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Why we should buy the biggest and most expensive home?

Friday, January 30, 2015

Bro, good, knock some sense into her head!

Whenever I tell people not to buy a home that stretches their finances to the max (and beyond), often, I would get the reply that if they don't buy a home that is as big as possible, that is as expensive as possible, they might not be able to afford something like it in future due to inflation.

I have blogged about how our homes are really consumption items and not investments although it is hard for many to accept that especially when they see real estate prices in Singapore sky rocketing in recent years.

Of course, in recent months, the mood has become a tad more cautious but many people still think of their homes as investments and assets which are a good hedge against inflation. 

A recent argument put forward by someone along this line provided the catalyst for this blog post.

That someone said recently that if I were willing to buy some physical gold and silver as a hedge against inflation, why not a bigger and more expensive home?

Well, I have to say that my motivation for having some gold and silver is, in fact, an insurance against the flaws of fiat currencies. 

Embedded in that motivation, therefore, is the belief that precious metals are a hedge against inflation. So, this person is right in this respect. 

However, his understanding is incomplete.

The vast majority of us have to use leverage in the purchase of a home. 

A home purchased with a loan is a liability for the next 20 years, 25 years, 30 years or whatever the duration of the loan should be.

Only a home that is fully paid with our own money is an asset. 

Before that, we might have control over the property and the ability to enjoy using it but we do not have ownership of the property.

Another point is that if we have developed a crisis mentality, we would know that having some precious metals as insurance also makes sense because they are portable. 

Our home, even a shoebox apartment like mine, is not portable. 

Well, there are exceptions, I suppose, and those who live in caravans and houseboats might be the really smart ones.

Finally, precious metals usually form less than 10% of our wealth, for those of us who have them. 

However, for most of us, our homes easily form 50% or more of our wealth. 

This is why people say that Singaporeans are asset rich but cash poor. 

That asset they are referring to is usually our home.

"Professor Benedict Koh, director of the Singapore Management University's Centre for Silver Security, says the asset-rich, cash-poor phenomenon is an outcome of over-investment in property. And the proportion of such seniors is only going to rise as the population ages, say Prof Koh and other observers.

"Ms Peh Kim Choo, director of Hua Mei Centre for Successful Ageing, is worried that the asset-rich, cash-poor problem will be exacerbated as baby-boomers retire over the next 20 years. This is the generation that entered the workforce after CPF and the message of home ownership were introduced, she says.

"As more of these folk retire, says Ms Peh, "that is where we will see a lot more of the asset-rich, cash-poor situation". It cuts across both public and private housing, she notes. Her centre has counselled such seniors living in larger HDB flats."


What makes thinking that we should get the biggest and most expensive homes we can afford now because real estate prices will always go up in the long term particularly risky is complacency, the lack of a contingency plan, the lack of a crisis mentality.

Of course, vested interests would want to propagate the belief that there is never a bad time to buy a home and we don't have to time the market.

Apart from questions we should be asking these vested interests, we should ask ourselves some questions.

What if we were to lose our jobs? 

What if we were unable to continue working for any reason? 

What if we had bought at the peak of the market? 

What if the property market should crash in the next few years?

Do we have the financial resources to cope in such instances and if we should have some financial resources, would these financial resources remain strong or weaken in tandem?

I have been through a few economic cycles. 

I have seen how bad the bust in an economic cycle could be and how they affected families and friends.

It could be that this time it is different as I certainly do not possess the ability to look into the future.

However, we might want to remind ourselves that although history does not repeat, it does rhyme.

Related posts:
1. Disastrous investments in the property market.
2. Singapore properties will surely make money.
3. Two questions to ask buying investment properties.
4. Buying a home within your means.
5. Buying a property: Affordability and value for money.


The Sun said...

The perception of a house being an asset is not helped by the fact that people are cashing in on their homes - at a premium what they had paid - after the minimum occupation period. Media publicity on these profitable sales exacerbates this sort of thinking. Just look the recent apartments sold at the Pinnacle @ Duxton...

RealMe said...

Fantastic post... Many in Singapore "invest" in property based on the assumption that inflation will always mean property price will only go up plus land is scare in Singapore. Nothing wrong but the timing to get in is very important. I recently (Jan 2015) came across a deal in CCR where the owner bought his condo in 07 and based on the current market valuation, his property is still under-water (disregarding cost like interest, property tax, maintenance, etc).

Ana said...

Really? I thought prices are a lot higher now than 2007...

AK71 said...

Hi Ana,

It is mostly seen in the luxury segment although it is not unheard of to have people just breaking even a couple of years ago if they bought their condos in the suburbs before the AFC. So, timing is important. :)

"The second half of 2014 saw more luxury homes sold at loss-making prices, as a growing number of wealthy owners seek to sell off their trophy properties, reported the media.

"Based on Maybank Kim Eng data, eight of the top 10 loss-making projects are located in District 9 and Sentosa island. Historically, these areas had attracted much higher foreign interest compared to other parts of Singapore.

"The project that recorded the highest loss-making transaction was the Turquoise@Sentosa, in which one unit was sold for $3.9 million in July, or almost half of its $7.1 million original price when it was sold in November 2007.

"Other projects that witnessed loss-making transactions in H2 2014 include Helios Residences, Orchard Scotts, The Grange, The Oceanfront@Sentosa Cove, The Orchard Residences (pictured), Tanglin Hill Condominium and The Cascadia."

Source: (6 Jan 2015)

AK71 said...

WHILE homebuyers are expected to service higher monthly mortgages on the back of rising interest rates, some consultants believe it is still an opportune time to snap up units amid falling home prices.

Colliers International deputy managing director Grace Ng said that homebuyers have to be even more cautious now when assessing affordability before they commit to a property purchase. But with interest rates still expected to be relatively low compared to the levels seen before the 2008 financial crisis, the impact on homebuyers ability to service monthly mortgages "is not expected to be significant".

Homeowners were caught by surprise last month when the Singapore interbank offer rate (Sibor) and swap offer rate (SOR) - key benchmarks used to price most home loans here - shot up after years of slumber.

Fitch Ratings said in January that in tandem with Singapore's benchmark rates, mortgage rate indices will also increase slightly this year, albeit still reaching low levels of around 2 per cent.

CIMB regional economist Song Seng Wun noted that the spikes in the SOR and Sibor were due mainly to a flight to safe haven assets denominated in the greenback as fears heightened over a potential exit by Greece from the eurozone.

Following a surprise policy move by Monetary Authority of Singapore last week to slow the appreciation of the Sing dollar, the three-month Sibor - most commonly used to set floating-rate home loans - continued its upswing, hitting a fresh five-year high of 0.679 per cent as at Monday.

"Unless another external shock triggers an economic slowdown, we are of the view that we are seeing the start of a new growth cycle, which means that interest rates will go up," Mr Song said.

But currently, lower oil prices and easing inflationary pressures suggest that the rise in interest rates will be not be brisk, he added. He expects the Sibor to rise above one per cent by the end of this year and 2 per cent by end-2016.

But for investors who can manage their cashflows, Ms Ng felt that they may be better off renting the property out at a lower rent to gain some income to service their monthly mortgage payments, rather than to let go of their units at lower prices.


AK71 said...

Singapore has lowered development charges (DC) for non-landed residential projects, with the biggest decrease seen in the north-eastern region.

In a news release on Friday (Feb 27), the Ministry of National Development (MND) said that the DC rates have fallen on average by 3 per cent for land for non-landed residential property. Seventy-three out of 118 sectors saw decreases ranging from 2 per cent to 13 per cent. There is no change to the DC rates for the remaining 45 sectors.

The largest decrease of 13 per cent was for Sector 100 - which covers the Tampines Road / Hougang / Punggol / Sengkang area, said MND.

The change in DC reflects changes in the value of land in the area.

... prices of private residential homes have fallen amid Government measures to cool the sector and a looming oversupply of condominium units.


AK71 said...

Based on new home sales data for January 2015 from the Urban Redevelopment Authority, there are 20 large developments with a total unsold stock of more than 200 units each - excluding executive condominiums.

They include recent projects like Symphony Suites in Yishun, as well as those launched two years ago, such as The Trilinq in Clementi.


AK71 said...

“Here, if someone happens to own a landed property, likely that person will become an accredited investor. If investors are really rich, it’s not a problem. But some people are semi-rich, or look rich on paper.”
- Christopher Chen, an assistant law professor at Singapore Management University.

Kevin said...

Private home prices feared to plummet by up to 15% according to a report by OCBC Investment Research.

AK71 said...

K says...
Correct me if I'm wrong, after wiping out ur CPF for initial DP for HDB flat, we are forced to repay the hdb loan by wiping out our subsequent cpf monthly contributions every month?

S says...
The govt just want us to work forever and ever and ever.

AK says...
Few are able to afford their first home without tapping on their CPF savings.

You can always choose to do voluntary refunds to your CPF-OA later on when you are financially more capable.

We must never forget that the aim of the CPF is primarily to help ensure retirement funding adequacy.

Over-consume on housing and we might have to "work forever and ever and ever".

We have a choice in housing type.

The government didn't tell us to buy the largest and the most expensive housing type there is available to us. ;)

WTK said...

Hi AK,

One possible option is to rent the housing.


AK71 said...

Hi Ben,

In some instances, it might actually make more sense to rent than to buy.

AK71 said...

Peter Yu says...
People did not know that cpf is meant for retirement.

Some people cant get over that fact that they cant draw out the money anytime they like so might well use all to buy the biggest flat.

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