Yesterday, I had an insightful discussion with a very percipient person whom I admired a lot. After our discussion, I reflected on what he said about the issue of housing prices in Singapore and understood a deeper implication on why we need to keep our housing price affordable in Singapore.
For many years, I used to think of a house as an asset. But as I gained more financial knowledge, my view changed.
A thing can only be an asset if it generates income for you.
I only have one house. It is a place where I seek shelter, sleep overnight and bond with my family. Does it give me income? The answer is NO. So, it is not an asset. If I sell it, I will have to buy or rent another one … I need a shelter over my head and for my family … its a need to be fulfilled.
To make matter worse, unless you are wealthy, the rest of us need to take a hefty loan to buy our desirable house. That makes it a liability or a “burden” to many of us.
I am sure if you live in Singapore, from time to time, you will hear about people selling their house because they can no longer afford to pay the monthly interest of the loan. And often this happens when the sole breadwinner loses their job – then it becomes a double whammy.
If we are financially conservative and/or with some financial literacy, we will go for a house that we feel we can reasonably afford without over-leveraging in case something unforeseen happens. What is that amount that we can “reasonably afford” is a Science on its own. It is very specific to the individual.
Our government has tried to help us set a benchmark by using the Total Debt Servicing Ratio (TDSR) and capping this ratio for a person taking a loan at 60% of a borrower’s gross monthly income. Hopefully this ensures that he/she will not be overly-leverage.
In our conversation yesterday, the learned person pointed out further the reason why affordable housing is critical for Singapore’s future and keeping our competitive edge and why our government is making a tremendous effort to make this happens.
We all know why affordable housing is important because we want to make sure everyone in Singapore has a shelter. It is a need not a want. Furthermore, if everyone in Singapore has a house, it will also ensure that we will grow roots in Singapore. Many of us will have family if we have our own house and having a stable house to go home helps give us a peace of mind and also build happiness in our lives.
However, if we take a more macro level, ensuring affordable housing to Singaporeans is also needed so that Singaporeans will be less afraid to take risk.
It is a well known fact that a large chunk of our monthly pay goes to repay our housing loan and given the hefty property loan that we often took, we literally need our entire career life to repay the loan.
Once you put yourself in these shoes, it is easy to see why many would avoid taking excessive risk.
If you have a high loan to repay, would you choose a stable job that pays reasonably well or try to be an entrepreneur with a new startup business and hopefully make it big? For those with family, the answer is very clear. I am sure most if not all will choose the former. Even for the young guys, would they do so if their family financial conditions do not support?
However, in the new world now, staying constant and conservative is not going to give us the competitive edge. Singapore is what it is today because our political leaders and our fathers and mothers took risk. But today, are we as adventurous as them?
In order to promote an entrepreneurial society, to promote innovation (i.e. investing time for R&D and taking risk), to inspire people to take risks – which are the ingredients to survive and win in this modern world, the need for an affordable house is critical.
You can also extend the argument to say that maybe we should build safety net to ensure that those who tried and not successfully are also taken care off. Yes, I think some form of safety net would help however, there is a need for some balance. The safety net cannot be so secured that no one wants to take any risk or hard work anymore.
It is important to also work on the Pull side : The size of prize (success) must be compelling so that people will want to take risk and work towards the prize.
Back to the topic of affordable housing, to us individually, I think it is important that we find a house that we can reasonable afford. Don’t over stretch yourself. On one end, we need to be prepared for rainy days. But at the same time, with an affordable house, it will also free us to dream big and take risk to improve our lives, to gain wealth so that we can better help the less fortunate people around us and also to make Singapore hungry and willing to compete and win!