Are We Holding Too Much Home Equity?

Earlier this month, Ministry of Finance published an Occasional Paper “Income Growth, Inequality, and Social Mobility Trends in Singapore”. This paper reivew trends in income growth, inequality, and social mobility in Singapore. It also outlines theGovernment’s approach and policies to sustain a fair and inclusive society. This is an update of an earlier paper published in August 2015.

This paper highlights various interesting data that intrigue me. The one that caught my attention the most is this following chart.

(Source: https://www.mof.gov.sg/news-resources/newsroom/occasional-paper-on-income-growth--inequality--and-social-mobility-trends-in-singapore/)

Singapore is known as a country with high home ownership. What surprises me though is how high this home ownership really is. Across all household weath percentiles, property equity constantly make up almost half, if not more, of the total household wealth. This holds true even for the bottom 20%.

This means that half of our net worth for most of us is actually locked into something very illiquid that we might not even unlock the value out of.

If we look further into the exact figures for the household wealth, we can get an even clearer picture.

(Source: https://www.mof.gov.sg/news-resources/newsroom/occasional-paper-on-income-growth--inequality--and-social-mobility-trends-in-singapore/)

For the top 20% households, 58% of $5.264M is locked in home equity. That represents $3M. Only $1.4M is held in other financial assets with $0.7M in CPF balances. While $5.264M sounds likes a lot of money, what is truly liquid is rather little. CPF is not exactly liquid so you are only left with the other finanical assets which could be considered as liquid. Let's say this $1.4M is the full portfolio value and you assume a safe withdrawal rate of 4% for retirement purposes, you could only safely withdraw $56,000 anually. This represents just $4,800 every month. If you are a married retired couple, this doesn't look like a comfortable amount to retire on for both persons.

In a report released by OCBC of late, these are what you need for various retirement lifestyles.

(Source: https://www.ocbc.com/iwov-resources/sg/ocbc/gbc/pdf/simplyspoton/retirement-insights.pdf)

A monthly retirement amount of $4,800 cannot even substain retirement lifetsyle B for two person. It could at best support retirement lifestyle A. If you are having a house of at least $3M in value, I highly doubt you will be contented with retirement lifestyle A.

Of course, there is still $0.7M in CPF balances which works out to be around $0.35M per person. If the retired couple is already 65, he or she could probably easily hit BRS and could get another approximately $950 each under the CPF LIFE Standard plan. So we could add $1900 ($950 x 2) into the equation and that could result in $6,700 of monthly retirement income. In that case, perhaps retirement lifestyle B would then be achieveable but certainly not retirement lifetsyle C. If you and your spouse are below 65 and are still not eligible for the monthly payout under CPF LIFE scheme, then good luck to that.

If you are in the middle 20% (in terms of household wealth), it's likely you will not be able to retire comfortably too.

Based on a household wealth of $0.994M, $0.526M is held in property equity. $0.328M is held in financial assets while $0.139M is in CPF balances. A safe withdrawal rate of 4% on $0.328M will result in only $13,000 annually which represents just $1093 per month. This is barely sufficient to even retire on any measure.

I don't think we even need to repeat the exercise with the other groups to know how infeasible it is to retire comfortably with such a meagre amount in other financial assets and CPF.

This now begs the question.

Are we simply holding too much home equity?

For the top 20% households, living in a less expensive property and boosting their investment portfolio could easily allow them to retire better and easier. Is there really a need to hold so much of your wealth in something so illiquid?

Some might argue that you can easily just sell away the home and move into somewhere cheaper. But hoenstly, how many of us will do that? Especially when you are so used to living in the same place or neighbourhood for many years.

There is a recent article by Nick Maggiulli that argues that home equity might be fake wealth after all. In the article, there is a quote that resonates with me and I like to share with the readers here as an ending to this blog post.

But if the home you live in goes from $200,000 to $1,000,000, you are not wealthy, because the replacement home also costs $1M. You are trapped. You cannot sell the house and take the profit, because you still need a place to sleep, and the house across the street also costs $1,000,000.

You haven’t gained purchasing power. You have simply experienced a revaluation of your Cost of Living.

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