SINGAPORE – Following the President of Singapore Halimah Yaacob’s call for policy suggestions, economist Walter Theseira suggested halting the use of CPF savings to buy homes. The rationale of the proposal was to address the issue of inadequate retirement savings faced by Singaporeans.

If this policy change comes to fruition, it will likely have a massive impact on Singapore’s housing market. Over the past 10 years, tens of billions of dollars were withdrawn from CPF accounts for the purpose of making home purchases.

We examine some of the things that would likely result in such a policy shift, and why it probably will not happen.

1. Immediate Plunge in Residential Prices

As practically all Singaporeans use their CPF savings to finance their property purchases, halting the usage would mean Singaporeans may no longer be able to afford that downpayment with their limited cash savings. Hence, it is inevitable that housing prices will drop immediately due to drastically lower purchasing power.

2. Drop in Consumer Spending

With less cash to spend after paying off housing mortgages, Singaporeans will likely tighten their purse strings and pull back on discretionary spending.

3. Pullback in Economic Growth

With real estate making up around 9.6 per cent of Singapore’s gross domestic product (GDP), a scaling back of property prices will have an adverse impact on GDP growth. Moreover, with decreased consumer spending, other sectors of the economy will also take a hit.

4. Spike in Mortgagee Sales

If home owners are no longer allowed to use CPF for their mortgage repayments, you can bet that the number of people unable to service their mortgage loans will spike. This may be compounded by retrenchments due to a worsening economy. Furthermore, if the drop in property prices is significant, banks may force home owners to revalue their property and top up the difference in cash – failing which the mortgagee may be forced to sell the property.

5. Lower Liquidity in Market

Existing home owners will be less inclined to sell their homes because not only do they have to return the CPF amount (plus accrued interest) they borrowed, they will not be able to use CPF monies for their next purchase. Also, if housing prices fall enough to create a negative equity, home owners will need to fork out that difference when they sell. All this leads to lower liquidity (i.e. lower housing stock) in the housing market.

6. Cash-rich Investors Will Snap Up Bargains

A group of people will benefit from this – investors who are cash rich but do not own any properties in Singapore. These investors will be able to snap up property at bargain prices, especially when they compare Singapore’s prices with other global cities. Many of these are likely to be foreign investors or companies.

As you can imagine, the consequences of halting the use of CPF for home purchases are nothing but dire.

Therefore, it is quite unlikely that such a policy shift will happen immediately, if at all. It is more probable that more restrictions or lower limits will be placed on CPF usage for housing. Regardless, it would be prudent for would-be home buyers to consider policy risks before they buy any property.