Some readers have commented that the benchmark of 3 years income to pay for a home is outdated. I agree.
In my book on financial planning, I have used the benchmark of 4 to 5 years. I consider 5 years to be on the higher end of the scale. Some people have commented that they are not able to buy a decent home using this benchmark, as prices are high, even for HDB flats.
My advice is not to go beyond 5 years. It may mean that you have to consider other options, such as renting your home or buying a smaller flat.
Some people pay 6 to 8 years of income for their home. They calculate that they can afford the monthly repayment. But, they forget to take the following factors into account:
a) Interest rate may increase in the future, from the current low levels. The higher interest rate will increase the amount of repayment.
b) Jobs are uncertain. If they lose their current job, they may not be able to find another job that pays the same salary.
If more people take this advice and act prudently, the property price will not continue to escalate, as it had in the past years. Do not chase a property bubble. Do not think that you are making a good investment. An overpriced property can drop in value by 30% and leave you with a large financial burden. This has happened in USA and Europe. It can happen in Asia. The low price may be stuck for a decade or longer, as it has happened in Japan.
My book on Financial Planning can be purchased here.
Tan Kin Lian
"An overpriced property can drop in value by 30% and leave you with a large financial burden. This has happened in USA and Europe. It can happen in Asia. The low price may be stuck for a decade or longer, as it has happened in Japan."
ReplyDeleteIt already happened in Singapore. Those who bought at the peak in 1996 saw their home market valuations drop by up to 40%. They had to wait until 2006 just to regain the same market valuation. If factor in costs like interest, conservancy and maintenance charges, inflation, opportunity costs etc then the outcome is still negative after 10 yrs of waiting and slogging.
The saving grace for that 10 yrs was that jobs for post-secondary educated were still quite obtainable. Nowadays, even university educated need to consider whether they can maintain their jobs or level of salary once they hit 37-38 yrs old.
Related to home prices and Budget Statement 2010, who decides the annual value (AV)of our hdb flat? Is the procedure or process transparent?
ReplyDeleteApparently the goodies we received from the government depend on this AV.