 years are up, HDB fully intends to relocate you to another newer estate into a new flat at the much higher market rate than the old one you had. Who knows, you might have been mortgage-free in the old flat and now have to start with a new mortgage again. In addition, loopholes in the lease contract enables the HDB to transfer ownership cost such as property taxes, upgrading costs, conservancy fees to you, the tenant, thereby further depleting your CPF account.


The end result is that probably in excess of $100 billion have been channeled out of CPF into the govt coffers through the sale of a piece of rental agreement for 99 years. Singaporeans literally have nothing to show for it. If this does not make it one of the biggest modern swindles of all times, than I don’t know what does. This is not some greedy Wall Street wolf doing the fleecing here, but a govt using legislature, boldfaced lies, and obfuscation to con a gullible populace into buying into a pipe dream.

This letter was written by BD.
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