Dollars and Sense recently published a blog post titled “Here’s the salary you need to earn to determine affordability of these homes in Singapore”.
The writer of the article has the good intention to show readers what type of housing they can afford based on their monthly salary. However, income is only part of the whole picture when it comes to deciding whether you can pay up for a property.
Housing affordability is not all about income
When you apply for a housing loan, banks usually ask for your latest payslips, account statement, tax assessment, CPF contribution history, etc.
The banks need to make sure that borrowers are capable of repaying their housing loan. This also provides proof of income when calculating the Total Debt Servicing Ratio (TDSR).
However, whether you can afford a particular housing type cannot be entirely based on your monthly salary. There are other important factors to consider too.
1. How much cash and CPF you can use to settle the deposit, legal fee, stamp duties, renovation, etc.
2. How much you can set aside for mortgage repayment after deduction of your monthly expenses.
3. How much contingency fund you have to cope with interest rate hike, negative equity, etc.
4. How stable is your household income (job stability of both husband and/or wife).
5. When you purchase your property makes a big difference in the loan-to-value, buyer and seller stamp duties, etc.
Comparing Dollars and Sense Affordability Table and 3-3-5 Rule
Back in June 2014, Yahoo News reposted an article from my book No B.S. Guide to Property Investment about my 3-3-5 affordability test. This has attracted tons of comments and sparked off heated debates online.
Let me briefly recap the 3-3-5 rule that is meant to determine your affordability of the property that you intend to buy.
Rule #1: 30% of property price
Your initial capital should at least be 30 percent of the property’s asking price, in order to pay for the downpayment, transaction costs and other miscellaneous expenses.
Rule #2: 1/3 of monthly salary
Your monthly mortgage payment should not exceed one-third of your monthly salary.
Rule #3: 5 times of annual income
The purchase price of the property cannot exceed five times of your annual income.
The table below is a comparison between Dollars & Sense’s Affordability Table and my 3-3-5 rule.
As you can see, if you earn the “average salary per spouse” in Dollars & Sense’s table, you fail rule #2 (repayment less than one-third of monthly household income) in all types of private housing.
If Dollars & Sense’s average housing price is accurate, prices of all categories of housing are higher than 5 times of annual household income which can’t pass rule #3.
Look before you leap and enter at your own risk
Compared with the Dollars & Sense Affordability Table, the 3-3-5 rule is no doubt more conservative and stringent in determining the affordability of a home buyer. Afterall, buying a home is usually the biggest purchase in a salaryman’s whole life. It’s better be safe than sorry.
Of course if I were a property agent or a developer, I would come up with a 1-2-10 rule. You will be relieved and happily hand me your cheque for the deposit.
Rather than complaining that the 3-3-5 rule is too strict and unrealistic, and that you will never be able to buy your dream home in this market, have you ever thought of the fundamental issues here?
If you need to pay more than one-third of your household income for your mortgage every month, you are not having enough buffer for a market downturn. If the housing price is higher than 5 times of your annual household income, you can’t really afford it. Either switch to a higher-pay job or settle with a more affordable housing type.
Allow me to quote what I said before in my earlier blog post “Can you afford your dream home after taking the 3-3-5 test?“:
We are having the ‘boiling frog’ phenomenon here: When people are in a high-price environment for too long, they will gradually think that it is normal and acceptable to pay high prices. Similarly, when people are in a prolonged boom of the property market, they will forget what is a ‘value-for-money’ home, or why it is necessary to calculate the ROI of an investment property.
Affordability model for property investors
What about buying a private property for investment rather than for your own stay?
Over the years, I have seen many investors being burnt by their wrong or untimely investment in the real estate market. So let me define affordability in 4 simple categories:
1. Very Affordable
If the investment property is only one of your many investments, any time you have to cut loos you don’t even bat an eyelid; if you can pay in cash in full or with minimum or negligible loan, the property is “very affordable” to you.
2. Highly Probable
If you can go through the 3-3-5 rule, and you have reliable streams of passive income not dependable on a pay cheque, your chance of riding out the storm is “highly probable”.
3. Merely Stretchable
If you can’t pass the 3-3-5 test, and after you purchase the property, you have to constantly worry about low rental, no tenant, interest rate hike, economic recession, job stability, failing business, etc., you are “merely stretchable”.
4. Barely Reachable
If you have difficulty even forking out 20 percent for the deposit, and your property agent hints that “there’s a way to help”, you know that investing in a private property based on your current savings and financial situation is “barely reachable”.
Buying a property is different from buying stocks. It is more complicated and also highly illiquid. Do you dare to take the plunge just based on your current salary?
Did you watch my video “2018 Singapore Property Market – what developers, agents, banks and analysts are hiding from you”? Watch it now!
For most ordinary joes, whether in S’pore or overseas, the main criteria is having a job with sufficient salary.
That’s why you won’t see a widespread property crash until there’s a high level of unemployment.
In S’pore context, for younger couples, I think only HDB BTO can fulfill the 3-3-5 rule.
For those with higher salaries, maybe new launched ECs, but smaller units.
In certain cities like HK, I think the 3-3-5 rule may only be passable by multi-millionaires & above.
Even some multi-millionaires like actor couple Julian Cheung & Anita Yuen have decided never to buy HK property, but instead to rent, saying that for the typical buying price, they can rent similar luxury homes until they are 130 years old. I’m sure they have plenty of overseas properties investments though.
A late actress in Hong Kong said, “I don’t understand why people spend their life savings to pay for Heaven’s price, when they are only buying a place on Earth.”
Hi Property Soul, may I know for you first and second property did you use this 3-3-5 rule? Base on this 3-3-5 rule, basically alot of people will not pass the criteria. Thanks!
Yes, not just the 1st and 2nd ones, but all the subsequent ones. Always remember: If you can’t pass the 3-3-5 rule, you either over-stretch yourself or the property prices are now overpriced.
I am wondering how well this sits with the notion of “anyone able to afford a flat with $1000 salary”?
Will this fit the 3-3-5 rule?
Private property and home ownership are not for everyone. There is always public housing and rental options. https://www.propertysoul.com/2019/03/26/home-ownership/
Can I understand the mechanics behind each of the components of the 3-3-5 rule? How did you derive the 30% of property price, 1/3 of monthly salary and 5 times of annual income? I understand that these rules are conservative but I believe there should be a sound logic behind the conservativeness as well and would appreciate your help on this. Thank you.
You can refer to my earlier post on the 3-3-5 rule -> https://www.propertysoul.com/2014/06/20/can-you-afford-your-dream-home-after-taking-the-3-3-5-test/