CPF + HDB = Poverty

Despite having one of the highest saving rates in the world, 45% of Singaporean who turned 62 last year were unable to meet the minimum sum amount of $60,000. This sum of $60,000 is by no means a large amount. It can only provide you with $500 a month for 10 years. One of the major reasons why Singapore Peasants cannot retire after slogging away for half a life-time is this: The CPF + HDB combo

At the very heart of the CPF + HDB combo is this little known effect: Living in a home that you own is exactly the same as paying rent for one.

The more expensive your home is, the more rent you pay.

To illustrate this point, let's consider person X, who has $1 million to buy a home. X can buy a $1 million dollar home and live in it. This will leave X will $1 million less in his bank account with a cash flow position of $0.

Alternatively, X can buy a $1 million home and lease it out for a yield of 5% per annum, which is $50,000. Then with that $50,000, he can rent a $1 million home and live in it this time, paying $50,000 a year. In this scenario, X will also have $1 million less in his bank account, with a cash flow position of $0 again.

I know still sounds rather counter-intuitive or strange even. But think of it this way. If X had acted like a cheapskate and decided to sponge on his parents by staying in his parent's home without paying rent, purchased a $1 million home and leased it out, he would have a positive cash flow of $50,000 a year instead.

By virtue of purchasing a house and living in it, you are missing out on the chance to collect rent. The more expensive your home, the greater the opportunity cost. Therefore, it would be beneficial to your finances if you had purchased 2 $500,000 houses instead of $1 million one, live in one of them and lease the other out. Doing so will give you a positive cash flow of $25,000 a year (assuming a rental return of 5% pa). Over a period of say 3 decades, the effects can make a difference of a life-time. Assuming rental yield and property prices keep pace with the rate of inflation, staying in a $500,000 house will earn/save you $750,000 in real terms. The cheaper your home, the better it is for you financially.

So how does CPF comes into the picture? By locking peasants' sweat blood money for what seems to be an eternity, CPF systematically skews a person's decision towards buying a home. Most peasants will rather buy a home with their CPF money than let it rot in the ordinary account that used to give 2.5% interest, resulting in artificially inflated prices of property. This means that you are in effect paying more rent, and the effect of this over half a life-time is poverty.