Tan Kin Lian's Blog: Buy a property that you can afford

Sunday, November 02, 2008

Buy a property that you can afford

How much should a person pay for a property? This is an important question. So far, there is no guide on this matter.

When property prices goes up, too many people spent too much money on buying a property thinking that it will go up forever. When the property prices reach a ridiculous level and falls from there, it can cause a lot of problem to the financial system.

I suggest that the limit should be:

> 7 years of the breadwinner's income
> 5 year of the combined family income

If one spouse is working with an annual income of $40,000, the limit should be $280,000. If both spouses are working with an annual income of $70,000, the limit should be $350,000.

In working out the guideline, I have taken into consideration the percentage of income that goes to service the housing loan, the repayment period of 30 years and the long term level of interest rate, and future increase in earnings.

I hope that this gudeline is useful for most people You should not exceed the limit. It is all right to buy a property below this limit.

19 comments:

Tan Kin Lian said...: Some buyers look at the monthly installments based on the current low interest rate and take a loan higher than the limit suggested by me.

When interest rate increases in the future year, they will not be able to afford the higher repayment.

This is the problem of the subprime mortgages in America. They pay low teaser rates. When the interest rate reverts to the nromal rate, the borrowers are not able to afford the payment. They are not able to sell the property, as it has dropped in value.; November 03, 2008 12:20 AM
Anonymous said...: Mr Tan,
thanks for another great advice. I think many singaporeans pay way beyond their limit to buy a property. Hope more people will follow your guideline.; November 03, 2008 12:47 AM
AlphavilleSG said...: Hello Mr Tan,

Do you think the problem is the affordability of housing rather than what a borrower can afford?

And for us, when the PAP govt. is the biggest land owner in Singapore, are they not in a favourable position to make HDB housing cheaper by the way of managing supply and demand?

And the idea that the CPF our retirement is sink into funding the mortgage, it seems like they who make the market, has to ensure house prices will always rise.

Are we not trap in a dilemma here?; November 03, 2008 8:16 AM
Anonymous said...: Mr Tan,
Buying a property beyond one's limit is very common in Singapore because one can stretch the loan period over many years. If this loan is not handled properly, it can become another crisis as in the western countries.

Jasmin; November 03, 2008 8:21 AM
Tan Kin Lian said...: Hi alphavillesg

If the HBD flat buyers limit their purchase to the guidelines, the prices will come down.

If the buyers want to chase property prices beyond their affordability limit, the prices will go up (and will only fall during a financial crisis).

In the old days (20 years ago), the government kept HDB flat prices at affordable levels. Today, the prices are based on market supply and demand. This is why the prices have gone up beyond the affordable level.

I wish to have the government of 20 years ago, because life is better for the people in the old days.; November 03, 2008 8:26 AM
Unknown said...: I think Singaporeans has to bear part of the blame. Just like COE, if everyone thinks it is only worth $10 for 10years....it will be $10....else you rather not buy.; November 03, 2008 10:01 AM
Anonymous said...: Dear Mr. Tan

You mentioned
income $40,000 - limit $280,000. income $70,000 - limit $350,000.

My question is this the buy price of the house or the actual price a person pays i.e.

downpayment + loan principle + interest to be paied during the loan tenure + taxes ++ = real actual cost of the house

Regards
Paddy; November 03, 2008 11:28 AM
Tan Kin Lian said...: Hi Paddy,

The should be the purchase price of the house. After deducting the downpayments, etc, the actual loan should be smaller.

Do not over-commit on your house or flat. Be prudent.; November 03, 2008 11:53 AM
Anonymous said...: But with the limit you suggested, one can only find a flat that is far from the center where most of the jobs?

Wouldn't the trade off be too expensive to make?; November 03, 2008 1:38 PM
Anonymous said...: The really sad thing about Singapore properties are that they are becoming unaffordable for working people.
The cheaper HDB townships in Singapore are located on the outskirts and far flung regions eg. Jurong West, Punggol, Sengkang, Sembawang, Yishun, Woodlands, etc. Although cheap to buy, they don't generate good capital gains even in good times due to their poor location.
On the other spectrum, HDB towns like Queenstown, Tiong Bahru, Toa Payoh, Bishan, Kallang, Whampoa, Bendemeer, etc are getting more & more expensive due to their proximity to the CDB area. It is not surprising that the Pinnacle @ Duxton & City View @ Boon Keng are priced quite close to 99yr leasehold private condos.

The basic understanding for buying Singapore properties is:
1. Bank interest rate (eg. mortgage interest) is quite stable due to continued inflow of foreign investments into Singapore ie. why our fixed deposit rates are so low!
2. You should have at least 18 months of liquid savings to pay the monthly mortgage payments should there be a contingency eg. job loss or loss of income.
3. Never, never spend more than necessary & simple renovations within budget when you do up your flat or apartment. Renovation costs are never recoverable when you sell your property. You will have to write off your renovation cost within 5 years. To spend $100k on a $300k flat is plain stupid! Don't take up renovation loans as they will end up costing you more when interests are included.
4. There is no wealth benefit for staying in a property long term. You should capture any capital gains (tax-free) whenever there are reasonable gains. Be prepared to sell, buy & move your home every 5-10 years. The era of substantial gains for Singapore properties are over! But, you still could get reasonable gains.
5. If you're between 30-40, go aggressive on your property ie. go for good locations for good capital gains & try to pay down your mortgage as soon as possible. Banks are more willing to extend mortgage loans for this age group. However, if you're 50 & above, downshift your property ie. landed to condo, condo to HDB, etc. Cashed in your property or reduced your mortgage exposure if you still have a mortgage. A lot of empty nest retirees in Singapore lived in landed properties but survived frugally. They could have easily sold off their property & lived in a studio apartment & use the money for their healthcare and living.; November 03, 2008 1:55 PM
Anonymous said...: Mr. Tan Kin Lian's suggestion appears a little too simplistic and if followed, it means very few people can afford a private property because his limits refer to the price of the property rather than the loan quantum.

Also there are no safety margins in his recommendations.

Do not think that the monthly instalment is the only thing a property owner has to pay because there are other costs of home ownership particularly the maintenance and sinking fund contributions for condominiums and some surprise levies for things like repainting the estate, replacing lifts, etc.

If one has a sizeable amount of cash savings which could be used as the downpayment, then the property price can be much higher than those suggested by Mr. Tan. That is why I suggest the loan quantum, rather that the property price.

In my own financial planning, I make sure that I have enough of funds (cash, FDs) to pay at least 18 months of mortgage instalment plus maintenance and sinking fund contributions and the utilities bill in case a recession drop from heaven and everyone in the family is out of work!

Home ownership is a long term commitment, not short or medium. So Mr. Tan's 5 to 7 years are not applicable, 10 to 15 years would be more appropriate.; November 03, 2008 3:04 PM
Tan Kin Lian said...: Hi 1:38 PM

You should buy a property within your affordable limit.

It could be a smaller property in a good location or a bigger property in the outskirt.

Do not over-stretch beyond your limit. Do not assume that property price will go up and you can make a profit.

It is better that property remain stable rather than go up. Even if property increase in value, you cannot capitalise on it, as the next property will be even more expensive.

Live within our means! Stop speculating on property.; November 03, 2008 3:23 PM
Tan Kin Lian said...: Hi James Tan,

If your family icnome is more than$200,000 a year, it is all right to buy a private property.

I would recommend against buying a property that cost more than 10 years of your income. It is stretching the limit.

You should have savings for your retirement. Do not put too much money in property. It is a wasting asset.

It could drop, like the subprime properties.; November 03, 2008 3:38 PM
Anonymous said...: contrarily i got into properties at a time i could ill afford

but it tripled in value in less than 6 months and now i am still deciding what i should do with all that

life is about taking necessary calculated risks, think someone said this somewhere sometime

I am NOT promoting risks.

I am SUGGESTING CONSIDERING necessary calculated risks.; November 03, 2008 5:22 PM
Anonymous said...: Dear Mr Tan,

Thank you for your help and opinions, Be sure that it is apprciated.; November 03, 2008 8:29 PM
Anonymous said...: I mean Mr Tan Kin Lian; November 03, 2008 8:30 PM
Wealth Journey said...: Mr Tan,
You can try this..
http://www.globalpropertyguide.com/Pacific/Australia/price-gdp-per-cap

They define houseprice to income ratio..
(PRICE psm / GDP per capita) * 100.

Australia have a ratio of 15.9x while NZ have 10.43x for upscale housing.

So for singapore, if it's $1000 psf which is roughly $10k psm, with GDP per capita of around $32k then we have a ratio roughly 33 times.; November 03, 2008 8:31 PM
Xtrocious said...: I think one reason for the distortions in the property market here is because of CPF...

Because we can use CPF to pay our monthly instalments, it makes the loan look more affordable than it really is...

But at the end of the day, what happens is that home owners won't have enough or any retirement funds unless they can downgrade...; November 06, 2008 3:13 PM
Anonymous said...: If want to borrow long term, must think carefully.

For the last 10 years, there were the following crises:

1998 Asian Financial crisis

2000 Dot Com crash

2001 September 11

2002/2003 Sars

2007/2008 Subprime

Who knows how many more crisis there will be in the next 15 years?; November 07, 2008 8:35 PM