Alternative news in 1 day? (part 83): 30% of households spend more than earnings?

I refer to the article “Ministry takes issue with don’s study on affordability” (Straits Times, Mar 12).

Bottom 30% households spend more than they earn?

It states that “A study by an economist, which found that Singapore’s bottom 30 per cent of households spend more than they earn, has been disputed by the Ministry of Finance (MOF) and a veteran statistician.

Main cause of rising expenditure was housing?

The study by National University of Singapore (NUS) economist Tilak Abeysinghe compared households’ expenditure against their incomes from work. Professor Tilak said that according to his research, the bottom 30 per cent of households spent 105 per cent to 151 per cent of their income last year and the main cause of rising expenditure was housing.

Every family owns a flat, have CPF to pay for mortgage?

But MOF took issue with Prof Tilak’s methodology as he used imputed rentals as a measure of expenditure on housing.

Prof Tilak said he did so as most households were unlikely to have fully paid up their mortgages, so imputed rent captured some of these outstanding payments.

He also cited an earlier study he did which compared housing price to lifetime income. He said that too showed a long-term deterioration of housing affordability.

Imputed rentals measure how much a household would have to spend on rent if they did not own the house they live in.

MOF said it disagreed with the use of imputed rentals as a proxy for mortgage payments on three grounds.

How many get grants and how much?

First, mortgage payments have been lower than imputed rentals for lower-income households because of government grants.”

– Before we even get into a debate on this subjective and complex issue – can we have a breakdown of the statistics on how many and the proportion of HDB flat buyers who qualified for grants, and the quantum of the grants?

Rentals rose, mortgage interest fell?

As to “Second, mortgage payments and imputed rentals have diverged significantly in recent years, with imputed rentals rising much faster in line with the property market, while mortgage interest rates have fallen.”

What about HDB prices, loan tenures?

– Shouldn’t we also take into account the rising prices of HDB flats as well, and the longer tenure of housing loans? In other words, rentals may have risen whilst mortgage interest rates have fallen – but are we forgetting rising flat prices and longer loan tenures?

Only count interest of mortgage payments?

As to “Statisticians internationally also remove the principal component of mortgage payments as it reflects an investment. They only count as expenditure the interest payment portion, which is much lower.”

– in my view, there is nothing wrong to have 2 different analyses – one with the interest payment only and the other including the principal component.

When sell HDB – CPF may not be cash that can be utilised?

I think we may also need to think about the unique situation in Singapore, whereby most lower-income HDB flat owners may be using a lot of their CPF. Unlike a typical house investment in other countries, much the proceeds when one sells a HDB flat, may not be realisable as cash because much of it may be deferred until age 65 when only a fixed monthly life annuity will be paid out.

Assume everyone has enough CPF always to pay for mortgage?

With regard to “MOF released figures to show how imputed rentals over-estimate how much lower-income households spend on housing.

The figures showed that for a family on a monthly household income of $2,000 who buy a three-room flat, their actual expenditure on housing is $134 a month, far lower than the average imputed rental of $700.”

– I believe this “actual expenditure on housing is $134 a  month” refers only to the cash outlay and does not include the CPF utilised to pay for the mortgage.

We should not assume that every HDB owner has CPF to pay for the bulk of one’s mortgage throughout the typical 30 year loan tenure. What about the self-employed who do have have CPF contributions that can be used for housing, the reduced contribution rate to the CPF Ordinary Account as one gets older, job loss, pay cuts, etc?

What about those who don’t own flats?

Also, what about the about 60,000 families renting HDB rental flats, those paying rent on the Interim Housing Scheme, those renting in the open market, etc?

“On subsidies lowering expenditure, Prof Tilak agreed that it was something to be studied. He also said that he did not have data on government transfers and subsidies.

In his study, Prof Tilak compared resident households’ average monthly expenditure and income, excluding government transfers. He did so for the years 1998 to last year.

Based on the data, he derived a ratio known as the expenditure-income, as a measure of living affordability.

Prof Tilak said his ratio takes into account the relative standard of living, a measure of well-being, where people increase their spending because others have increased theirs. He added that his study also looks at expenditure in different categories, such as food and transport, and reflects how a household’s budget is allocated.

Still, MOF said it welcomed studies aimed at identifying the needs of different segments of society, “which the present study seeks to do”.

Its comments on the study’s methodology “in no way detract from the importance of the issue of affordability of lower-income households”, it added.”

With regard to “It said the Government was actively focused on needs of this group, and has significantly expanded schemes to help them in education, work, housing, health care and retirement.

How much of transfers, top-ups, subsidies, etc are like cash that can be used immediately? 

“For most of those in the bottom third, government transfers in the form of cash and savings top-ups (not including other subsidies) provide significant supplement to their incomes,” the ministry said.”

– Can we have a breakdown as to what proportion of the government transfers, top-ups, subsidies, etc, are actually disposable cash that lower-income Singaporeans can use straight away?

Leong Sze Hian

About the Author

Leong Sze Hian has served as the president of 4 professional bodies, honorary consul of 2 countries, an alumnus of Harvard University, authored 4 books, quoted over 1500 times in the media , has been a radio talkshow host, a newspaper daily columnist, Wharton Fellow, SEACeM Fellow, columnist for theonlinecitizen and Malaysiakini, executive producer of Ilo Ilo (40 international awards), Hotel Mumbai (associate producer), invited to speak more than 200 times in about 40 countries, CIFA advisory board member, founding advisor to the Financial Planning Associations of 2 countries. He has 3 Masters, 2 Bachelors degrees and 13 professional  qualifications.