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https://www.propertysoul.com/2017/07/26/housing-affordability-is-more-than-salary/
Why housing affordability is more than your salary
July 26, 2017
Dollars and Sense recently published a blog post titled “Here’s the salary you need to earn to afford these homes in Singapore (http://dollarsandsense.sg/heres-salary-need-earn-afford-homes-singapore/)”.
The writer of the article has the good intention to show readers what type of housing they can afford based on their monthly salary. However, income is only part of the whole picture when it comes to deciding whether you can pay up for a property.
Housing affordability is not all about income
When you apply for a housing loan, banks usually ask for your latest payslips, account statement, tax assessment, CPF contribution history, etc.
The banks need to make sure that borrowers are capable of repaying their housing loan. This also provides proof of income when calculating the Total Debt Servicing Ratio (TDSR).
However, whether you can afford a particular housing type cannot be entirely based on your monthly salary. There are other important factors to consider too.
1. How much cash and CPF you can use to settle the deposit, legal fee, stamp duties, renovation, etc.
2. How much you can set aside for mortgage repayment after deduction of your monthly expenses.
3. How much contingency fund you have to cope with interest rate hike, negative equity, etc.
4. How stable is your household income (job stability of both husband and/or wife).
5. When you purchase your property makes a big difference in the loan-to-value, buyer and seller stamp duties, etc.
Comparing Dollars and Sense Affordability Table and 3-3-5 Rule
Back in June 2014, Yahoo News reposted an article (https://www.propertysoul.com/2014/06/20/can-you-afford-your-dream-home-after-taking-the-3-3-5-test/) from my book No B.S. Guide to Property Investment (http://propertyclubsg.com/resources)about my 3-3-5 affordability test. This has attracted tons of comments (https://sg.news.yahoo.com/afford-home-simple-affordability-test-101534387.html) and sparked off heated debates online.
Let me briefly recap the 3-3-5 rule that is meant to determine your affordability of the property that you intend to buy.
Rule #1: 30% of property price
Your initial capital should at least be 30 percent of the property’s asking price, in order 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 of your annual income.
The table below is a comparison between Dollars & Sense’s Affordability Table and my 3-3-5 rule.
https://i2.wp.com/www.propertysoul.com/wp-content/uploads/2017/07/PS_affordability_table.jpg?zoom=1.5625&resize=750%2C446&ssl=1
As you can see, if you earn the “average salary per spouse” in Dollars & Sense’s table, you fail rule #2 (repayment less than one-third of monthly household income) in all types of private housing.
If Dollars & Sense’s average housing price is accurate, prices of all categories of housing are higher than 5 times of annual household income which can’t pass rule #3.
Look before you leap and enter at your own risk
Compared with the Dollars & Sense Affordability Table, the 3-3-5 rule is no doubt more conservative and stringent in determining the affordability of a home buyer. Afterall, buying a home is usually the biggest purchase in a salaryman’s whole life. It’s better be safe than sorry.
Of course if I were a property agent or a developer, I would come up with a 1-2-10 rule. You will be relieved and happily hand me your cheque for the deposit.
Rather than complaining that the 3-3-5 rule is too strict and unrealistic, and that you will never be able to buy your dream home in this market, have you ever thought of the fundamental issues here?
If you need to pay more than one-third of your household income for your mortgage every month, you are not having enough buffer for a market downturn. If the housing price is higher than 5 times of your annual household income, you can’t really afford it. Either switch to a higher-pay job or settle with a more affordable housing type.
Allow me to quote what I said before in my earlier blog post “Can you afford your dream home after taking the 3-3-5 test? (https://www.propertysoul.com/2014/06/20/can-you-afford-your-dream-home-after-taking-the-3-3-5-test/)“:
We are having the ‘boiling frog’ phenomenon here: When people are in a high-price environment for too long, they will gradually think that it is normal and acceptable to pay high prices. Similarly, when people are in a prolonged boom of the property market, they will forget what is a ‘value-for-money’ home, or why it is necessary to calculate the ROI of an investment property.
Affordability model for property investors
What about buying a private property for investment rather than for your own stay?
Over the years, I have seen many investors being burnt by their wrong or untimely investment in the real estate market. So let me define affordability in 4 simple categories:
1. Very Affordable
If the investment property is only one of your many investments, any time you have to cut loos you don’t even bat an eyelid; if you can pay in cash in full or with minimum or negligible loan, the property is “very affordable” to you.
2. Highly Probable
If you can go through the 3-3-5 rule, and you have reliable streams of passive income not dependable on a pay cheque, your chance of riding out the storm is “highly probable”.
3. Merely Stretchable
If you can’t pass the 3-3-5 test, and after you purchase the property, you have to constantly worry about low rental, no tenant, interest rate hike, economic recession, job stability, failing business, etc., you are “merely stretchable”.
4. Barely Reachable
If you have difficulty even forking out 20 percent for the deposit, and your property agent hints that “there’s a way to help”, you know that investing in a private property based on your current savings and financial situation is “barely reachable”.
Buying a property is different from buying stocks. It is more complicated and also highly illiquid. Do you dare to take the plunge just based on your current salary?
https://www.propertysoul.com/2017/07/26/housing-affordability-is-more-than-salary/
Why housing affordability is more than your salary
July 26, 2017
Dollars and Sense recently published a blog post titled “Here’s the salary you need to earn to afford these homes in Singapore (http://dollarsandsense.sg/heres-salary-need-earn-afford-homes-singapore/)”.
The writer of the article has the good intention to show readers what type of housing they can afford based on their monthly salary. However, income is only part of the whole picture when it comes to deciding whether you can pay up for a property.
Housing affordability is not all about income
When you apply for a housing loan, banks usually ask for your latest payslips, account statement, tax assessment, CPF contribution history, etc.
The banks need to make sure that borrowers are capable of repaying their housing loan. This also provides proof of income when calculating the Total Debt Servicing Ratio (TDSR).
However, whether you can afford a particular housing type cannot be entirely based on your monthly salary. There are other important factors to consider too.
1. How much cash and CPF you can use to settle the deposit, legal fee, stamp duties, renovation, etc.
2. How much you can set aside for mortgage repayment after deduction of your monthly expenses.
3. How much contingency fund you have to cope with interest rate hike, negative equity, etc.
4. How stable is your household income (job stability of both husband and/or wife).
5. When you purchase your property makes a big difference in the loan-to-value, buyer and seller stamp duties, etc.
Comparing Dollars and Sense Affordability Table and 3-3-5 Rule
Back in June 2014, Yahoo News reposted an article (https://www.propertysoul.com/2014/06/20/can-you-afford-your-dream-home-after-taking-the-3-3-5-test/) from my book No B.S. Guide to Property Investment (http://propertyclubsg.com/resources)about my 3-3-5 affordability test. This has attracted tons of comments (https://sg.news.yahoo.com/afford-home-simple-affordability-test-101534387.html) and sparked off heated debates online.
Let me briefly recap the 3-3-5 rule that is meant to determine your affordability of the property that you intend to buy.
Rule #1: 30% of property price
Your initial capital should at least be 30 percent of the property’s asking price, in order 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 of your annual income.
The table below is a comparison between Dollars & Sense’s Affordability Table and my 3-3-5 rule.
https://i2.wp.com/www.propertysoul.com/wp-content/uploads/2017/07/PS_affordability_table.jpg?zoom=1.5625&resize=750%2C446&ssl=1
As you can see, if you earn the “average salary per spouse” in Dollars & Sense’s table, you fail rule #2 (repayment less than one-third of monthly household income) in all types of private housing.
If Dollars & Sense’s average housing price is accurate, prices of all categories of housing are higher than 5 times of annual household income which can’t pass rule #3.
Look before you leap and enter at your own risk
Compared with the Dollars & Sense Affordability Table, the 3-3-5 rule is no doubt more conservative and stringent in determining the affordability of a home buyer. Afterall, buying a home is usually the biggest purchase in a salaryman’s whole life. It’s better be safe than sorry.
Of course if I were a property agent or a developer, I would come up with a 1-2-10 rule. You will be relieved and happily hand me your cheque for the deposit.
Rather than complaining that the 3-3-5 rule is too strict and unrealistic, and that you will never be able to buy your dream home in this market, have you ever thought of the fundamental issues here?
If you need to pay more than one-third of your household income for your mortgage every month, you are not having enough buffer for a market downturn. If the housing price is higher than 5 times of your annual household income, you can’t really afford it. Either switch to a higher-pay job or settle with a more affordable housing type.
Allow me to quote what I said before in my earlier blog post “Can you afford your dream home after taking the 3-3-5 test? (https://www.propertysoul.com/2014/06/20/can-you-afford-your-dream-home-after-taking-the-3-3-5-test/)“:
We are having the ‘boiling frog’ phenomenon here: When people are in a high-price environment for too long, they will gradually think that it is normal and acceptable to pay high prices. Similarly, when people are in a prolonged boom of the property market, they will forget what is a ‘value-for-money’ home, or why it is necessary to calculate the ROI of an investment property.
Affordability model for property investors
What about buying a private property for investment rather than for your own stay?
Over the years, I have seen many investors being burnt by their wrong or untimely investment in the real estate market. So let me define affordability in 4 simple categories:
1. Very Affordable
If the investment property is only one of your many investments, any time you have to cut loos you don’t even bat an eyelid; if you can pay in cash in full or with minimum or negligible loan, the property is “very affordable” to you.
2. Highly Probable
If you can go through the 3-3-5 rule, and you have reliable streams of passive income not dependable on a pay cheque, your chance of riding out the storm is “highly probable”.
3. Merely Stretchable
If you can’t pass the 3-3-5 test, and after you purchase the property, you have to constantly worry about low rental, no tenant, interest rate hike, economic recession, job stability, failing business, etc., you are “merely stretchable”.
4. Barely Reachable
If you have difficulty even forking out 20 percent for the deposit, and your property agent hints that “there’s a way to help”, you know that investing in a private property based on your current savings and financial situation is “barely reachable”.
Buying a property is different from buying stocks. It is more complicated and also highly illiquid. Do you dare to take the plunge just based on your current salary?
Singapore very safe when Bank can loan you money to buy property.
Our government always think for us and we don't need to think.
If you are not marry, they think for you.
If you don't have enough for retirement, they think for you.
We are so lucky to have a thinking government.
Bumblebees shouldn't be able to fly if assessed based on the principles of aerodynamics of the airplane. But it flies.
Simple as that.
http://www.todayifoundout.com/index.php/2013/08/bumblebee-flight-does-not-violate-the-laws-of-physics/
Bumblebees shouldn't be able to fly if assessed based on the principles of aerodynamics of the airplane. But it flies.
Simple as that.
http://www.todayifoundout.com/index.php/2013/08/bumblebee-flight-does-not-violate-the-laws-of-physics/
That is why got the 1% and the 99%.
anythingwhatever
26-07-17, 23:39
Bumblebees shouldn't be able to fly if assessed based on the principles of aerodynamics of the airplane. But it flies.
Simple as that.
http://www.todayifoundout.com/index.php/2013/08/bumblebee-flight-does-not-violate-the-laws-of-physics/
Some times I think the VIP author sounds like living in a vacuum for too long. The market has apparently moved on quickly, leaving her behind still in denial mode.
Well, had I listened to her years ago, would have been stuck in renting for donkey years and dare not buy a single place even now, let alone owning multiple props.
Do the math, trust yourselves... :)
The property market will crash unexpectedly a few years down the road, and it will BURNT BADLY those OCR private property buyers who bought at THOUSAND YEARS historical peak price........
The biggest gainers out of all these is the government who collected all the taxes like ABSD, SSD, and the super high land sale price etc.
So it really depends on at which point in the property cycle you are looking at...........
Some times I think the VIP author sounds like living in a vacuum for too long. The market has apparently moved on quickly, leaving her behind still in denial mode.
Well, had I listened to her years ago, would have been stuck in renting for donkey years and dare not buy a single place even now, let alone owning multiple props.
Do the math, trust yourselves... :)
Many of the private OCR owners are receiving huge sums of enbloc money as we speak. "Upgrading" to CCR isn't actually as difficult as you imagine.
They won't wait 50 years, much less a thousand years.
Very soon, you will realise what is meant by inelastic demand, as well as what is "real" estate and what is not.
Huge sums pumped into market, old units removed from market supply as resales (mainly OCR and RCR), increasing land price, cost pressures (labour and materials), there is no running away from the inevitable.
The results will either be growing funds seeking yield, rental demand (for those without other properties), or replacement properties. All 3 avenues support the real estate market.
We will know soon who is the real kelong.
The property market will crash unexpectedly a few years down the road, and it will BURNT BADLY those OCR private property buyers who bought at THOUSAND YEARS historical peak price........
The biggest gainers out of all these is the government who collected all the taxes like ABSD, SSD, and the super high land sale price etc.
So it really depends on at which point in the property cycle you are looking at...........
tonymontana
27-07-17, 09:01
Some times I think the VIP author sounds like living in a vacuum for too long. The market has apparently moved on quickly, leaving her behind still in denial mode.
Well, had I listened to her years ago, would have been stuck in renting for donkey years and dare not buy a single place even now, let alone owning multiple props.
Do the math, trust yourselves... :)
she sold too early. she did very well (according to her own words la), just graduated and came to singapore in 2000 and in 5 years owned multiple properties in d15, d9 (according to her bio).
anythingwhatever
27-07-17, 09:35
The property market will crash unexpectedly a few years down the road, and it will BURNT BADLY those OCR private property buyers who bought at THOUSAND YEARS historical peak price........
The biggest gainers out of all these is the government who collected all the taxes like ABSD, SSD, and the super high land sale price etc.
So it really depends on at which point in the property cycle you are looking at...........
Please carry on waiting for a million years then... I only have another 50~60 to go if lucky :)
PropVestor
27-07-17, 11:08
Please carry on waiting for a million years then... I only have another 50~60 to go if lucky :)
I think both TB and VIP's intention are good. Sometimes its the wrong audience reading it. They are not out to get people to throw money into real estate without thinking. Hence, their target audience are not those who owned multiple units and are seasoned property investors. I have said that read all forum inputs with a pinch of salt but use our own judgement and thinking. Like my LSE econ professor said, use both qualitative and quantitative data combined before making any statement. We should not look at pure data and hearsay especially if it costs 7 figures. We are not bornt like aspirations.
Before I bought my first investment property back in 2013, I did read her book and blog as part of my knowledge building. She did have some valid points about leverage and how to choose first property. If I had listened to her blog post back then, I would not have bought Duo too. We should never blame anyone nor any external factors for any investment decision except ourselves.
Lets all contribute meaningfully to this platform and learn from one another without dousing pepper on eyes. It stings (stinks).
2 cents,
PropVestor
She did have some valid points about leverage and how to choose first property.
If I had listened to her blog post back then, I would not have bought Duo too.
Why not Duo?
PropVestor
27-07-17, 11:55
She did have some valid points about leverage and how to choose first property.
If I had listened to her blog post back then, I would not have bought Duo too.
Why not Duo?
I think you misunderstood me Sir. She did not explicit say that Duo is bad buy. There is no mention of that in her posts.
Back in 2013, the market according to her is highly oversupply and she advised NOT to enter the market at all. I also remembered a data point she quoted about the number of population and foreigners dwindling. The foreseeable housing supply is out of proportion as a whole. These are her advice back in 2013 and they are all true quantitatively and should not be misquoted or misrepresented today. Some of her data points are still true today.
After applying more data based on D7's prices (SouthBank, CityGate, Concourse Skyline, TQL street etc), its green light for Duo.
Wannabe Contrarian,
PropVestor
I think you misunderstood me Sir. She did not explicit say that Duo is bad buy. There is no mention of that in her posts.
Back in 2013, the market according to her is highly oversupply and she advised NOT to enter the market at all. I also remembered a data point she quoted about the number of population and foreigners dwindling. The foreseeable housing supply is out of proportion as a whole. These are her advice back in 2013 and they are all true quantitatively and should not be misquoted or misrepresented today. Some of her data points are still true today.
After applying more data based on D7's prices (SouthBank, CityGate, Concourse Skyline, TQL street etc), its green light for Duo.
Wannabe Contrarian,
PropVestor
ic, because if I can buy I will also buy Duo.
tonymontana
27-07-17, 19:22
Many of the private OCR owners are receiving huge sums of enbloc money as we speak. "Upgrading" to CCR isn't actually as difficult as you imagine.
They won't wait 50 years, much less a thousand years.
Very soon, you will realise what is meant by inelastic demand, as well as what is "real" estate and what is not.
Huge sums pumped into market, old units removed from market supply as resales (mainly OCR and RCR), increasing land price, cost pressures (labour and materials), there is no running away from the inevitable.
The results will either be growing funds seeking yield, rental demand (for those without other properties), or replacement properties. All 3 avenues support the real estate market.
.
https://www.srx.com.sg/singapore-property-news/39282/former-hudc-estate-serangoon-ville-sold-en-bloc-for-499-million
"After the sale, I will likely buy a resale HDB flat and use the re- maining money to help my children buy homes," said Mr Lee, 69, a retiree who has lived in the estate since 1989.
homes. plural. another buyer coming into market.
https://www.srx.com.sg/singapore-property-news/39282/former-hudc-estate-serangoon-ville-sold-en-bloc-for-499-million
"After the sale, I will likely buy a resale HDB flat and use the re- maining money to help my children buy homes," said Mr Lee, 69, a retiree who has lived in the estate since 1989.
homes. plural. another buyer coming into market.
When I went for my RES training at PropNex, one of the experience RES share how he predict the HDB resale will take off after all the en-bloc in 2007. The effect will then go to the PC when the resale HDB sell their unit to the rich en-bloc uncle and auntie.
If you can buy and still want to wait please be warn the fruit is not dropping.
When I went for my RES training at PropNex, one of the experience RES share how he predict the HDB resale will take off after all the en-bloc in 2007. The effect will then go to the PC when the resale HDB sell their unit to the rich en-bloc uncle and auntie.
If you can buy and still want to wait please be warn the fruit is not dropping.
ic, ur a Real Estate Saleperson...now I know why you talk so much about yourself
ic, ur a Real Estate Saleperson...now I know why you talk so much about yourself
Nothing to hide was a real estate agent 20 years ago during the cowboy time but just for the knowledge but did not learn much.
After returning from France staying there for 8 years 8 months nothing better to do so go RES course to see got anything I don't know.
Was surprised to see a lot of investor going for the course.
Sometimes it is good to stand at the other side to see the thing you don't over your side.
ic, ur a Real Estate Saleperson...now I know why you talk so much about yourself
Forgot to add, got SGD 250 off from Union member and another SGD 500 off from Skill future.
http://www.lma.com.sg/course-res
LMA is a CEA Approved Course Provider and has been in the industry for the past decade. With experienced and professional trainers on board, we provide accurate and the latest up-to-date information that will simplify preparations for your RES Examinations.
Professional Trainers with more than 10 years experience
Skillsfuture and UTAP claimable (up to $750)
Free Makeup and Refresher class
Flexible Schedules (Day and Night classes)
tonymontana
27-07-17, 22:46
Forgot to add, got SGD 250 off from Union member and another SGD 500 off from Skill future.
http://www.lma.com.sg/course-res
LMA is a CEA Approved Course Provider and has been in the industry for the past decade. With experienced and professional trainers on board, we provide accurate and the latest up-to-date information that will simplify preparations for your RES Examinations.
Professional Trainers with more than 10 years experience
Skillsfuture and UTAP claimable (up to $750)
Free Makeup and Refresher class
Flexible Schedules (Day and Night classes)
So you're not actively marketing any properties right this minute ? :p
btw, just asking for fun, you don't have to answer.
ic, ur a Real Estate Saleperson...now I know why you talk so much about yourself
Almost forget also got CLI long time ago.
So you're not actively marketing any properties right this minute ? :p
btw, just asking for fun, you don't have to answer.
I know, I now every free waiting for my flight back to Singapore.
Oversea work for the last 20 weeks, no time to market the property.
Should be doing nothing at work till Nov 2017.
Sometimes I also don't know what am I doing, life is like a box of chocolates.
anythingwhatever
27-07-17, 23:03
I know, I now every free waiting for my flight back to Singapore.
Oversea work for the last 20 weeks, no time to market the property.
Should be doing nothing at work till Nov 2017.
Sometimes I also don't know what am I doing, life is like a box of chocolates.
Semi-retired, enjoy life. :)
tonymontana
27-07-17, 23:07
I know, I now every free waiting for my flight back to Singapore.
Oversea work for the last 20 weeks, no time to market the property.
Should be doing nothing at work till Nov 2017.
Sometimes I also don't know what am I doing, life is like a box of chocolates.
yup, it's good not to think (or worry, or ponder) so much.
Semi-retired, enjoy life. :)
Still working, just that I don't know what I am doing, must be too much espresso at the work place.
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