Immigration, Property Prices and Your Retirement

The Straits Times reported on Friday 22/10/2010 that Singapore was ranked seventh in a survey of how countries ranked in terms of adequacy of income for retired persons. It reported that the CPF Board had expressed reservations regarding the limitations of the survey, in particular its exclusion of the CPF funds that we use to buy property:

“If CPF monies withdrawn for housing are included, savings are substantial, averaging around $200,000 for active members who turned 55 in 2007-2009.”

Implicit in the CPF Board’s statement is that money used to buy our HDB flats could be included in the assessment of our financial preparedness for retirement.

What worked previously

Historically, our HDB flats and other residential properties have been a good store of value for our retirement. Rapid economic growth in the past decades have allowed for the appreciation in the prices of such properties. This has allowed older people who have retired in the past 20 years to cash out of real estate at significant profits for use to fund their retirement.

What this means for those of us who are saving for our retirements is that if we are to rely on the existing model of using real estate as a means of funding, we will also need our economy to continue to grow in order to be able to obtain the price appreciation needed. Furthermore, for most of us, we will need to have continued growth in our incomes in order to pay off the mortgage that invariably comes with the purchase of real estate.

In order for this model to continue working, we will also need to sell our properties to someone else, and this is where the issue of immigration comes into play.

Given the country’s low fertility rate, we will soon be facing the prospect of a declining population if there is no immigration. Specifically with respect to the real estate market, this will mean lower demand for housing in future, which translates to the possibility of the country having a surplus of housing units. This lower demand will mean either lower growth or even outright declines in property price in future.

In addition, given that economic growth is a function of capital, labour and productivity growth, a declining population will also mean that economic growth will slow unless compensated by rapid increases in productivity. Given our mediocre record in raising productivity, this means that economic growth will be problematic in future without immigration.

It can thus be said that we Singaporeans are confused about the immigration issue. On the one hand, we have expressed our unhappiness at the influx of foreigners causing all sorts of stresses on the country’s physical infrastructure. On the other hand, whether we are aware of it or not, we need to keep population either stable or growing in order to maintain real estate prices that we depend on for our retirement. So short of a rapid turnaround in birth rates, which seems to me to be unlikely, we will have to accept the current liberal immigration policy.

Risks

While I feel that the government is not likely to reverse in any significant way the current immigration policy, I would like to highlight the risks to us as individuals of continued reliance on real estate as a store of value to fund our retirement accounts.

A mortgage is a bet on your personal future. It is an expression of confidence that you will be able to grow your income sufficiently to handle the payments, and if stretched over a long period, that the income stream will be stable. In recent years, we have seen more volatility in the Singapore economy due to greater uncertainty in the global economic situation. With the constant need to restructure, jobs have become less secure and retrenchments and unemployment more likely. This means that committing to a long term mortgage (e.g. 15 years and above) may not be a prudent thing to do.

For those who buy additional properties to rent out, besides betting on the government not changing the current immigration policy, you are also betting that the economic prospects of Singapore are bright enough to continue to attract people to move here for work and residence. While we cannot foretell the future, we need to be aware of the significant risks that lie on the horizon. These include peak oil, the currency wars turning into global protectionism and trade wars, and a collapse of the USD resulting in a new currency regime. Although I am unable to guess with any degree of accuracy what the exact impact of these events will be on Singapore, it is possible in my view that they will result in diminished prospects due to the serious external economic dislocations that are likely to happen.

On the whole, I personally am of the view that reliance on real estate as a funding vehicle for retirement will have significant risks in future. Furthermore, as real estate prices here have increased at a pace far outstripping income growth in the past decade, one has to wonder how much further this trend can continue. As such, new entrants to the property game should be aware of the dangers of buying at or near the top of the market.