March 2023 ~ Investment Stab

Sunday 5 March 2023

ChatGPT says 'No' to NCMP Land Sales Proposal

06:49 Investment-Related, Others No comments

In the recent budget debate, NCMP Hazel Poa proposed an alternative source of revenue to be added to Singapore's yearly budget.

Current Framework (CF):

Keep proceeds from land sales in reserves and invest them.
Allow up to 50% of investment returns generated from the proceeds to be spent in the budget under the NIRC.

Alternative Proposal (AP):

Land sale proceeds are dividend equally over its lease period, with each portion added into the corresponding year's budget as revenue.
Invest the unused portion of the proceeds in reserves, with up to 50% of the investment returns allowed to be spent under the NRIC.

Needless to say, DPM Lawrence Wong rejected the proposal, citing that over the long term, the AP does not generate returns very different from the CF.

Recommended Read: Why We Still Need Insurance Agent

Introducing, ChatGPT

We figured, rather than rely on our brains, let's rely on an AI.

Hence we pit the CF against the AP in ChatGPT.

We screenshot the questions and answers we got below.

So, it doesn't seem ChatGPT is very pro the AP.

But, to make sure it is not biased, we also asked it what are the benefits of the AP.

Obviously, at this stage, ChatGPT started to contradict itself a little.

It first stated that drawing on land sales is volatile while NIRC provided stable funds.

Then it contradicts itself by saying that land sales are stable while NIRC is volatile due to investment risk.

Our conclusion is: to take the ChatGPT response with a pinch of salt.

Rationale of the Alternative Proposal

In personal finance, there are several schools of thought on how to manage money for retirement.

One of them is the "living off the interest" approach, which emphasises on:

Accumulate a large pool of capital (principal)
Spending only the returns generated by the principal
Never draw down on the principal.

This is the approach utilised by the CF.

Another school of thought is the "4% rule movement", which emphasises:

Accumulate a large pool of capital (principal)
Principal and the returns generated go back into the pool to form the portfolio
Draw 4% of the portfolio every year to spend

This is the approach utilised by the AP, but with a much more conservative twist: drawing only 1% instead of 4%.

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Excel Spreadsheet

So we ran an Excel Spreadsheet just to see how much of a difference each framework would generate in terms of returns.

Below are some of our basic findings

By the end of the 99-year period, CF would have 75% more funds than the AP.
By the end of the 99-year period, CF would provide 57% more in annual NIRC contribution than the AP.
Over the full 99-year period, CF would have contributed 23% more than the AP, in terms of total dollar contribution.
In the beginning, AP would contribute more to the NIRC as compared to the CF. The switch will happen at the 35th-year mark, where onwards CF will start contributing more to the NIRC than the AP.
At the 64th-year mark, CF would surpass the AP in total accumulated dollars contributed to the NIRC.

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Conclusion

There is no right or wrong answer on this matter.

It is a matter of perspectives and personal preference.

Because at the end of the day, mathematically, both approaches still grow the reserves and contribute to the budget.

It is just whether we prefer the "living off the interest" approach (our current way) or the "4% rule movement" approach (NCMP's suggestion).

Personally, we're on the "living off the interest" camp, but that's our preference.

What about you?

Let us know in the comment section which approaches you prefer.

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Thursday 2 March 2023

Reasons Why the 99-Year Term Limit on Properties are a Must

07:05 Investment-Related, Others No comments

There are 3 (R)easons why Singapore set a 99-year term limit on public housing and most private housing.

2 of which have been mentioned by the Singapore Government multiple times on multiple occasions.

The last reason was one we thought of as a potential reason that was not explained/explored by people.

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Reason One: Revitalise old Building(s)

Buildings deteriorate over time.

Eventually, there will come a time to demolish and rebuild.

However, if no absolute deadline is set, the probability of the building being demolished is ZERO as people living inside the building will not allow it to happen.

Hence a rule (or law in this case) has to be set in place to mandatorily allow the buildings to be vacated for demolishing and rebuilding.

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Reason Two: Re-purpose the Land

The second reason for the 99-year lease limit on public housing in Singapore is to ensure a sustainable supply of land for future generations.

By having a set lease period, the government can plan for the redevelopment and renewal of housing estates and allocate land for new developments, such as parks, schools, and hospitals, in a systematic and sustainable manner.

This helps to prevent a situation where land becomes scarce and unaffordable, which could lead to social unrest and economic inequality.

Therefore, the 99-year lease limit serves as a long-term planning tool to ensure that land remains available and affordable for the benefit of all Singaporeans.

Reason Three: Reduce Land Concentration

The 99-year limit is required to prevent the land from being concentrated in the hands of a tiny group of the population.

The Pareto Principle (80-20 rule) has been shown to be evident in most social and economic situations, be it investments, properties, wealth, productivity, or even crime.

Should everyone be allowed to freely own their home indefinitely without a "redistribution" from an external force, it is only a matter of time before 80% of the land goes to 20% of the population, and the rest of the people have to scramble for the remaining 20% of the land.

There was a research that dove into land ownership in Singapore before we had the Land Acquisition Act (LAA).

Research had estimated that the Hadrami Arab community had at one point owned close to 50% of all the land in Singapore, although they made up less than 1% of the population.

They were one of the major property owners in Singapore before the implementation of the LAA.

Had it not been for the LAA, it would be safe to assume that there would most likely be a lot less land today for public use.

Hence to prevent properties from concentrating into the hands of a few, term limits were set on properties so that the majority of the land would return back to the government for redistribution for the next generation.

Of course, this might be counterfactual as it has not happened.

But we definitely would not want to plan our policies in a way that would put this theory to the test.