How To Budget For A Property
“Be fearful when others are greedy and greedy when others are fearful”
The above are the wise words of Warren Buffet and they have been popularized often by financial experts commenting if “it’s a good time to buy”. I have noticed that this phrase have been repeated most often when the prices (could be equities or property) of investments are at or near to an all time low. Obviously, it makes good sense as everyone knows that the only way you make money from investment is if you were to buy something and sell it later at a higher price. Another way to say it is that we make money when we “buy low and sell higher”.
I have not for a long time heard or see this quote being used when it comes to the Singapore property market. Property prices are an extremely subjective topic and almost always, you’ll find 2 people disagreeing on the value they place on a piece of real estate. After all, a big house to one can be a garden shed to the other. How then do we make a decision on the affordability of a property purchase?
In normal financial planning standards, the concept of “debt-service ratio” (DSR) is used. It is the percentage of an individual’s loan repayments over income. For example, if you earn $1,000 a month and your monthly mortgage repayment is $500, your debt-service ratio is 50%. A healthy debt-service ratio is being recognized as anything less than 35%. In Singapore, the typical market practice for lenders in deciding to approve a loan is to use a DSR of 40%.
An article recently in the Straits Times caught my attention and I have attached it to share with you. The writer argued that affordability should be based on the “lifetime income” of a person rather than the monthly affordability. This is because monthly affordability can be “altered” by increasing the loan tenure or having an initial low-interest rate commitment thus short-term affordability seems all right. In the article, the author wrote “undue reliance on short-run housing affordability measurements was one of the triggers in the US sub-prime mortgage crisis”.
In my opinion, the concept of using “lifetime income” to determine the affordability is sound. Take for example a condo worth $1 million dollars. If your lifetime income (money you are expected to earn for the rest of your working life) is only $1million dollars, this would have been unaffordable as you still have other needs such as food, shelter and basic human wants (man think beer, women think holiday) to satisfy. On the other hand, if your lifetime income is $10 million dollars, you should expect no problems buying the condo.
Debt-Service ratio determines if you can buy a property, your lifetime income decides if you can own one. Unfortunately, there are many people who do not understand the difference between being able to buy and being able to afford.
The government has just announced additional measures to cool the property market. Your guess is as good as mine whether it will have the desired effect but I do know 2 things. One, we have a very greedy market right now and two, what goes up must…
I hope you enjoy the article and I’ll end with another wise quote and practical tip… “Big houses creates lots of emptiness, while smaller ones help build family ties and create warmth”!
Article by Lee Meng Choe
The writer is the Executive Director (Distribution) of GEN Financial Advisory