Why we should buy the biggest and most expensive home?

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."

Source:
http://www.straitstimes.com/the-big-story/case-you-missed-it/story/asset-rich-cash-poor-retirees-speak-20131203

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.