According to a survey by United States urban planning researcher Demographia, Singapore’s housing is considered ‘seriously unaffordable’. If Singapore is ranked against the 367 metropolitan areas in nine countries, Singapore was found to be 270 / 367 or at 73th percentile (the higher the percentile the more expensive it is). Housing in Singapore cost 5.0 times of the median household income.
The worst country in terms of housing affordability was Hong Kong. Hong Kong earned the top prize as housing there cost 19 times of the median household income.
(Source: http://www.demographia.com/dhi.pdf )
In reality, most Singaporeans actually spend much more than 5 times of their median household income. This is because the majority of borrowers tend to have mortgages that are very long term. To make matter worst, they use their CPF to pay for the installments.
Here are some calculations:
Assume the property price is $408,000 and your salary is $81,900. [These figures happened to be the median property price and median household income. Figures are extracted from the above PDF link].
Let’s say you take a loan of 80%. Hence, the initial loan is $326,400. Assuming an interest of 2.6% and a loan period of say 25 years, the monthly installment is $1,480.78. The total interest payable over the entire 25 years is 1480.78 * 300 – 326400 = $117,833.18. This interest is what I call the explicit cost of borrowing.
Normally people use CPF-OA to service their loan. The CPF interest of 2.5% forfeited as a result of withdrawing from CPF-OA is FV(2.5%/12, 300, -1480.78, 0, 1) – 1480.78*300 = $173,313.52. This interest forfeited is what I call the implicit cost of borrowing. Others like to call it opportunity cost.
Hence, the total price of the property is $408,000 + 117,833.18 (explicit cost) + 173,313.52 (implicit cost) = $699,146.71.
Thus, the multiple is 699146.71/81900 = 8.54 times of the median household income
Actually a property price of $408,000 seems to be below average. Many of my clients who bought their BTO are already paying nearly $500,000. Those who opt for Balance of Sales have to pay much more than this. While we can argue that people should buy a property that they can afford, but frankly speaking the size of the flat and location matters as well. To setup a family, you need to have a minimum size of at least 1000 sqf if you are going to have one spouse and 2 kids. This is not even counting other family members like parents and a domestic helper. If you have school going children, living near their schools is important. You do not want your kids to travel 3 hours every day (yes, some kids take this long just to go to school and come back). Some parents have to resort to buying a car to fetch their kids to and from school. Buying a car increases the family living expenses by many times and this actually makes life even harder. By the way, the majority of good schools are located in Bishan and Bukit Timah. Property prices in these two areas are high.
With such a high cost of living in Singapore, what should we do? Frankly speaking, there is no shortcut but prudent measures such as:
- Know your expenses and cut what is unnecessary. Differentiate between wants and needs. Reduce the ‘wants’.
- Prioritize your goals. For example, if reducing your debt is the most important, then channel your resources to regularly pay down your debt instead of using your extra cash to buy the latest smartphones and tablets.
- Make sure there is sufficient money for emergency such as retrenchment and stock market crash. ‘Emergency cash’ for disability and serious illnesses should be provided for through insurance because the required amount to be set aside for such contingencies can be astronomical.
- If it is possible, do not use CPF for housing as the opportunity cost of forfeiting the interest is too high. You can treat the CPF balances as part of your retirement investment portfolio. In any case, under certain scenario, there is a limit as to how much CPF-OA can be used for housing. Please read this actual case study: Case study on CPF valuation limit to find out more.
Prioritization of goals and optimizing limited resources is part and parcel of financial planning. Very often, I have clients who tell me that they do not want to have any children due to affordability issues. But after going through a comprehensive financial planning exercise with me, they found themselves able to afford to have 3 children! Of course, there is nothing magical other than through prudent living and prioritization of goals.
You do not need to give up your goals and dream of having a family just because resources are limited. Contact me if you are keen to find out more about financial planning. Resource optimization and finance modeling is my expertise.
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