"House poor is no fun."
UPDATE (DECEMBER 2016):
Why are you borrowing?
I remember both as being extremely frugal and I always wondered why being people who stayed in condominiums were they so poor. Of course, those were days when I was a financial ignoramus.
Now, although I think that frugality is a virtue, it is a virtue when we are so without being forced to be so.
If we had a choice and we chose to be frugal, good. However, if we are frugal because we don't have a choice, that is misery on earth!
I remember when I talked to both of them, they gave me almost identical answers. Yes, I was a nosey kid. Their families had to make hefty monthly repayments to the banks. So, they had to be very careful with their money.
Although I have suggested that investing in properties could give us a leg up in our wealth building efforts, I believe that buying properties without any margin of safety is foolhardy.
Basically, if we had to take the maximum of 80% LTV allowed in order to buy a property and if the monthly repayment was an amount that would lead to a very frugal lifestyle which was not by choice as a result, we should not buy the property. It could be within our means by conventional definition but this is one example of how we should not succumb to conventions.
Buying properties in Singapore has been seen as the way to riches. To many ordinary Singaporeans, buying a condominium for self-stay seems to be a natural first step.
I will share these thoughts:
1. Like I said, if we have no choice but to be frugal in life, that is utter misery! If to stay in a condominium, we are forced to live like paupers, the price is too high.
2. We have to remember that our homes do not generate cashflow. So, a home is not really an investment. It is consumption. So, just like anything we consume in life, make sure we do not spend beyond our means. In fact, we should not just spend within our means. We should spend well within our means.
Of course, our homes might have the unique property (pun unintended) of being able to appreciate in price over time which makes them unique in the world of consumption but it does not detract from the fact that our homes are not investments but consumption.
3. Borrowing to the max with no reserves means there is no margin of safety.
Probably, a $3,000+ monthly repayment on a 30 years loan of $800,000 is manageable for a couple who is making some $8,000 in combined gross monthly income. Now, we have lots of cheap money sloshing around, after all.
What happens when the party stops?
What if interest rates go up just 1% which means almost a doubling from current levels?
What if the economy goes into recession and home values decline?
What if the couple were to be retrenched?
I won't talk about whether it is a good time or bad time to buy a condominium in this blog post. I will, however, say that we must be very careful or we could end up slaving just to stay in a condominium.
Surely, this is more so for new condominium buyers who intend to be owner-occupiers today.
1. Good debt is always good?
2. Affordability of housing in Singapore.
3. More cooling measures on the way?