Recently, I have been conducting a few one-to-one consultation sessions for people who are planning to buy their new home. In general, they all want to know three things – whether they should buy a particular condominium project, whether they can afford to buy, and whether this is a good time to buy.
By the way, I really enjoy all these personal consultation sessions. In the first place, people who paid for my service are serious about their home purchase. They want to do it right. Besides, since I charged by the hour, they all arrived punctually. As I went through the slides and calculations with them, they were all eyes and ears. They would let me do the talking and asked all the right questions.
3 things that homebuyers often forgot
Potential homebuyers can be easily carried away by a newly launched project. They may be attracted by the location, condo facilities or developer gimmicks that they find out from the website or property agents. Many are fascinated by the images under artists’ impression, the lifelike virtual tours, or latest smart home technologies.
Yet, they forgot to ask the most important question: How much will it cost them? Can they really afford it?
Whenever I ask my clients whether they have checked their affordability, they often answer “roughly”. This one-word answer can imply checking with their agent, talking informally to a bank, or going through some online affordability tools.
I will remind them two important aspects to check whether they can afford a property: Firstly, whether they can borrow the maximum loan-to-value from the bank. Secondly, whether they can afford it over the entire course of ownership.
Above all, before making any home purchase, check the affordability three types of costs: the acquisition cost, operating cost and total cost of ownership.
1. Acquisition Cost
This is the initial capital. That includes the downpayment (25 percent to 45 percent if no outstanding housing loan), legal fee, Buyer’s Stamp Duty and Additional Buyer’s Stamp Duty (if applicable), renovation and furnishing.
2. Operating Cost
Overheads of a property include the monthly mortgage, maintenance fee, property tax, repair costs, etc.
3. Total Cost of Ownership
This is the addition of 1 and 2. over the years. Don’t forget the total compound interest paid (from both mortgage and CPF withdrawal) to come up with the total loan repayment over the entire tenure of the mortgage. This is the reason why some people do not have sufficient fund to repay CPF or to retire after selling their home.
Guess how much the total amount paid for a $1.8 million home? Assuming taking 75 percent loan-to-value or a $1.35 million loan. Even with a flat interest rate of 2 percent, the total loan repayment after 30 years comes up to close to $1.8 million. And that is on top of the initial capital of over $500,000 spent at the beginning.
How to check whether you can afford it
It caused a stir when I first came up with the 3-3-5 housing affordability rules in 2014. When the property market is hot, people say the rules are too conservative. When the property market flops, people thank me for being cautious.
I don’t care. Rules are rules.
Rule #1: 30% of property price
The initial capital you set aside should be a minimum of 30 percent of the property’s asking price 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 your annual income.
Allow me to quite from my book Behind The Scenes of The Property Market how I define housing affordability in four simple categories:
1. Very Affordable
The home you intend to buy or the investment property is only one of your many investments. You can afford to pay in full any time or with a minimum loan. Next time if you need to cut your losses, you won’t even bat an eyelid. Then the property is “very affordable” to you.
2. Highly Probable
If you can pass my 3-3-5 test, and you have reliable streams of passive income not dependable on a paycheque, it is “highly probable” that you can ride out the next storm in the property market.
3. Merely Stretchable
You fail to meet any of the three requirements of 3-3-5 rules. After you purchase the property, you need to settle your mortgage at the expense of your current lifestyle. If you constantly worry about job stability, economic recession, interest rate hikes, low rentals or no tenant, you are “merely stretchable” buying that property.
4. Barely Reachable
If you have difficulty even forking out 20 or 30 percent for the downpayment, and your property agent hints that “there might be a way to help,” you know that you have overstretched financially. Investing in a private property based on your current financial situation is “barely reachable”.
Buy when interest rates are high, not low
Did you feel the wealth shock recently?
The year 2022 is a completely different market in investment. With deep diving of prices in cryptocurrencies, stocks and other financial assets, so far US$800 billion have been wiped out from billionaires in the US. Since the beginning of the year, JPMorgan Chase estimates that there is at least US$5 trillion plunge in wealth. The amount could reach US$9 trillion by end of this year.
That’s for the rich. For the middle-income and working-class families, they are now struggling with high inflation and rising mortgage rates. Many homeowners have their wealth closely linked to the valuation of their homes.
In a booming real estate market, homeowners can refinance to get cash from their mortgage bank. Or they can sell their homes with high valuation from the bank. After all, buyers are happy to buy high valuation homes with low interest rates.
But market direction has changed. From now on, things are working the other way round.
As homebuyers, it is safer to buy when interest rates are high but trending down. Because you will be relieved to see lower monthly mortgage payment as interest rates start to fall.
On the other hand, if interest rates are low when you are buying a home, make sure that you can still afford your monthly mortgage even if interest rates are tripled. That is, from 1.5 percent to 4.5 percent, or from 2 percent to 6 percent. The situation is highly possible. In fact, Singapore mortgage rates have doubled over the last six months.
Another thing to check: Even if you (or your spouse if it is co-ownership) lose your job, you still have enough cash to settle your monthly mortgage for the next two years.
You can’t afford to have a negative equity
You home is a negative equity when its value falls below your outstanding housing loan. The implication is: Even after you sell your property to pay back the bank, you still owe the bank the difference between the lower selling price and your higher outstanding mortgage. Nothing is worse than owing the bank money even after you lose your home.
If you have good holding power (high cash reserve, positive income streams or a stable job), it is fine to hold onto the negative equity. Otherwise, you will be spending quite some time paying back your debt but end up with nothing.
How to avoid your property becoming a negative equity? If your home is on 75 percent leverage, you should sell it when its valuation drops 25 percent. If you wait till prices drop 30 percent, the bank can ask you to top up the difference of 5 percent in cash.
During the past financial crises, there were many negative equity cases. In Hong Kong, the bulk of them happened in the year 2003. Many people couldn’t take it and committed suicide. Unlike Singapore, Hong Kong media can report suicide cases. Every now and then there would be news report of negative equity homeowners ending their lives by burning charcoal or jumping into the MTR train tracks. Since then, the Mass Transit Railway Corporation started installing glass doors on the train platforms.
When property prices are high, homeowners are happy. At most there are complaints from those who cannot afford to buy or upgrade. But they can still live in HDB flats or rent for the time being. At least, nobody dies from high property prices.
Food for thought
If you can’t afford it, you can’t afford it. There is nothing wrong staying in HDB flats. If you stretch yourself to upgrade, you are taking high risk. Your life will be filled with stress. You and your family won’t be happy.
Why I always remind homebuyers to be very careful when buying properties?
Because most people buy homes when they feel high in a pleasant sales gallery or in an euphoric new project first launch. In contrast, I bought my properties when I faced desperate sellers in a mortgagee sale or a fire sale when there was blood in the streets.
I won’t forget what I saw and the lessons I learned.
The property game only kills the house-rich cash-poor – those who save just enough for the downpayment; those who barely pass the TDSR test; or those who pay a huge chunk of their salary for their mortgage every month. Sadly, in any society at any time, the house-rich cash-poor always outnumber the cash-rich asset-poor.
I have purchased both mortgagee sale and fire-sale properties from owners who have overcommitted in a thriving property market. I have seen many investors being burnt badly by their wrong or untimely property investment. They could have avoided the negative outcome had they abided by the 3-3-5 rules before their purchase.
In a few property viewings, I was told that the owners were close to bankruptcy. It must be a big blow to them seeing the Official Assignee sell off their home against their will. The worst thing in life is to end up in a situation that you are not given any choice. When you are out of options, you will be forced to do something you don’t want to do. This is when you can no longer live with dignity. The pain and trauma are going to last for a long time.
– Vina Ip, Behind The Scenes of The Property Market
If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.
My new book Behind The Scenes of The Property Market is now available for preview and order online. You can also check out my online courses.
Thanks for the article! I am currently renting and looking for a place for own stay, is it better to wait until say later this year when the property market trend is more clearer? e.g. when the impact of interest rate increment on property price (if any) is shown.
Not sure if this is considered as “timing” the market, which I know is hard & not advisable, but want to get some general ideas. Thank you very much!
No one can tell what will happen in the future. But we can tell whether a market is hot or not and avoid going in with the madding crowd. Another thing we can do is to get hold of what’s available and analyze the macro factors and relevant data. You can read the published official figures from the URA website, e.g. the pipeline supply of completed private residential units in the next few years.