This article was first published by Aspire.
Here’s a dumb question: Why buy house(s)?
“If not, live where?” some would respond quickly.
“Very paiseh if everyone buy house already and you don’t buy,” others would say.
“Why not, got CPF Housing Grants what,” this is pretty obvious to first-time HDB buyers.
Everyone has his/her own reasons for buying a house. But if you’re buying for any of the three reasons below, you would probably need to rethink your options.
1. “Property prices are always rising, so buying a house is a form of investment.”
Nope, your house, especially your first house, is not an investment just because it appreciates in value. Simply put, it cannot be an investment if you never plan to sell it and downgrade to cheaper housing options.
In other words, imagine sitting on a pile of gold but not being able to spend it or move it.
In fact, most people’s properties are not assets, but liabilities to them, as pointed out by sgmoneymatters. Not only do you have to pay for mortgage/housing loan every month, but you will also have to pay for property tax, renovation, maintenance, utilities, etc…
The point is, the house you buy will likely generate expenses and become a liability for a long time before it can generate income. Even if it does become an investment, the carrying costs are high. Furthermore, it is highly possible that you will grow too emotionally attached to your house to move out of it and turn it into a source of income.
There is also the “worst case scenario” where one buys a house that’s too expensive for his income level as he believes that its value would certainly appreciate over time, so he struggles to pay off the mortgage and eats cup noodles for many years, but only to witness the property market collapse before he could sell the house.
2. “I can just buy more property and collect rent.”
Sounds like a good investment? Again, easier said than done.
If you are residing in Singapore and wish to purchase a second or even a third home (which is probably too expensive to even consider for most people), you can only purchase it from the private housing market. And don’t forget the Additional Buyer’s Stamp Duty (ABSD) of seven percent for second property and 10 percent for the third and subsequent properties.
Let’s do some simple math here, playing with average figures. (Disclaimer: This is just to get a rough idea of whether owning a condominium for rental yields pays off, but it may not accurately reflect the actual market value of any condo in particular).
According to globalpropertyguide.com, condos in Singapore are priced at around US$13,500 (approx S$18,918) per square metre. In that case, a 120 sq.m. condo costs around S$2.27 million. The ABSD would be around S$158, 900.
Even if you obtain a monthly rental of $4000-7000 (as suggested by guidemesingapore.com), it will take two years or more to cover just the ABSD with the rental.
How long more does one need to pay off his loans for his second or third property? That depends on the loan-to-amount ratio the amount of loan taken and the interest rate, but to pay off loans with rental? That would easily take decades too, which brings us to the next misperception—
3. “Buying a house helps me reach my financial goals more quickly.”
Firstly, you’ll need to ask yourself what your financial goals and priorities are. For most people, it usually boils down to these two: 1) financial security, and 2) financial freedom.
While it can be argued that buying a house helps you attain both financial security and freedom in the long run, the long-term commitment that it demands may take away your freedom to choose the work you like (despite it paying you less), as well as the freedom to live where you want (if you wish to try multiple places), the freedom to seize opportunities to invest in other things, or even the freedom to retire earlier.
Of course, owning a house makes us feel safer by providing a secure base for us to settle down with our family. To some, it is also a prerequisite for them to raise their kids.
On the other hand, if freedom is your bigger priority, buying a house to attain financial freedom kind of defeats the purpose, especially when there are other available options out there such as renting or staying with parents.
It is a bit like the story of the fisherman and the businessman—people sometimes take a huge detour to pursue what truly makes them happy without realising so. Although we know that life is too short to be stuck in a rat race, it is often not easy to make the less popular choice.
At the end of the day, we should be making the choice that gives us a greater amount of happiness.
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