Jan 24, 2011

Calculating Your Personal Net Worth

My New Year's resolution was to tidy up my financial matters. So far, I've been making good progress. Among other things, I reviewed my insurance policies; closed two useless bank accounts; switched to a better online funds distributor; switched to a better mortgage package charging lower interest; engaged a financial adviser; opened a trading account; rebalanced my wife's investment portfolio and redeemed all my credit card points.

I realise that financial planning is not exactly the most exciting topic in the world. However, it is a highly practical topic and therefore it's very much worth knowing something about it.

Today, just for general educational purposes, I'm going to explain how to calculate your personal net worth (that really means - how rich or poor you are).

If you want to be very exact, this could be a rather tedious exercise. However, for most people, it works fine if you just want a "big picture" snapshot of your current financial condition.

Step 1. List your biggest fixed assets, such as your apartment and your car, at their current market value.

Step 2. List all of your financial assets, such as your cash savings, fixed deposits, shares, unit trusts, CPF balances etc.

Step 3. List any other possessions which you might conceivably be able to sell, if you needed the money. Gold and other jewelry, for instance.

Step 4. Add together all of the above, and you get your total assets.

Step 5. Subtract all of your debts, such as your mortgage, car loan and credit card balances, from your total assets.

And there, the result is your net worth. An instant snapshot of how rich or poor you are, today.

That should start you thinking about how you can improve your financial condition. Sometimes there are ridiculously easy ways to cut a few expenses or make a bit more money.

Keep your spreadsheet or that piece of paper somewhere safe. One year later, do this exercise again. Hopefully, you'll find that you've grown richer. Good luck.

CCAs and the Government's Edusave Top-Up

Jan 24, 2011
$155 million top-up for Edusave scheme
By Kor Kian Beng & Leow Si Wan

THE Government is pumping some $155 million into the Edusave scheme to ensure that students can continue to enjoy enrichment classes and IT-enabled programmes, despite higher inflation.

The top-up is the biggest since the Edusave scheme was launched in 1993.

The Edusave account of each student in primary and secondary school will get a one-off boost of $130 this year.

This brings the total amount that a primary school pupil gets this year to $330, and a secondary student, $370.

The account top-ups will total $54.8 million.

Announcing the news on Sunday, Education Minister Ng Eng Hen added that the Ministry of Education (MOE) has given an additional $100 million in Edusave grants to government, government-aided and independent schools.

So in the run-up to the elections, here's the government trying to look generous. But it's really not generous at all. Let me elaborate.

I have two children. Both are in primary school. The girl goes to an all-girls school and the boy goes to an all-boys school. In fact, this is the boy's second primary school (he had transferred from elsewhere).

So over the past few years, I have become well-acquainted with the in's and out's of three separate primary schools. I know a lot about how they operate. And through them, I also have a good sense of how Singapore's primary schools operate.

For instance, I know that nowadays, schools take their CCA activities very seriously indeed. If you are an "outsider" to the current school scene, you would really be surprised.

In the old days, "CCA" (or "ECA", as it used to be known) was often little more than letting the boys randomly bounce a basketball around on the court, after school hours. Kids were not supervised. Every CCA had a teacher in charge, but the teacher didn't necessarily know anything about the activity at all.

(For example, when I was in primary school, the chess club was run by a teacher who didn't know how to play the game. She couldn't even tell the difference between the king and the queen).

Those days are over. CCAs are now much more structured, and well-planned. There is much more focus on proper accreditation, accountability and objectives. The "KPI" management style of thinking has invaded the universe of school CCAs.

The teachers still don't necessarily know anything about the CCAs, but now they don't have to. Nowadays, primary schools regularly engage external professional instructors to conduct the courses and activities for the children.

For example, my daughter has taken up ballet as her CCA. Her school has engaged ballet instructors from the Royal Academy of Dance (RAD) to run this CCA. RAD is the local subsidiary of the RAD in London, a well-established, 90-year-old ballet school whose syllabus is taught in 82 countries around the world.

Music lessons are also compulsory for all students in the school, from Primary One to Primary Three. The school has a three-year programme leading up to a Grade 1 examination for the ABRSM Theory of Music. Again, external music instructors are engaged to conduct the course.

Meanwhile, at his previous school, my son had joined Speech & Drama. This CCA had plenty of fun activities (including a short public performance at Bishan National Library). But again there was a proper underlying structure. This CCA adopted the Trinity-Guildhall exam syllabus from London. Taken far enough, it would lead to a formal certificate in Speech & Drama that is the equivalent of an O-level subject.

Why are schools, even primary schools, taking their CCAs so seriously?

The answer is simple. It is a consequence of certain changes that the Singapore government had made to the education system, over the years.

In the past, academic results were all that mattered, in helping you to get from primary school to secondary, or secondary to JC, or JC to university. Nowadays, however, the student's CCA achievements can be used to help him gain admission to the next stage of education.

For primary schools, the specific driver is the Direct Schools Admission policy. It is now possible for a Primary Six student to secure a place in a top secondary school, even before his PSLE results are out (in fact, even before he has actually taken his PSLE exams). All he has to do is demonstrate a sufficiently high level of CCA achievement.

Schools are now restructuring their CCA activities, such that their students' CCA achievements are more objectively verifiable. In some cases, this means that the CCA ultimately leads to some accredited certification (for example, a certificate from Trinity Guildhall, Royal Academy of Dance, and so on). In other cases, it means getting the students to participate (and win some prize) in a nationally recognisable CCA-related event (such as an inter-school sports competition).

I like the idea of systematic, well-run CCA programmes. This is because I believe that young people should get the chance to pursue their personal interests, beyond the academic syllabus. Overall, it makes for a more well-rounded education. I'm also a believer in the principle of "If you want to do it, then do it well - otherwise don't do it at all.". That's why I like the idea of properly-qualified instructors running the students' CCA programmes.

On the other hand, there is the very relevant consideration of financial cost. Parents have to fork out more money to pay for their children's increased CCA expenses.

In the old days, taking part in a CCA was free or cheap. But nowadays, CCAs cost money. That is because external instructors cost money. So do their exams, their materials and their equipment (just imagine the cost of buying enough Yamaha keyboards for all Primary 1, 2 and 3 students in a school, to have weekly music lessons). Here's another example - when my son took his Speech & Drama exam, an external examiner was flown in from London to Singapore, to conduct the exam. Somebody's got to be paying for that man's flight and accomodation.

It's worth noting that as a practical matter, CCAs aren't optional. They are compulsory. Your child may get to pick his specific CCA (for example, a sport or a musical activity), but he MUST pick at least one. Also, depending on the school, some CCAs can be compulsory for all the kids.

Personally, the money doesn't bother me. I can afford the costs of my children's CCAs. On the other hand, I am much wealthier than the average Singaporean. So I do wonder how the average Singaporean parent is coping.

Back to the Straits Times article.

We learn that the government has given a $130 Edusave top-up for each student. This means that each primary student gets a total of $330. Edusave is meant for enrichment activities, i.e CCAs and the like.

Now, using my daughter as an example, let's see how helpful the Singapore government's top-up really is, taking into consideration actual expenditure in practical reality.

My daughter's ballet leotard cost about $80 (I bought the cheaper one, the most expensive version recommended by the school was about $120). The ballet class itself costs $300. The compulsory music course costs $40 (after the school subsidy). There is also a compulsory Gymnastics & Rope Skipping programme (again, external instructors are engaged). This costs another $40.

That's a total of $460. The Edusave account has been completely wiped out. More than completely wiped out.

And note that right now, it's only January. The school year has just begun. As the year goes on, there will be more fees to pay.

Still think that the government is generous?


Here are a few points that I would like to know.

When the Singapore government introduced schemes such as the Direct Schools Admission policy, did it not anticipate that schools would then start beefing up their own CCA programmes? And that the costs of these programmes would start escalating dramatically?

If the Singapore government knew this, then did it not foresee that a large part of the costs would be passed on to the parents? If so, did it stop to consider whether the average Singaporean parent can cope with these increased costs? What's being done, to help the poorer families?

Jan 22, 2011

"Would You Die For Each Other?"

I read this question in the Straits Times today. The article was about Lee Kuan Yew's new book. The question posed to Singaporeans was - "Would you die for each other?". The Straits Times is even doing an online poll.

I could not help laughing. The question is so dramatic that it is melodramatic. Like a line from one of those weepy Taiwanese soap operas.

To the PAP ministers I would say - "What about you? Would you even pay yourselves anything less than the highest ministerial salaries in the world?"

But then we already know the answer. The last 20 years have made it clear.

Jan 21, 2011

Possible New World Record for Singapore?

Floods have caused hundreds of thousands of people in Sri Lanka to become homeless. As many as one million people - including 400,000 children - may experience food shortage.

And the Singapore government is donating ..... $25,600?

That's less than the price of one C.O.E.

Surely this must set some kind of international record. For stingy-ness. This could be the smallest sum ever donated by one sovereign nation, to another sovereign nation, for a humanitarian cause.

I wonder if the government of Sri Lanka feels insulted.

One single primary school like Anglo-Chinese School could probably raise three times that amount in a week, just by asking parents for donations.

$25,600 flood aid for Sri Lanka
TODAY 05:55 AM Jan 21, 2011

SINGAPORE - The Government is contributing US$20,000 ($25,600) in aid to flood-stricken Sri Lanka, the Singapore Ministry of Foreign Affairs (MFA) said in a statement yesterday.

Floods and mudslides in Sri Lanka over the past several days have reportedly killed 40 people and left hundreds of thousands of people homeless.

The MFA said the money will go towards post-flood rehabilitation efforts undertaken by Mercy Relief.

The humanitarian organisation will be distributing water filtration units for fresh drinking water to those affected by the floods.

President S R Nathan had earlier sent a letter to Sri Lankan President Mahinda Rajapaksa to express his sympathies to the people and government of Sri Lanka over the loss of life and destruction caused by the floods, the MFA said.

Meanwhile, international humanitarian group Save the Children warned that the damage to agricultural land and loss of livestock is so serious that it could leave up to a million people - including 400,000 children - without enough food.

Jan 19, 2011

The Ultimate Guide to Real Estate Investment in Singapore

Ismail Gafoor is the CEO of Propnex, one of the largest property agencies in Singapore. I came across his bio-data and was quite impressed.

Among his many achievements, Ismail holds, as an NSman, the rank of Lieutenant Colonel. He is currently the Deputy Brigade Commander of one of the SAF's infantry brigades.

This is notable especially because of his race. It's an open secret that the SAF is biased against the ideas of Malays holding senior appointments in the military.

(Actually, that's not even a secret. Lee Kuan Yew has spoken publicly about it before).

Anyway, I digress. What I really want to talk about is Ismail Gafoor's new book, "The Ultimate Guide to Real Estate Investment in Singapore".

I bought the book ($34.99 at Popular Bookstore), even though I don't expect to be buying or selling any properties in the next two or three years. The book is informative and well-written, and I feel that its useful shelf life will extend beyond a 2 or 3-year period.

At 337 pages, the book provides quite comprehensive coverage of its topic. There are chapters about HDB flats; landed properties; condominiums; property auctions; bargaining strategies; being a landlord; obtaining a home loan; understanding the URA Master Plan; evaluating a property's location; planning your budget, and more.

Highly recommended, if you're interested in real estate in Singapore.

* * * * * * * * *

Anyway, here's one interesting nugget from the book.

If you're interested in private property, you probably know that on a per square foot (psf) basis, landed property is usually much cheaper than condominiums. The question is - why?

I have always assumed that it's because Singaporeans are willing to pay the extra premium for the condo facilities. Typically, that means the swimming pool; the tennis courts; the gym; the barbecue pits; the clubhouse; the children's playground; and so on.

In contrast, a house is, well, just a house.

However, when Ismail discusses the question, he doesn't even mention condo facilities at all. (I take it that this means he would consider my view to be either irrelevant or wrong). Instead, here's what Ismail says:

"How is it possible that a space in the sky is actually more expensive than land on the ground?

The answer basically lies in the rules of land ownership. In Singapore, foreigners are generally not allowed to buy landed homes, unlike condominiums. Foreigners who desire to own a piece of land must fulfil the criteria and submit an application to the authorities, which will only be approved based on its merits."
So according to Ismail, you pay more for your condo, because you're competing with the foreigners. All these years, they've been jacking up your price.

In contrast, landed properties are cheaper (on a psf basis) because the foreigners are still kept out (not entirely, but largely) by the laws and regulations. Foreigners can buy landed properties, only if they first succeed in getting government approval.

Jan 18, 2011

The Partial Myth of the "Asset Rich, Cash Poor" Singaporean

Consider this scenario.

Mr Tan Ah Kow is a Singaporean in his mid-30s. He has about $80,000 in his POSB savings account, and about $80,000 in his CPF Ordinary Account.

Every month Mr Tan needs to pay about $800 for his HDB loan. Should he pay with his POSB money, or with his CPF money?

Note that Mr Tan's CPF OA earns interest at 2.5% per annum. Meanwhile, Mr Tan's POSB money earns interest at a much lower rate of about 0.125% per annum (20 times less).

If this difference in interest rates was the only consideration, Mr Tan would surely use his POSB money to pay his mortgage. After all, his POSB money is earning so little interest.

However, in reality, most likely Mr Tan would use his CPF money to pay his mortgage.

Why? Because Mr Tan wants to reserve his POSB money for all his other financial needs and purposes. In other words, Mr Tan wants to maintain his core liquidity.

Mr Tan also knows that if he doesn't use his CPF OA money to pay his mortgage, then all that money would remain largely locked up until he reaches the age of 55 years.

Or 62 years. Or 65 years.

(Or maybe 85 years, depending how the government decides to fiddle with the rules, over the next few decades).

In other words, Mr Tan's CPF funds are subject to long-term political risk. The more money Mr Tan has in his CPF Ordinary Account, the greater the political risk he is exposed to.

Mr Tan may not know the technical terms - such as "core liquidity" or "political risk" - but Mr Tan is not stupid. The extra interest he could earn on his CPF monies (in comparison to the interest on his POSB savings) is almost certainly not going to be sufficient to entice him.

Almost instinctively, Mr Tan will seek to spend as much of his CPF money as he can, on his home loan. In fact, Mr Tan may even use his surplus CPF OA funds to prepay a large portion of his HDB loan.

Meanwhile, if Mr Tan is a prudent man, he might also save for his retirement needs, by investing some of his POSB savings in shares, bonds, ETFs, unit trusts, investment-linked policies and the like. With some care and a little luck, Mr Tan can build up a tidy sum of money over time, to meet his retirement needs. It's just that this money won't be coming from his CPF account.

* * * * * * * * * * *

If Mr Tan's case is common among Singaporeans, then what does this say about the CPF? Possibly, one could draw the the following conclusions:
(1) The CPF is a mandatory savings scheme, not so much for your retirement, but for your housing needs. Thus the success of the CPF scheme should be measured not necessarily by the number of Singaporeans who can retire comfortably with their CPF savings, but by the average age and the number of Singaporeans who own their own homes and have fully paid up their mortgages.

(2) If you actually expect your CPF money to cover your retirement needs, you could be seriously screwing your own financial health. Instead you should be actively saving and investing for your retirement, with your non-CPF funds.
In addition, due to the long-term nature of the CPF scheme and the government's power to write and rewrite the rules, one may also conclude that your CPF monies are exposed to a significant degree of political risk.

But then, just like Mr Tan, you already knew that.

Didn't you?

Jan 16, 2011

My Thoughts on The Online Citizen Getting Gazetted as a Political Association

I always knew that it was going to happen.

It was just a matter of time.

To me, the only surprise was that it took so long for the government to gazette The Online Citizen as a political association.

Then again, the elections are looming. So this too is the right season for the PAP to do what it did.

Years ago, I already realised that in the Singapore blogosphere, group blogs commenting on sociopolitical issues were at risk. The more well-organised, prolific and popular a group blog is, the higher the risk it would face.

That is one reason why I never joined any group blogs.

(The other main reason is that I like the freedom of having my own individual blog. Apart from yakking about sociopolitical issues, I can also yak about anything else that interests me).

In my opinion, as far as raising public awareness; promoting active citizenship and encouraging critical thinking among Singaporeans, the best form that the blogosphere can take is as follows.

(1) Lots and lots of individual bloggers.

(2) Many, many intelligent voices providing reasoned, constructive views.

(3) But no individual voice should be so compelling and outstanding that it becomes an obvious nail for the PAP to hammer down on (whether by defamation suits, political gazetting, public ministerial attacks, police investigations or the like).

(4) An amorphous, informal network among the active bloggers, so that they interconnect themselves with plenty of hyperlinks, "Friends", "Likes", blog comments etc.

The gist of the idea is that the Singapore sociopolitical blogosphere should be as big as possible, so that its collective influence is far and wide, and yet sufficiently diffuse, so that the PAP lacks obvious targets to attack.

Anyway, I'm reading the Internet commentary out there, and I see that many posters commented about the "foreign funding" aspect of the Online Citizen issue. (Gazetted political associations are not allowed to receive funding from foreigners).

This is a red herring. Or a non-issue. It just isn't the point.

Seriously, it costs peanuts to run a website. (And that is what The Online Citizen mainly is - a website).

Using Blogger, Wordpress and the like, you can set up free blogs and web pages within a few minutes.

If you pay for your own server space, that costs a bit more money. You get to pick your own domain name; you have more space to upload files etc. But seriously, it just costs a bit more money.

One doesn't need "foreign funding" to achieve that.

Personally, I don't see what's the big deal about foreign funding.

This is not the US, where political campaigns can be expensive. In Singapore, even if an opposition candidate has billions of bucks, the government will allow him only x minutes to appear on TV and talk to the people of Singapore.

It's not as if he's able to buy more airtime with his money. He's already constricted and tied down by a host of government laws, regulations and rules, on his campaigning activities.

Got money, also cannot spend.

Anyway, every other Tom, Dick and Harry on this island is a foreigner. The government adores them, talented or not.

So what's the big deal? About foreign funding?

Oh, remind me to write about something else in my next post. About my favourite poem. Or my daughter's IQ test. Or my new furniture.

Something non-political. Otherwise, who knows? Maybe the government would change the law again and say that even an individual blogger can be a "political association". LOL.

Jan 15, 2011

Singapore's Official Retirement Age To Be Extended

The Straits Times makes me cringe. The subtlety of their propagandising is so lacking that it makes the hairs on my arms stand. I mean, really. The hairs literally stood up, as I read the article below.
ST Jan 15, 2011
Singaporeans welcome new retirement age of 65

EVERYONE looks forward to retirement, but many Singaporeans still feel capable of working beyond the age of 62, so many rejoiced at the government's recent announcement of lifting the retirement age to 65.
Singaporeans "welcome" the new retirement age? They "rejoiced" at this?

Where are the parties? Where are the celebrations? Where are the big balloons and waving flags and smiling happy faces? Where, at least, are the survey results to show that Singaporeans are happy with their retirement age being stretched to 65?

They don't exist. All the Straits Times did was scurry around for to find a few people to interview. The journalist managed to find a grand total of two Singaporeans, who would say something moderately nice about working in your old age.

Based on that, the Straits Times boldly declares that "Singaporeans Welcome New Retirement Age at 65"! And that we are "rejoicing". Owwww. Down, my hairs, down.
Ramesh Prakash Sharma, 66, is so good at his job that when he turned 62, he was given a promotion instead of being asked to retire. His company Qioptiq, an optics manufacturing company, made him a Technical Mentor to show younger employees the ropes. He says: 'I love my job. Optic is in my blood.'

Under the new Retirement and Re-employment Act passed in Parliament on Tuesday, employees who turn 62 will now be given the option to work for another three years. The new re-employment law will be in place from January 2012 and will affect some 20,000 workers.

Another gainfully employed sexagenarian is Elizabeth Hendriks, a 63-year-old steward with Fairmont Singapore who has never missed a day of work in her 13 years with the organisation.

She says she is happy with her job as it keeps her active, and she has only taken 2 days of medical leave in the last 5 years.
Come to think of it, neither Ramesh nor Elizabeth (as quoted above) actually said that they welcomed the government's new policy. Instead both just said that they love their own jobs.

I guess the Straits Times could not actually find any Singaporean who would say, 'Yes, I welcome the official extension of the retirement age to 65, and I rejoice in this!".

Most Singaporeans probably do understand the real significance of the retirement age extension. Later it will just become a political excuse to further delay the full withdrawal of your own CPF savings.

Jan 10, 2011

The Community Care Endowment Fund and Income Inequality in Singapore

An email from a reader:
    Hi Mr Wang,

    I’m a student who have been reading your blog for the past two years. Recently, I've been reading online blog entries on income inequality in sg and it’s true that there are many elderly cleaners and tissue paper sellers around today especially when I’m dining at Bedok Hawker Centre.

    But with existing schemes like Comcare, Workfare and Public Assistance Scheme to help the needy, I really don’t understand why it’s not helping this bad situation that has been ongoing for years. Why are these cleaners not going for workfare? Are they not informed or are they not eligible? I thought the govt has been pumping in $ for workfare all this while?

    ("The Community Care Endowment Fund, or ComCare for short, represents the Government’s commitment to do more for needy Singaporeans. Since the launch in 2005 by the Prime Minister, it has disbursed more than $200 million to help 160,000 needy Singaporeans, and the government has been progressively topping up the Endowment Fund which now stands at $800 million." taken from MCYS News Dec 3 2010)

    I dunno much about this but is 800 million too little to provide safety net for the society? So what's the solution to the unequal income distribution in Singapore?
Firstly, I should say that I have not looked closely at Comcare, and do not know the details of its schemes. But we can do some quick back-of-the-envelope calculations, based on this paragraph:
"The Community Care Endowment Fund, or ComCare for short, represents the Government’s commitment to do more for needy Singaporeans. Since the launch in 2005 by the Prime Minister, it has disbursed more than $200 million to help 160,000 needy Singaporeans, and the government has been progressively topping up the Endowment Fund which now stands at $800 million."
Firstly, $800 million is the amount set aside to help needy Singaporeans. But this is not money that has actually been disbursed yet. When will this money be disbursed, and under what circumstances, and in what amounts, and over what period of time? Your guess is as good as mine.

The amount that has actually been disbursed is $200,000,000. This amount was disbursed over five years. That money went to a total of 160,000 needy Singaporeans.

We don't know how long, on average, each Singaporean stayed on the ComCare scheme. For example, some may have received ComCare assistance for a year, while others may have received it for the past five years. Let's say that on average, ComCare recipents received help for 2.5 years.

Then, according to this reader's calculations (thank you), each person received an average amount of $1,250 per year, or about $104 per month.

This will be roughly enough to buy one packet of chicken rice ($3) per day, with a few coins left over for spare change. It does not sound like much of a safety net to me. But form your own opinion .......

Jan 7, 2011

Food Price Inflation - The Next New Global Theme

Suddenly, food price inflation has become the new global issue. From the New York Times, 5th January:

      U.N. Data Notes Sharp Rise in World Food Prices

      World food prices continued to rise sharply in December, bringing them close to the crisis levels that provoked shortages and riots in poor countries three years ago, according to newly released United Nations data.

      Prices are expected to remain high this year, prompting concern that the world may be approaching another crisis, although economists cautioned that many factors, like adequate stockpiles of key grains, could prevent a serious problem.

      The United Nations data measures commodity prices on the world export market. Those are generally far removed from supermarket prices in wealthy countries like the United States. In this country, food price inflation has been relatively tame, and prices are forecast to rise only 2 to 3 percent this year.

      But the situation is often different in poor countries that rely more heavily on imports. The food price index of the United Nations Food and Agriculture Organization rose 32 percent from June to December, according to the report published Wednesday. In December, the index was slightly higher than it was in June 2008, its previous peak. The index is not adjusted for inflation, however, making an exact comparison over time difficult.

      The global index was pushed up last year by rising prices for cooking oils, grains, sugar and meat, all of which could continue to remain high or rise.

      “We are at a very high level,” said Abdolreza Abbassian, an economist for the organization, which is based in Rome. “These levels in the previous episode led to problems and riots across the world.”
Here's a more Asian perspective, on the same matter.

      SINGAPORE - RECORD high food prices are moving to the top of the agenda for many Asian policymakers as the prospect of higher inflation in 2011 poses a major threat to the region's strong revival from the global financial crisis.

      The United Nations' food agency (FAO) said on Wednesday that food prices hit a record high last month, moving beyond the levels that prompted riots in 2008 in countries as far afield as Egypt, Cameroon and Haiti.

      Food inflation in many Asian countries, including China and India, is already in double digits, raising fears that the price pressures could spread more broadly to other sectors and pose a threat to both economic and social stability as millions of Asians live in poverty.

      Surging food prices have proved a trigger for social protests in the past, forcing governments to cave in to demands for action. They were a factor in the fall from power of Indonesia's long-term autocrat Suharto in 1998.

      'Food price inflation could really go into double digits across the region and rise to such an extent that it undermines the purchasing power of households and as a result then slows consumer demand and overall economic growth,' said Frederic Neumann, regional economist at HSBC in Hong Kong.

      'And that's a problem for Asian economic growth. But really it's also a problem for the rest of the world because as the Asian consumer increasingly is helping to stabilise world demand, it's actually a challenge of wider global significance.' Indeed, South Korean authorities sounded the alarm on Thursday over rising commodity prices. -- REUTERS

I just have a sneaky suspicion that one cause of the current food price inflation is increased activity by financial investors and speculators. It was just last month that my financial adviser was talking to me about investing in agricultural commodities.

Also, in the past few years, investment banks worldwide have been growing increasingly interested in the commodities business. As far as I'm aware, the bulk of their interest has been in metals such as copper, gold and steel. But really, if there's money to be made, they would just as well move into sugar, rice or corn.

In the end, it's all just money to the bank. Doesn't matter whether it's sugar or gold; rice or steel or widgets .... as long as it makes money.

Jan 6, 2011

The Inexact Science of Property Valuation

Saw this in the Today newspaper:

These sellers are not serious
Flat owners re-valuing flats for profits
Letter from Gurmit Singh Kullar

THE latest cooling measures have admittedly had some effect in curbing the cash over valuation (COV) for resale HDB flats but we are still unlikely to see any decrease in valuations.

I have come across some sellers who have had their flats re-valued even before their current valuations expired so as to lock in a further gain.

A flat owner who rejected my offer did exactly that because he was convinced by property agents that his flat was "too cheap".

In another case, a property agent tried to convince me to buy a particular flat because the valuation had increased by $10,000 since the last assessment two months earlier.

Is this practice of multiple valuations for a HDB flat across such a short period condoned? Can the value of a flat really increase so rapidly?

Since valuation prices are based partly on previous assessments, frivolous seller behaviour causes unjustified increases in baseline prices.

In addition to focusing on buyers, I feel that the HDB also should introduce steps to weed out non-serious sellers ....
Gurmit is wrong. In the current market, sellers who constantly seek revaluations are not only serious, but savvy.

Property valuation is not a science. We should think of it more as an art. Or even better, just as an opinion. Supposedly an independent, educated and informed opinion - but in any event, still just an opinion.

So for instance, let's say that we simultaneously ask for three property valuations of the same HDB flat. Even though all valuations are done at the same time, the first valuer might say "$500,000"; the second valuer might say "$520,000"; and the third valuer might say "$540,000".

In all three cases, the respective valuer will support his opinion by citing a list of relevant factors in his report. For example, he would look at the recent sale prices of similar properties in the same neighbourhood. He would consider the nearby amenities (is there an MRT station nearby? Or any top school? Or a good shopping area?). He would also take note of the physical state of the apartment itself (for example, whether it has a good view, or has been renovated nicely).

But all these factors have subjective elements. For example, what is a "good" view? Which schools are "top"? How faraway can an MRT station be, and still be considered "near"? Since the answers to these questions are merely opinions, it should be obvious that the valuation figure itself is also merely an opinion.

Particularly in a rising market, a savvy seller may seek revaluations. Why? Because, as I mentioned earlier, property valuers will consider the recent actual sale prices of similar properties in the same neighbourhood. If market prices are generally on an uptrend, the valuation you get in January is likely to rise by April. That's because the April valuation would have taken into consideration data on sale prices that had become available only in February and March.

Although property valuations are merely opinions, they have a lot of practical significance. Among other things, they determine the maximum amount that a bank would be willing to lend to the buyer. In turn, this influences the price that the buyer is willing to offer to the seller.

So Gurmit is both wrong and right. He is wrong to say that the sellers are not serious. He is right to say that they are out to make money. The sellers are serious. They are serious about making money.