Commentary: How much should young couples spend on their first home?

A young couple who earns S$5,000 each may be considering either a S$900,000 three-bedroom Executive Condominium (EC) or a S$450,000 HDB flat. 

The former, with a S$3,000 monthly mortgage, leaves you with S$7,000 for other living expenses and retirement funds. If one half were to suddenly stop working, you are left with S$2,000 for variable expenses. 

This can be quite tight financially, especially if you have children. On the other hand, the HDB option with a S$1,500 monthly mortgage can give you more breathing room for exigencies.

Ensuring that homeowners won’t end up overstretching their financial limits and still have enough left for food, transport, healthcare and other essential expenses is a key reason that drove the implementation of a Mortgage Servicing Ratio (at no more than 30 per cent of a borrower’s gross monthly income).

READ: Commentary: Why Singapore's private residential market will remain attractive in the long term

LISTEN: COVID-19 and the outlook for Singapore’s residential property market in 2020 and beyond

But regulations aside, there’s good reason to spend even less on housing.

One way to look at this is the amount you need to set aside to pay off the mortgage in the event that your income is disrupted (as we have seen during this pandemic). 

The recent sale transactions of million-dollar HDBs in Tiong Bahru and Sin Ming made the news but deserves a closer look.

The S$1.1 million dollar flat at Tiong Bahru – an amalgamation of two two-room units with two main entrances – gives the buyer flexibility to convert it to a dual-key unit rent out one side of the flat for extra income. 

If he/she decides to rent out the whole apartment instead for S$5,000, it will pay for his/her monthly instalments with extra cash to spare. 

But the S$1.02 million loft unit at Sin Ming doesn’t quite have the same rental potential. Unless the aim is to rent it out completely, the mortgage on this would be quite a burden for a couple starting out.

If you’re buying property for rental income, consider that real estate portal SRX Property shows the Singapore rental market has been sluggish – rental rates were highest in 2013, and is down by 14.9 per cent since.

So relying on rental income to pay for your mortgage and earn extra income may not always pan out either.

RENOVATION COSTS ADD UP

In this age of social media that fuel arms races in expectations, it can also be tempting to want to splurge on an “Instagram-worthy” renovations, judging from the series of stories on CNA that showed a yacht-themed apartment and another that looked like a Balinese resort in recent weeks. 

But if you do not intend to stay for long in your place, think about saving or investing your elsewhere instead.

Three years ago, the Consumer Association of Singapore (CASE) released figures over a 10-year period showing that renovation costs had been increasing steadily, from about S$7 million in 2008 to over S$14 million in 2016. 

Typically, a homeowner can spend an average of $50,000 for a four-room flat. Prices have not fallen since then. 

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For my husband and me, our maximum renovation budget was one year of my annual income. To reduce costs, we opted for vinyl flooring in the bedrooms and kept carpentry to a minimum. 

Most of our furniture were bought from Johor Bahru, while other brand new household items were mostly from online stores which were cheaper by at least 20 per cent.

You don’t have to renovate the whole house at once either. Some homeowners opt to renovate the essential areas – the bedrooms, kitchen and toilets – and work on the beautifying the flat later.

IS YOUR HOME PART OF YOUR INVESTMENT PORTFOLIO?

Of course, there are couples who purchase their apartment for investment purposes, putting most of their income into a home and hoping the appreciation would allow their houses to become a sizable nest egg, which they can sell off later. 

This strategy makes most sense if you’re buying directly from HDB or the developer for a private home, property agents say. 

If you earn a relatively high combined income and do not have kids or elderly parents to look after, this may be a viable strategy.

READ: Commentary: Burden of caring for ageing parents weighs heaviest on unmarried daughters

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But a property does lock up a bulk of your cash too. Consider the S$1.5 million profit made by a seller at a condominium along Amber Road last week.

While this may sound like a huge sum, it works out to be an annualised gain of 5 per cent over 15 years – just slightly higher than the returns on your CPF Special Account. 

Investing in the S&P 500 in the same time period would have returned over 9 per cent instead. If you had invested in Microsoft stocks instead, you would have gotten a 15 per cent annualised gain in the same period, or an 800 per cent return. 

People seem to bank on a soaring property market to lift their house prices but few realise the Urban Redevelopment Authority’s private residential price index currently is hovering at 2013 levels, owing to the cooling measures imposed in 2018 and the slow sales during the COVID-19 circuit breaker.

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For me, my flat is a place to live and raise our son. And I would rather invest the cash in other investment vehicles.

WHAT THE PANDEMIC HAS TAUGHT US 

The current pandemic has shown that things can change abruptly. That high-income earner today may be out of a job tomorrow. 

Many airline crew for instance, who made big investments based on their salaries (which included generous allowances) now find themselves in a bind because their incomes have plummeted and they struggle to meet payments. 

On Thursday (Sep 10), Singapore Airlines Group announced that 4,300 positions will be cut as the aviation industry continues to be hit by the impact of COVID-19.

While we simply cannot predict how our futures will pan out or whether we will have the kind of jobs we have now, it does make sense to start small when it comes to buying and renovating your home and be prudent. 

After all, the assurance that we will not sink under a mountain of debt should the worst happen, is a peace of mind that money cannot buy. 

Dawn Cher, otherwise known as SG Budget Babe, runs a popular blog on personal finance.