Recently, we were at a dialogue session with Minister Desmond Lee, the Minister for National Development in Singapore.
One of the questions I asked was:
Have we made it too comfortable for Singaporeans here, in owning a house, that they no longer want to move out of Singapore?
His reply, which I paraphrase,
No, I don’t think so. In fact, it may be better for them to have a strong base in Singapore, and thus have the security to spread their wings abroad.
I don’t deny that.
If you look worldwide, Singapore is one of the cheapest place to buy a home. For all the complaints about how expensive it is to buy a house, if you look at global comparisons, Singapore is cheap.
If you look at the charts drawn below from the 2022 Urban Land Institute, Asia Pacific Home Attainability Index, you will see that Singapore has one of the lowest
- Average housing price per unit
- Price to median annual household income ratio
All this does mean that it can be really affordable to buy a home in Singapore.
But the question is,
Here’s why I’m choosing not to, at least for the next 5 years.
Homes don’t make sense as the first big financial outlay
Almost everyone I speak to talks about how homes are an ‘investment’ for the future.
Not really. It’s an obligation to pay up, every month.
This makes sense if you’re confident that your long term future is here in Singapore. But if you prefer to see more sheep in Scotland, before settling, then you should most probably preserve the optionality.
Optionality is a concept not many of us understand. It’s a concept from investing. It’s the idea of having the option to choose, but without the obligation to exercise the option.
It’s a powerful idea. When you start to see the power of options, you will realise that a big part of life should be about optimising the options available to you. You don’t want to be in a place where you have few options available to you, and you have to pick something you don’t want.
One way to see how powerful your options are is to put yourself in a scenario.
If you quit your job today, could you do something you want, without any major worries?
In October 2021, I did exactly that. With no debt obligations, I realised I had enough of my old job, and left. But the savings I’d built up over the past 5 years, gave me the optionality to do that, with few fears. With a regular dividend income of at least $200 a month, it ensured that as long as I could earn $300 a month, I could be safe.
It’s the same with housing. You have the option to buy a home here in Singapore. The government makes it very attractive. But here’s a question.
Have you ever thought why it’s so attractive to buy a home here in Singapore?
Lee Kuan Yew, the founding father of Singapore, once said,
Our families own their homes and are rooted to Singapore. Owning their homes gives everybody a sense of ownership.
Moreover, with NS, every family must have a stake in a property to defend.
Owning homes gives you a stake in Singapore, and something you want to defend. Sure, if your 500k HDB flat is going to get destroyed, you’re definitely going to want to defend it!
But it also ties you here in Singapore.
When your home becomes the first debt obligation you have to fulfil, you lose the optionality of quitting your job, and pursuing something you really want when you’re perhaps 36.
But more importantly, if you were really thinking of investing, there are fair better, liquid instruments.
The buying of a house, wipes all of that out.
Paying for a house out of your CPF stymies your long term CPF growth
Paying for a house out of your CPF also prevents your CPF from growing at the 2.5 to 5% growth.
You may think this is a small amount, but if you’re compounding $100k at 4% a year, in your Special Account, that’s $4000 a year.
That’s a lot of money.
Ku Swee Yong, of International Property Advisors, did some numbers to show you how much you exactly forgo when you choose to finance with CPF.
House-rich, cash poor
HDB already applies a Mortgage Servicing Ratio (MSR), which prevents you taking a loan if the repayments would exceed 35% of your monthly household income. If your monthly household income is $7,000 per month, for example, your loan repayment cannot go beyond $2,450 per month.
DBS recommends that you keep your ceiling at 30%.
This prevents you from taking up too big a debt burden.
But what you may not realise is that whilst you may now have a house, you’re no longer cash rich. Your home does not throw off cash. You’re living in it. And for the next 20 years, you will find your cash hoard actively dwindling.
Of course, if you’re comfortable with squeezing into one room whilst allowing someone else to rent out the other room, you can use the tenant to pay off some of your mortgage.
The headline figures on HDB is always that the average homebuyer doesn’t pay more than $1000 in cash for the mortgage, and that most of it can be paid with one’s CPF.
Sure, but it doesn’t discount the fact that you and your partner would probably need at least $165,000, for your average 4-room hole in the sky.
|Payments needed||Guidance around amounts||Real cost|
|Option fee||Varies according to flat||$2000, if it’s a 4-room HDB flat|
|Downpayment||20% of purchase price if you’re taking a HDB loan||That works out to about $80,000 cash for a $400,000 HDB flat|
|Renovation||Depending on how much you want to do||Be prepared to set aside at least $80,000|
|Legal fees||Varies according to house size||Set aside about $300|
|Total||Totals $162,300, but be prepared to put aside a headroom of at least $165,000|
Again and again, I say this not to diss the government’s work in building affordable houses. But I say this because I want you to know that buying a house, is not buying an asset.
It’s buying a home.
You should not mix the two together. Keep your housing and investment goals different. You need a place to stay, a stove to cook, a home to call your own (away from the prying eyes of your parents.)
A home, in Singapore, at least, is not likely to be an investment asset, because you need the space to stay. And when spaces are already so small, it’s not likely that you are going to rent it out, just to have some income.
House mortgages tie you to Singapore
Unless you’re born in cash, you’re probably not rolling in cash when you have to stump up the money for a home.
You need to take a loan. Mortgages will inevitably tie you to Singapore, especially with the Minimum Occupancy Period of 5 years meaning that you can’t rent out your whole home, even when you’re away.
A way to work around it is to rent out a few rooms, rather than the whole place.
This way, you can still take on global opportunities, whilst still keeping your home.
HDB has also introduced a very helpful way of looking at the other expenses to think of before buying a home.
All of these, you got it, cost money.
So where do you stay?
Don’t get me wrong. I’m not saying you be otaku, living and eating at your parent’s home for the rest of your life.
I’m saying that a house may not be something you buy in your 30s, but it can be something you buy in your 40s, when you have substantially more money to work with.
In the meantime, you can still rent a place.
Or if you’re that thick-skinned, you can still live with your parents. No shame around that there.