Post by oldman on Oct 19, 2013 7:19:13 GMT 7
Your First Million, 2nd Edition
Chapter 7 - Money & Life
In the dictionary, affordability is defined as something that is believed to be within one’s financial means.
If I wanted to buy something and I have all the required cash on hand, it is clear that I can afford to buy the item. However, if I have to take a loan to buy an item, is this item still termed affordable?
I think the answer lies in the generation in which we live. During our grandparents’ time, whenever they wanted to buy anything, they had to save for it first. This includes buying a house. Only the very rich then had access to bank loans and hence, the prices of houses remained very low because almost everyone had to save to buy a house. If they did not have enough savings, they simply would not be able to buy the house. As a result, house prices remained low and it was easier to afford a house then, compared to now. I was told that in the 1950s, a bungalow in Singapore cost $20,000.
Now, even a terrace house in Singapore costs a few million dollars. But yet, we are told that house prices remain affordable. Salaries certainly could not have climbed by the same quantum. What has changed is the way bankers have redefined affordability.
Affordability is nowadays defined as the ability to service a loan to pay for a product. By adding this loan component into the equation for affordability, what was previously unaffordable now becomes very affordable. A 30-year home loan can potentially add 30 years of future salaries into the equation for affordability.
In our parent’s generation, this 30-year loan may still be manageable as jobs then tended to be long term in nature. Nowadays, it is difficult for anyone to know if he is employable five years from now, let alone 30 years. If we cannot be certain that we are employable 30 years from now, how then can we say that buying a house on a 30-year loan is affordable?
For me, I keep to my traditional Asian values of affordability. I can only afford something if I can pay fully for the item without taking any loans. This is how I define affordability and this is what I teach my children. I teach them to save when they want to buy something they like.
Savings is the foundation for investing. Without savings, there will be no money set aside for investing. This is why I feel that kids must be taught the importance of savings and of course, they must be taught the right definition of affordability.
Once again, you can only afford something if you can pay fully for that item.
If you need to take a loan to buy, then you almost certainly cannot afford to buy it now but you may be able to afford this in the distant future. In a way, by taking a loan, you are living your future today. But for that privilege, you have to pay monthly interests & instalments and even worse, commit to a lifetime of repayments, especially if you were to take a 30-year home loan. If you become unemployed anytime during these 30 years, this prior loan commitment can become very daunting and traumatic. As life is full of uncertainties, I strongly suggest thinking very hard before you take up any loans.
When property prices go up, we are told that our net worth has increased. However, for most of us, this is more perceived than real as we are likely to own just one property – the property which we are currently living in. We are unlikely to be able to sell this property unless we want to downgrade or move into rental units. Hence, whatever increment in property price is more perceived than real.
If we take this argument one step further, we will realise that it is actually to our benefit to have stable property prices so that when we upgrade, it will get cheaper for us to do so. If we take a loan, we will need a smaller loan. Let’s take an example of a couple upgrading from a $500,000 apartment to a $1 million apartment. They may have bought their apartment for, let’s say, $300,000 a few years before.
In their minds, they have ‘made’ $200,000 worth of profit and they then use this money as downpayment for their $1 million apartment. Assuming that they also have $100,000 of equity in the original house and they use this amount to also help pay for the new house, they will then have to take a loan of $700,000 from the bank.
Now, if property prices remained stable instead, their new apartment may have costed them $600,000 instead of $1 million. Selling their first house at $300,000 will release the same $100,000 of equity which they then use to pay for the new house. Their loan for this new house will then be $500,000.
This new loan amount is $200,000 less than the loan they would have to take if property prices went up. Same house. The only difference is that when property prices are higher, they will be under the illusion that they are better off financially when in actual fact, they are worse off. They are only better off in their perception of their wealth.
Perception and realities are two different things. We live in the real world and unless we have multiple properties, plan to migrate or downgrade, we are better off with stable property prices. Moreover, if you look towards your children, they too will be better off with stable property prices. When property prices are stable, your children will be able to afford a house. Right now, I fear for my children when house prices rocket upwards beyond true affordability levels, especially for the young.
Rising house prices are good for developers, property speculators, foreigners, etc. but it may not be good for the general population. I would rather house prices remain truly affordable than to live in a house with a higher perceived value.
Chapter 7 - Money & Life
In the dictionary, affordability is defined as something that is believed to be within one’s financial means.
If I wanted to buy something and I have all the required cash on hand, it is clear that I can afford to buy the item. However, if I have to take a loan to buy an item, is this item still termed affordable?
I think the answer lies in the generation in which we live. During our grandparents’ time, whenever they wanted to buy anything, they had to save for it first. This includes buying a house. Only the very rich then had access to bank loans and hence, the prices of houses remained very low because almost everyone had to save to buy a house. If they did not have enough savings, they simply would not be able to buy the house. As a result, house prices remained low and it was easier to afford a house then, compared to now. I was told that in the 1950s, a bungalow in Singapore cost $20,000.
Now, even a terrace house in Singapore costs a few million dollars. But yet, we are told that house prices remain affordable. Salaries certainly could not have climbed by the same quantum. What has changed is the way bankers have redefined affordability.
Affordability is nowadays defined as the ability to service a loan to pay for a product. By adding this loan component into the equation for affordability, what was previously unaffordable now becomes very affordable. A 30-year home loan can potentially add 30 years of future salaries into the equation for affordability.
In our parent’s generation, this 30-year loan may still be manageable as jobs then tended to be long term in nature. Nowadays, it is difficult for anyone to know if he is employable five years from now, let alone 30 years. If we cannot be certain that we are employable 30 years from now, how then can we say that buying a house on a 30-year loan is affordable?
For me, I keep to my traditional Asian values of affordability. I can only afford something if I can pay fully for the item without taking any loans. This is how I define affordability and this is what I teach my children. I teach them to save when they want to buy something they like.
Savings is the foundation for investing. Without savings, there will be no money set aside for investing. This is why I feel that kids must be taught the importance of savings and of course, they must be taught the right definition of affordability.
Once again, you can only afford something if you can pay fully for that item.
If you need to take a loan to buy, then you almost certainly cannot afford to buy it now but you may be able to afford this in the distant future. In a way, by taking a loan, you are living your future today. But for that privilege, you have to pay monthly interests & instalments and even worse, commit to a lifetime of repayments, especially if you were to take a 30-year home loan. If you become unemployed anytime during these 30 years, this prior loan commitment can become very daunting and traumatic. As life is full of uncertainties, I strongly suggest thinking very hard before you take up any loans.
When property prices go up, we are told that our net worth has increased. However, for most of us, this is more perceived than real as we are likely to own just one property – the property which we are currently living in. We are unlikely to be able to sell this property unless we want to downgrade or move into rental units. Hence, whatever increment in property price is more perceived than real.
If we take this argument one step further, we will realise that it is actually to our benefit to have stable property prices so that when we upgrade, it will get cheaper for us to do so. If we take a loan, we will need a smaller loan. Let’s take an example of a couple upgrading from a $500,000 apartment to a $1 million apartment. They may have bought their apartment for, let’s say, $300,000 a few years before.
In their minds, they have ‘made’ $200,000 worth of profit and they then use this money as downpayment for their $1 million apartment. Assuming that they also have $100,000 of equity in the original house and they use this amount to also help pay for the new house, they will then have to take a loan of $700,000 from the bank.
Now, if property prices remained stable instead, their new apartment may have costed them $600,000 instead of $1 million. Selling their first house at $300,000 will release the same $100,000 of equity which they then use to pay for the new house. Their loan for this new house will then be $500,000.
This new loan amount is $200,000 less than the loan they would have to take if property prices went up. Same house. The only difference is that when property prices are higher, they will be under the illusion that they are better off financially when in actual fact, they are worse off. They are only better off in their perception of their wealth.
Perception and realities are two different things. We live in the real world and unless we have multiple properties, plan to migrate or downgrade, we are better off with stable property prices. Moreover, if you look towards your children, they too will be better off with stable property prices. When property prices are stable, your children will be able to afford a house. Right now, I fear for my children when house prices rocket upwards beyond true affordability levels, especially for the young.
Rising house prices are good for developers, property speculators, foreigners, etc. but it may not be good for the general population. I would rather house prices remain truly affordable than to live in a house with a higher perceived value.