Singapore Property Investing after Plus Prime Model

September 24, 2023

by Chengkok with No Comment Investment Accumulation Property Investment

On 20 August 2023, the Plus model was announced during the National Day Rally. This will bring a shift in mindset when it comes to Property Investing in Singapore. Due to popular demand, I have wrote down some of my thoughts on the property investing scene in Singapore and the direction you can consider to take.

Disclaimer: These are my own personal thoughts and it should not be used as your buy/sell/hold decision. Please check in with your property consultant (which I’m not) for your analysis.

Public housing to be affordable…

The government and HDB has time and again stress the importance of HDB being affordable. That being said, in the last decade, we have seen the “lottery effect” as places such as Duxton, Queenstown, Toa Payoh and so on (view the complete list here). If you look at the data, most $1 million HDB tend to be in the central regions of Singapore. They also tend to be the bigger units (5-Rooms).

This means that majority of the HDBs are still affordable given that our median household income (roughly around $10,000 as per 2022) has risen over the years. With the prices of 4 Room BTO between the ranges of $400K to $600K in the May 2023 batch, this means the median property price ratio to median annual income ratio is around 3.3 to 5. This is an extremely healthy range considering the ratios in London (13.9), Hongkong (41.6) and Japan (115).

I expect Singapore’s public housing prices to remain affordable if the government continue its’ stance on affordable housing. Our BTO prices will increase in line with our median household income. As long as our median household income increase, we will see an increase in the public housing prices.

… and accessible

The “lottery effect” had unintended effects of making the rich richer. This is because BTO prices in the central tends to be higher when it is launched. This in turn lead to the more affluent couples BTO in that area. As they then sell their BTO, this gave them a “lottery effect” which made them richer.

This will NOT be possible in the years to come.

The government has stepped in to introduce 2 schemes namely the Plus and Prime model. In both models, there will be subsidies to help young couples in their BTO. This means that couples who have lower income will have access to these BTO and able to stay closer to the city.

At the same time, there will be restrictions and tighter conditions to sell. For those couple who have lower income, I expect that they will continue to stay in those flats as there might not be other better options available to them. For those who have higher income and intend to “flip”, the longer Minimum Occupation Period (MOP) of 10 years and other restrictions will slow transactions in those flats.

Hence, eliminating the “lottery effect” and also create an more fair system to have home ownership (clearly trying to discourage any investment). This is brilliantly thought out.

I believe the ONLY way you can benefit from the BTO system as investment is if you fulfill the following criteria.

Marry very young (probably age 25 or less)
Buy the standard BTO flats (these flats tend to be “below” market rate)
Sell after 5 years and move on

Since BTO is “blocked”, how about resale HDBs?

If you look at the resale HDB prices on Q2, 2023. These are what you can find.

Resale HDB 4BR price range: $490,000 to $850,000. Average: $670,000

Resale HDB 5BR price range: $588,000 to $880,000. Average: $734,000

The price range is wide because of the location of the property. However, they are still affordable with median property price ratio to median annual income ratio for resale 4BR to be 5.5 and resale 5BR to be 6.11.

Using this data, you will make money if you BTO and sell your flat.

That being said, prices of resale HDB will not be able to increase drastically because of the Mortgage Servicing Ratio (MSR) rule. Unless Singaporeans are comfortable with the putting more downpayment (which defeats the point of investment anyway). I believe that HDB will continue to remain affordable and you will get a small windfall effect twice if you qualify for it (since we can BTO twice in our lives).

But Private Properties are expensive

Since the door to public housing “investment” is blocked, we should then turn to private properties. Private properties are relatively more expensive because we are so used to the affordability of HDB flats.

The average private property price in Singapore is $1,200,000 in 2022. There are tons of articles in the market that says that Singapore private property market is in a bubble. Looking at it based on data, we can see that the median property price ratio to median annual income ratio for private property is roughly at 10 (if we use the example of $10K as monthly household income). Considering other worthwhile comparison (like London, Hongkong and Japan), we are still relatively cheaper.

It is to my belief that there is still room to grow (and stretch) for private properties. In the table below, you can see that there are more people earning $10K/month (currently 44% of households in Singapore). These people tend to aim for private properties as they are the ones that can afford them. With private properties being around 27% of the properties in Singapore, I believe there is currently more demand than supply. This will somewhat push existing prices up until an equilibrium.

Final Thoughts By Wealthdojo

I believe the government will continue to give priority to making sure that HDB remains affordable and for more inclusion into the central regions of Singapore. I believe that HDB prices will continue to appreciate based simply on income effect of household. I believe that HDB will take the income of household to be one of the proxy for pricing BTO. HDB will continue to be used (and priced) for homestay and it will be not easy to use it for investment purposes.

This leaves private properties to be the only viable option for property investing. This is a game that can be played when your income crosses a certain level. I believe there is somewhat cautious demand for private properties based on a few factors such as more people are earning higher and the limited supply of private properties. I believe Singapore private properties are still priced fairly comparing to worthwhile comparisons among other nations.

What are your thoughts to this? Let me know!

Chengkok is a licensed Financial Services Consultant since 2012. He is an Investment and Critical Illness Specialist. Wealthdojo was created in 2019 to educate and debunk “free financial advice” that was given without context.

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

The views and opinions expressed in this publication are those of the author and do not reflect the official policy or position of any other agency, organisation, employer or company. Assumptions made in the analysis are not reflective of the position of any entity other than the author.

Should I Pay My Property Mortgage Loans?

January 10, 2023

by Chengkok with No Comment Money Management Money Mindset Property

Property Mortgage Loans are getting a lot of attention now as the interest rates are increasing. On 15 Nov 2022, DBS, OCBC and UOB raised their fixed home loan interest rates, with rates reaching up to 4.5 per cent. If you are approaching your refinancing period, there is a high chance that you are thinking of paying off your property mortgage loans. Should you do it or not?

Side note, if you are unaware of the latest property cooling measures, click here to read about it.

Brief Introduction

Mortgage is a loan that is secured by real property. It is a financial tool that makes the ownership of property possible as not everyone have the luxury of having hundreds of dollars in the bank at once.

The mortgage is made up of Borrower (you), Lender (usually the banks), Loan Amount, Interest Rates, Loan Tenure and Monthly Installment. Using a formula, you will be able to find out your monthly installment for your mortgage.

Should I Pay My Property Mortgage Loans Mortgage Formula

The Methodology

Behind every financial model, there is a few key assumptions that we will have follow. I have build an adjustable model to take into account your property mortgage loan value and also the interest rates. Here are the assumptions.

Loan Value: $1,000,000
Interest Rates: 4% and 1.1% (for comparison)
Interest Rates are Annualized
Amount to Pay Off: $100,000
Loan Tenure: 25
If not paying down loans, will be investing $100,000
If paid down loans, will be investing the interest that is saved by paying down loans

The 2 scenarios are whether this person should pay off their loans or not.

The Results

Should I Pay My Property Mortgage Loans Singapore Interest Rate 4%

In the first case study at interest rate 4%, you can see that it only make sense to pay down your loan if you are unable to find an instrument to invest at >4% (with the actual number closer to 5%). Usually, this means that you might be a balanced or adventurous investing personality.

The are interests in T-Bills and Singapore Saving Bonds (SSB) as these instruments are now offering cut off yield of 4.2% (T Bills on 5th Jan 2023) and 3.47% (SSB on 1st Dec 2022). Very simply, if you invested into T-Bills and SSB at this rate with an existing property loan of 4.5%, you would be worst off.

Should I Pay My Property Mortgage Loans Singapore Interest Rate 1.1%

If we were to rewind the clock and see property mortgage loans to be at 1.1%, it make senses to pay down your loan if you are unable to find an instrument to invest at 2%. Although this number might seem low, it also worth noting that at that period, interest rates for T-Bills and SSB were significantly lower too. The average interest for SSB on 2nd Jan 2022 was 1.76%.

In this scenario, those that were invested in the equity markets would definitely not pay off their loan.

To put these 2 scenarios together, there is a strong case not to pay off the loans in a lower interest environment.

Final Thoughts

That being said, I would advise you to consider that there are many more factors that you should take into consideration.

If you are thinking of paying off the loan, will this reduce your saving significantly? While it is good to reduce the amount of interest you are paying, it is unwise to do it when it affects your liquidity ratio. A period of retrenchment or illness will let you wish you didn’t pay down the loan.
Are you planning to invest into another property? As you pay off the loan, you will be able to get another loan to acquire another property.
Are you someone who considers being debt-free important? Is accrued interest daunting if you are using your CPF-OA?

The above is simply a financial model. You are unique in your own situation. If you would want clarity in your situation (depending on your interest rate, loan tenure etc), feel free to reach out to me so that you can understand your situation using the financial model above.

Mortgage planning is an important element in financial planning. I wish you all the best and happy chinese new year!

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

3 Effects of Property Cooling Measure Singapore

October 9, 2022

by Chengkok with One Comment Money Management Property Investment

Singapore is not new to property cooling measures. Do you know that the first property cooling measure was done in September 2009? I believe this was conveniently done after the global financial crisis of 2007 to 2008 to protect the property market in Singapore.

While I believe that cooling measures are introduce to allow Singapore’s property market to achieve slow consistent growth, there will definitely be effects on homeowners, buyers and the renters crowd. I want to share 3 main implications of the new cooling measures done on 30 September 2022.

Higher Interest Rate To Calculate Loans

For property loans granted by private financial institutions, MAS will raise by 0.5%-point the medium-term interest rate floor used to compute the Total Debt Servicing Ratio (TDSR) and Mortgage Servicing Ratio (MSR).

For residential property purchase loans and mortgage equity withdrawal loans, they will using the 4% per annum (p.a.) floor (up from 3.5% p.a.).

3 Effects of Property Cooling Measure Singapore Maximum Loan Amount

Putting this into numbers, the maximum loan that banks will be able to provide will reduce by the following amount. Personally, I think there will be no major impact from this as the quantum for the properties are in the millions. This will affect buyers who will not be able to stretch (even more) when it comes to bidding for the property.

If asked if the interest rate floor will increase again, I personally don’t think so and likely to hover around the current rates. The MAS-MND-HDB have commented that “They (interest rates) are expected to rise further in 2023 along with US interest rates, before settling at a higher level compared to the lows during the period 2013 to 2021.”

Loan-To-Value from 85% to 80%

This is applicable for HDB housing loans only (Private LTV limit remains at 75%). This means the HDB buyers will have to increase cash downpayment by an extra 5%.

I believe this is aimed at HDB that are bigger in nature namely 5RM, Jumbo, Executive Apartments etc. In particular, this aims to reduce the raise of the million dollar HDB (231 Million Dollar HDB from Jan to Aug 2022). I believe the government intends for HDB to remain affordable and want to reduce the use of HDB to do speculation.

3 Effects of Property Cooling Measure Singapore LTV Effects

Personally, I think there may not be major impacts even for the higher quantum levels. You will also be glad to know that first timers or the lower income group will not be affected much by this because of the housing grants (up to $80,000) available for them.

15 Months Wait Out Period For Switching From Private to HDB

This is perhaps the most talked about measure as it will affect people is planning to sell their private property into a resale HDB. Currently, people who have private properties have to sell it within six months of the HDB flat purchase.

Now, there is a wait-out period of 15 months after the disposal of their private properties before they are eligible to buy a non-subsidised resale flat. This means that it will not be easy to move towards HDB. You will be glad to know that this is a temporary measure.

You will also be glad to know that this will not affect those age 55 and above who is choosing to downgrade at that time**.

I believe there will be 4 main effects of this.

#1: There will be an increase in demand for smaller condo units. If people who do not want to wait for 15 months, they may consider to downsize to the smaller condo units. I believe transactions (perhaps price) for 2BR to increase in the months ahead.

#2: There will be an increase in demand for 4BR HDB resale units. For people age 55 and above, the 15 months wait out period will not apply to them** if they shift to a 4BR HDB or smaller.

#3: In general, lower transaction as the buying pool has shrunk. I believe that over the next quarters, the overall transaction might be lower as HDB upgraders will think twice. This reduces the effective buying pool.

#4: In general, rental rates will increase.

Final Thoughts

I believe that the government is planning for a sustainable and gradual growth of property prices. The emergence of million dollar HDB, the increase in property prices and the increase in interest rate calls for prudence for financial planning.

The effectiveness of the cooling measure will be tested as Copen Grand (7 Oct) and Tenent (Mid Nov) hits the market soon.

Property play a big role in our financial planning. It will be prudent to understand your own financial situation before making a decision into the market. It is also important to remember that other asset class (eg: insurance, estate planning, equity investment) should be taken into consideration when planning for your financial future.

I wish you all the best. Take care!

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

Should You Apply For Rochor River Peak BTO?

November 18, 2021

by Chengkok with No Comment Money Management Personal Finance Property Investment

Winning the BTO lucky draw is a bonus for many of young married couples. Pinnacle @ Duxton, Natura Loft @ Bishan, The Peak @ Toa Payoh are among the few that has made headlines for being sold at over a million dollars. These BTO are typically are matured areas.

The government then came up with the PLH model to discourage property inflation especially in the matured area.

In this article, I hope to share whether you should apply for River Peaks @ Rochor in the aspect of financial planning (affordability). I will seek to illustrate how much you should be earning monthly to be able to afford this property comfortably.

The Assumptions

Buying price for River Peaks is $635,000 (Average of $582K to $688K).

The couple is eligible for BTO application, no debts, no grant whatsoever. They pays for equal portion of the HDB downpayment and the loan. They starts from zero with no help from parents.

We are using HDB loan that requires the couple to pay at least 10% downpayment ($63,500) of the purchase price. We do not use bank loan as it require 25% downpayment and we assume that it is not an easy sum to pay.

We do not include stamp duties and misc expenses.

Illustration #1: Young Couple that just started working

If your partner and yourself are young with a few years of work experience, HDB loan might be the only option if you do not have capital.

Taking the medium monthly gross $3468 for the age group 25-29, your CPF-OA contribution will be $797.85 monthly. It will take you roughly 40 months / 3.5 years to have $31,750 in your CPF-OA. This means that you can consider applying for this BTO if you have already worked at least 3.5 years. Of course, if you have a good saving habit, you can use cash to pay for the downpayment (see #1A).

However with the monthly gross salary of $3468, the available HDB loan that is $458,400 and this is insufficient as the loan amount required is $571,500. There is shortfall of $113,100.

In this case, you cannot apply for the Rochor BTO unless you have saved an extra $113,100.

Should You Apply For Rochor River Peak BTO HDB Loan Estimator

Illustration #1A: Young Couple that just started working and are savers

Let’s push the assumption one step further and assume that the young couple saves 30% of their income for downpayment. This translates to $1040.4 cash and $797.85 CPF-OA per person per month.

Shortfall: $635,000 (property value) – $458,400 (potential loan amount) = $176,600

Monthly Couple Saving Towards Property: [$1040.4 + $797.85]*2= $3,676.5

This translates to 48months or 4 years.

Their estimated monthly mortgage repayment will be $2,080 for a 25 years payment at 2.6%. This works to be cash of $242.15 per person monthly.

This is doable but not easy. However, majority of their equity will be in their house.

Illustration #2: Young Couple that just started working with higher median monthly income

Given that the constant is the amount of loan that can be obtained, I did the reverse calculation and found out that a monthly income of $4,400 will produce the HDB loan of $576,000.

Should You Apply For Rochor River Peak BTO HDB Loan Estimator 2Should You Apply For Rochor River Peak BTO HDB Loan Estimator 2 — Should You Apply For Rochor River Peak BTO HDB Loan Estimator 2

In this case, a monthly income of $4400 would mean your CPF-OA would have $1012.09 being contributed monthly. It will take around 32 months or 2.7 years to have $31,750 in your CPF-OA.

Similarly, their estimated monthly mortgage repayment will be $2,080 for a 25 years payment at 2.6%. This works to be cash of $55.82 per person monthly.

Definitely suggest that you probably need a higher income to be comfortable to afford this property.

Final Thoughts

I expect that people applying for this BTO is probably going to be couples that have worked for at least 4 to 6 years (maybe 28 to 32 years old). I expect that their income to be at least $4000 to consider this project.

This assumption means that they have both time to save in their CPF and their saving account to afford for this project.

The downside is that the project have a waiting time of 71 months or close to 6 years (without delay). This means you would not be able to have a home until you are close to the mid 30s.

What do you think about this project? Let me know in the comment below.

Feel Free To Reach Out To Share Your Thoughts.

Contact: 94316449 (Whatsapp) chengkokoh@gmail.com (Email)
Telegram: Wealthdojo [Continuous Learning Channel]
Reviews: About Me

CPF Accrued Interest Trap: Can You Downsize and Retire?

August 6, 2020

by Chengkok with 6 Comments CPF Accumulation Investment Accumulation Money Management Property Investment Retirement

“My plan is to downsize my house to use the (capital appreciation) money for retirement.”

I was walking past a coffee shop and I happened to hear the above statement. The man who looked like he was in his 50s seemed to radiate confidence about his statement. I wonder if it was possible. While we are going to explore that today, do check out my most popular blog post in 2020 so far: 5 mistakes people make using their CPF.

Context Setting

To buy a home in Singapore, I would say a good majority of us will take a loan. As we are able to take up to 90% (HDB loan) or up to 75% (Bank loan) of the property prices, this means we have to put a down-payment. To illustrate, a $400,000 HDB property would require us to fork out at least $40,000 as down-payment.

To pay for this down-payment, I know most people would use their CPF-OA to pay for it. At the same time, most people will also use their CPF-OA to service their home loans.

This means that our CPF-OA might be wiped out throughout our loan bearing years.

What most people fail to recognized is that we are charged interest for using our CPF-OA, this is known as accrued interest.

CPF Accrued Interest

Accrued interest is the interest amount that you would have earned if your CPF savings had not been withdrawn for housing. The interest is computed on the CPF principal amount withdrawn for housing on a monthly basis (at the current CPF Ordinary Account interest rate) and compounded yearly.

(Source: How does the Board calculate the accrued interest on the amount of CPF used for my property?)

As CPF is meant for our retirement in our planning of Wealth Management, to safeguard the “loss of interest” during the years the monies are used for property, we need to refund the CPF-OA the following.

The down-payment that was used
The monthly installment that was used
The accrued interest (interest that we would have received from our down-payment and installment if we didn’t withdraw from CPF)

Will the plan work? Let’s put it to the test

Let’s fixed a few reasonable assumptions to form an illustration. We will looking at downsizing from a 4 bedded HDB to a 3 bedded HDB after the loan tenure of 25 years.

HDB 4RM Value: $400,000

Down-payment: $40,000 (10%). Buyer Stamp Duty (BSD): $6600. Legal Fee: $3000.

Loan amount: $360,000. Monthly Installment: $1634. HDB Loan: 2.6%

CPF Accrued Interest Trap Can You Downsize and Retire Calculations

In month 1, we add the down-payment, BSD, legal fee and the first monthly installment of $1634 to get $51,234. From day 1, the accrued interest would already be $106.74. In 25 years time (300 months), the total accrued interest would have already accumulated to $184,698!

Assuming the property market grows at 3% annually, your $400,000 property will now be worth $837,511. Isn’t that great? Your profited $437,511!! Before you think that your profit will be $437,511 and can be used for retirement, here is when the accrued interest trap comes in.

When you sell your house, you have to return back to your CPF the down-payment, the monthly installment and also the accrued interest. This would mean that you have to return $724,498 ($539,800 + $184,698) into the CPF. Your cash proceeds will only be $103,013.

Wait there’s more!

Because you are downsizing, you can use your existing CPF-OA to acquire a HDB 3RM. Using time value of money, a HDB 3RM wroth $300,000 now will be worth $628,133 in 25 years time if it grows at the same 3%. You have to make sure that you have enough money to acquire that HDB 3RM.

Wait there’s even more!

You have to pay the HDB resale levy of $30,000 (as of 2020), agent fee of $8,375 (1%) and also legal cost of $3000.

Wait there’s even some more!

After the age of 55, you have to set aside your Full Retirement Sum (FRS) which is a combination of your Ordinary Account and your Special Account. This might post some problems to use your CPF-OA to acquire a HDB 3RM if you are unable to reach your Full Retirement Sum.

And lastly..

Assuming that you can acquire the HDB 3RM without problems, would $113,013 be enough for retirement?

Conclusion

Retirement planning is often more than a single solution. There are many caveats that stumble the best of us. To ensure your retirement is secure, work together with someone that you trust and exhibit good expertise in this matter.

In my experience helping people plan for retirement, I realised those that retire in comfort usually have a combination of retirement tools ranging from properties, stocks, annuity and also insurance.

Thank you the uncle at the coffee shop who inspired me to write this article. Please help to share this article so that this article may find its’ way to him.

No one will care about your money as much as you do.

In Wealth Management, it is important to Pay yourself first. Beware of scams. Before you invest in any company or popular investment opportunity, be sure to do your own due diligence. If you wish to learn more about investment, I hope to nurture genuine relationships with all of my readers.

Check out my most popular blog post in 2020 so far: 5 mistakes people make using their CPF.

Please feel free to contact me on my Instagram (@chengkokoh) or Facebook Page or my Telegram Channel! Or subscribe to our newsletter now!

Wealthdojo

Public housing to be affordable…

… and accessible

Since BTO is “blocked”, how about resale HDBs?

But Private Properties are expensive

Final Thoughts By Wealthdojo

Brief Introduction

The Methodology

The Results

Final Thoughts

Higher Interest Rate To Calculate Loans

Loan-To-Value from 85% to 80%

15 Months Wait Out Period For Switching From Private to HDB

Final Thoughts

The Assumptions

Illustration #1: Young Couple that just started working

Illustration #1A: Young Couple that just started working and are savers

Illustration #2: Young Couple that just started working with higher median monthly income

Final Thoughts

“My plan is to downsize my house to use the (capital appreciation) money for retirement.”

Context Setting

CPF Accrued Interest

Will the plan work? Let’s put it to the test

Conclusion

Subscribe To Wealthdojo

Wealthdojo