Why it makes sense to start as early as possible.
In this land-scarce city state, the common rant we hear about is how expensive a residential property cost.
Between 2010-2015, the median salary growth rate is 3.1% and dipped lower to 2.7% from 2015-2020. (Source: Comprehensive Labour Force Survey, Manpower Research & Statistics Department, MOM).
Within the same period, non-landed private residential property price has increased by 51.6%. This translates to an average growth of 4.2% annually. (Source: SRX Non-Landed Private Residential Property Price Index).
At one glance, the difference might just be 1.1% to 1.5%. But If we consider that the median annual household income is about $180,000 and a 2 Bedroom unit at about $1,200,000, the absolute difference is almost 9 times!
With property price outpacing wage growth by 9 times, it makes a compelling case to start growing our property portfolio early.
Am I ready for such a huge commitment?
The decision is tough when we are not sure about the cost. In this article, I would like to help you understand the numbers involved in securing a private residential property. HDB will not be covered in this article due to the restrictions of purchasing before 35. (From an asset progression perspective, HDB is less advantageous. More on that in another article.)
Affordability Calculation
Unless you have the support from your loved ones, home owners usually purchase properties with bank loan. Our purchasing capability depends heavily on the amount of loan we can secure. Under current regulation, home owners can secure a loan of up to 75% of the valuation price of the property. For the balance 25%, 5% has to be paid in cash while the remaining 20% can be paid using a combination of cash and CPF OA.
Referencing from the Graduate Employment Survey carried out by MOE, the median basic salary of a graduate from Mechanical Engineering is $3,700. Let's look at the projected savings and CPF accumulated over the years.
(Assumptions: 10% salary increase in 4th and 7th year from promotion/switch, 20% cash savings on income)
With an accumulated Cash + CPF of over $200,000, we can realistically look at purchasing a residential property either for own stay or investment. There are shoebox units priced at very low quantum in certain districts but my personal opinion is to be cautious when buying these units as your first home due to the difficulty of selling them when the opportunity comes to upgrade. If you are buying a shoebox unit, be sure that there are compelling unique selling points about it before committing.
Shoebox Unit
A good shoebox unit to purchase would be at 77 @ East Coast due to its proximity to various amenities like parks and beach. The smallest shoebox unit is going at $738,000 and I will illustrate the financials using it as an example.
Example 1:
Purchase Price: $738,000
Loan Amount: $553.500, Interest Rate: 1.2% p.a.
Initial Outlay
Buyer Stamp Duty: $16,740
Legal Fee: $3,000
Downpayment: $184,500
Total cash + CPF requirement: $204,240
Monthly Loan Repayment
After Temporary Occupation Permit (TOP): $14,65.30
Cash: $235.72
CPF OA: $1229.58
After Certificate of Statutory Completion (CSC): $1,831.62
Cash: $602.04
CPF OA: $1229.58
(TOP is when homeowner can occupy the property. CSC is usually obtained 1 year after TOP.)
If it is not meant for own stay, a shoebox unit at East Coast can fetch a monthly rental income of $1,700 . The ease of rental and resale make this unit an attractive investment property.
2 Bedroom Unit
If the purchase is made jointly with a co-owner or by individual with higher income, 2 Bedroom units are ideal as they provide flexibility for own stay or investment.
Using a 2 Bedroom unit at Parc Clematis (District 05 - Bouna Vista / West Coast) as example. It has strong demand from families with young child due to its proximity to a popular primary school and affordability.
Example 2:
Purchase Price: $1,202,000
Loan Amount: $901,500, Interest Rate: 1.2% p.a.
Initial Outlay
Buyer Stamp Duty: $32,680
Legal Fee: $3,000
Downpayment: $300,500
Total cash + CPF requirement: $336,180
Monthly Loan Repayment
After Temporary Occupation Permit (TOP): $2386.55
Cash: $224.55
CPF OA: $2,162
After Certificate of Statutory Completion (CSC): $2983.18
Cash: $821.18
CPF OA: $2,162
Option to rent out a room at $1,400 or whole unit at $2,600.
In Conclusion
Owning a property before 35 is possible and as property price growth outpaced wage growth, it is beneficial to secure a home as early as your financial situation allows. However, in no way am I encouraging anyone to adopt extreme speculative practices like borrowing huge sums of money for downpayment and over-stretch loan repayment capability. I hope the 2 examples given are sufficient to help you get a clear picture of the numbers involved in determining affordability. I would encourage the readers to check your CPF OA account balance and consider the cash you have on hand to determine if you are ready to embark on growing your property asset.
Every situation is unique. If you would like to seek opinion on matters pertaining to your affordability or picking the right property, feel free to drop me your inquiry via WhatsApp (+65 96986289) or email to jeffchua.era@gmail.com and I will reply as soon as I can.
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