The Business Times, Saturday 01 June, 2002

Home is part of retirement assets

I REFER to the recent articles on property and usage of the Central Provident Fund for property purchases. It is worrying to see us swinging from fervent (property) asset enhancers to illogical aversion. I must compliment BT's attempt to bring balance to the debate.

First, I must compliment Siow Li Sen on her piece 'Property is still best bet for CPF funds, says study' (BT, May 27). However, I believe one needs to be careful with the conclusion that property is the best bet. I believe you would obtain different results if you used different rolling periods with the same study. That is, your success with property would be a function of your time horizon as well as your entry point. The lesson here is diversification and the appropriate asset allocation - investment planning is not about finding the surest bet and there is no such thing.

Second, the same piece uses the assumption based on a Ministry of Trade and Industry study from July 2001 that shows property values grow with the real gross domestic product.

I believe MTI got its statistics right but this correlation is flawed as the basis for a forecast of the future.

Fundamentally, price appreciation is more correlated with nominal GDP growth per capita rather than real GDP growth. This is substantiated in the research piece in the March 28 edition of The Economist, 'Going through the roof'.

Correlation results may be similar because the GDP deflator and population growth have appreciated at the same pace over the observed period. Moreover, correlating residential price appreciation with real GDP growth leads to a fundamental difficulty, which contradicts conventional-wisdom economics: Real assets such as property appreciate in an inflationary environment, while inflation tends to reduce real GDP growth. That is, property should therefore appreciate faster than real GDP growth when inflation ticks up, thus violating the correlation.

Third, I am somewhat worried by the policy implications of Manpower Minister Lee Boon Yang's recent comment in Parliament and I quote: 'By the end of the mortgage, the CPF member may find that even though his property has appreciated in value, it is still less than the total amount of CPF he has used up.'

Should we assume that there is no consumption cost for having a roof over one's head? If we don't own a home, we must surely pay a rental for our residence. I hope the government is not thinking of encouraging us to rent and leave our money in the CPF!

Indeed, legendary fund manager Peter Lynch in his book Beating the Street advises that one should buy one's home as a first priority before investing elsewhere. It is important to note that a home that you own is both an asset that is consumed as well as a store of future value.

Fourth, it appears we are making the assumption that your home is distinct from your retirement funding. From a financial planning perspective, this is wrong. Your home forms an intrinsic part of your retirement assets because as a retiree you have choices as to how you wish to convert your assets into a cashflow stream to live out your golden years. Indeed, is being asset-rich and cash-poor really a problem?

Converting a residential asset into a cash stream in retirement is, in my opinion, not a difficult problem. However, if we are not careful as to how we are tinkering with property values - whether through the CPF, excessive land sales or prejudiced publicity - we might all end up both asset- and cash-poor, and thus be truly without the means to retire.

Finally, before we decide that we are over-investing in property I would like to contribute some facts. The following statistics were obtained from Economist.com:

• Comparisons with the US and Europe, where about 30-40 per cent of household wealth is in property, must be made with the level of home ownership in mind. The US and Europe have about 60 per cent of home ownership. Although 75 per cent of our wealth is in property, our home ownership is close to 95 per cent. Given our high level of home ownership, is our level of wealth tied to properties excessive?

• Public housing in the US and Europe is primarily rented domiciles. In Singapore, we have the virtue that public housing is owned through tax-exempt CPF dollars. This functions both as a roof over our head and a store of value through asset ownership, which can be converted into a cash stream if required in future.

• In the US, property accounts for four times the value of equities in household wealth. Notwithstanding the stock market boom over the last 10 years, property is still the main store of value for households, having increased consistently in real value over 20 years in the West. Indeed, US households consider their residence as part of their retirement assets to be converted into cash when it is due.