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Tread Softly: The Covered Bond Blog

06 March 2015
Richard Kemmish

Although the Asian covered bond forum next week is about the prospects for the asset class in all jurisdictions, Singapore will obviously be the biggest topic of conversation, not just because the conference is in Singapore or because Singapore is this year celebrating the 50th anniversary of its independence (many congratulations to my Singaporean friends!) but also because of the delays to the first covered bond there.

The primary reason for the delay is the prior ranking claim of the Central Provident Fund – the state run pension fund - on the properties. Singapore allows money put aside for pensions, which would otherwise be administered by the CPF, to be used to part fund housing. This is a prudent tool of Singaporean housing policy to increase home ownership, about which more later, but is also an explicit example of a global issue – the interaction between pension and housing policies.

To ridiculously over-simplify, there are three models of home ownership: most people own their home; mortgages amortise over their economic life,  most people own their own home; mortgages are interest only and most people don’t own their own home.  Looking at the allegedly homogenous Europe all three models are apparent.

In the ‘own it and pay for it over your life’ model – as championed in the UK for example - the need for funded pensions is far less as the biggest single component of a pensioner’s cost of living is removed by the time they stop working. Other implications of this are that it is very difficult to introduce a tax on assets (rather than income) as is currently proposed by some political parties, that ‘equity release’ mortgages should be developed and that house price inflation becomes a staple topic of conversation at dull middle class dinner parties.

Switzerland, in contrast, has a large number of interest only mortgages. Homes that are ‘owned’ at retirement still require income for debt service. Prudently there should be a ‘second pillar’ pension, private, funded and roughly equal to the outstanding mortgage, either in notional or income potential.

Finally, in the absence of widespread home ownership pensioners have to rely on the state being solvent enough to provide public sector pensions and low inflation not destroying the value of private sector pensions. The implications for German public opinion on the euro crisis are too obvious to need restating here. 

But to return to Singapore, it seems clear that housing policy was a key contributor to its 50 year success story. High levels of home ownership – thanks in large part to the Central Provident Fund - and the enlightened policies of the Housing Development Board – including deliberate mixing of racial groups in the same development – created something almost unique in the 1960s globally, successful high density social housing. Changi succeeded where Cheryomushki falied.

It took the UK government five years to put in place a covered bond framework. The recent delays to the Singaporean framework need to be seen in that context. Covered bonds always need to adapt to local specificities. Whenever housing policy is involved there are profound implications for the financial system and society at large.


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