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Will future home buyers’ income able to afford higher monthly payments?

The ability for sustainable higher property prices heavily depends on future interest rates and income growth.

I am most of the time not the brightest person and having not build up a reading habit, some profound way of getting the point across can still be a challenge for me.

That is the impression I get when I came across this article at The Basis Point.

Essentially it is a guest account of how a money manager friend of the author views his home.

As investors or as home owners we can learn a fair bit from this as well.

Interest Rate and inverse relationship with Bond Price and House Value

We all know that when interest rate goes down, the value of bonds in the market goes up. When interest rate goes up, newly issued bonds have a higher coupon than bonds in the market, so bonds in the market value goes down.

The same can also be said about house. Of course there are a lot of other determinants of housing prices.

But the ability to pay for the home according to the writer bears a large effect on home prices as well.

When interest rate goes down, housing affordability goes up and so homes become more affordable and prices go up. The inverse is that, when interest rate goes up, ability of consumers to finance mortgages get impeded and thus home prices gets controlled.

Difference between home loan and normal bond issues

The writer states that there is a difference between the two, although they seem to exhibit similar relationships.

Unlike most forms of bond issuance, the capital raised in mortgage issuance can only be spent on one thing: Houses.

You can’t take a 30 year loan out on your car, appliances, or your kids education. The mortgage, a form of captive financing, can only be spent on the roof over your head.

Conversely when companies issue debt, they can spend the money however they choose, new factories, new products, research and development, etc. Simply beat the cost of capital by investing in projects that return more then the cost you borrowed and voila we have diversified economic growth. Companies have the right to choose the highest and best uses of how to invest the borrowed dollars.

That inflexibility means that a shrewd person cannot actively deployed this sum of money to the best of their ability to generate wealth and goals.

The future value of your home depends on the purchasing ability of your future prospective buyer

The writer reiterated the point that when you look to sell the house next time will depend on the interest rate then:

Much like when you purchased your last home, the amount you could afford was highly dependent on the prevailing interest rates (cost of finance, the coupon payments on your bond), the same is true for all the future buyers of your home. The amount they can spend will be highly dependent on financing costs at the time they purchase in the future.

The scenario has worked out quite well for those early bond issuers who conversely borrowed at the high priced financing (home loan) and bought the corresponding low price asset (house).

If we look back, interest rates have been on a structural decline since the 1980s hair bands ruled the concert circuit and MTV actually played music videos. Mortgage rates in the late 1980s were over 10% annualized interest.

An example is then cited on a 1991 property selling at USD 450k. The prevailing interest rate then is 11% (!!!) . The monthly payment is punishing!

Property X is a rare find built new in 1991 and sold for $450k. At the time the new home buyer was faced with a truly punishing prevailing interest rate near 11%. After a standard 20% down, the payment for $360k of debt a 30 year fixed rate mortgage was a whopping $3,428 per month. A lot of money today and certainly a lot of money in 1991 unless you were fronting a grunge band.

Interest rates have been declining and is fueling a housing boom. The same property now is worth USD 1 mil:

Oddly enough at prevailing interest rates with a 20% down payment, the monthly payment to purchase the home is almost the same about $3,600 dollars per month. So despite the roller coaster ride of house prices, the home’s intrinsic value (based on its fundamentals) is remarkably unchanged in a 20+ year period.

True, the headline home price has doubled since the time it was built, but over that same time period, financing costs have declined about 70%, enabling the home price appreciation.

Think of it like a 25 year ski run of downward trending interest rates. We’ve went through some moguls, some double black diamond sections, but all along the way the power of gravity has propelled interest rates lower and home prices higher and now we’re at the bottom of a very long run. Unfortunately there is no ski lift back up and the hike up the mountain will takes us longer than it did to get down.

Future depends on income growth

The writer leaves a note where this housing market is fuelled massively by the low interest environment to make home ownership easier.

The headwind is that we are at record low interest rate. A climb of interest back to a mean level would create a head wind to housing affordability.

Future buyer’s income must be able to keep up with this.

The Singapore Property Context

This article puts a lot of emphasis on future income growth. It is one of the complaints in modern society.

I was told that you cannot buy a condo in Singapore for SGD 1 mil. And folks are still filling up the show rooms and finding ways to beat the ABSD to buy a second condo investment.

The majority mindset is that in the future, property is inflationary protecting and should end up higher in land scarce Singapore.

Current middle managing couple’s home affordability

A $1.4 mil property with a 80% mortgage loan of  $1.12 mil at 1.2% interest rate for 25 years work out to be $4323 per month.

That amount to me is still very affordable for a 30+ couple earning $5k each. Most middle managers may earn more than that.

It is rather 43% of their income.

Future middle managing couple’s home affordability

For the property to double in 10 years, the price of the property will work out to $2.8 mil.

At the same interest rate, the mortgage (2.24mil) will come up to $8646 per month.

If we use the same 43% of their income argument, the same group of middle managers will be earning 20k together or 10k per person.

In short, the pay growth rate needs to keep up with the home price.

If we factor in what the author says, and that the interest rate reaches 3% then, the couple then will need to come up with $10622 per month.

Their earnings capability to afford something like that would have to reach $24,700 or $12k per person.

Would a  medium 9% annual growth in income be plausible? Since 1970s our income growth have been around 3% annually.

This will mean that

  1. Future home buyers need to fork out more of their income for a home
  2. Duration where current home buyers look to realize their values need to be extended further than 10 years probably
  3. Interest rates can’t really rise (possible?)

The runaway prices would at least be justified if the income growth is at the same pace.

We know that on the average income growth is struggling below 5% in Singapore.

Rampant Speculation and less sense of dwelling

I know from talking with friends the mind share of property as an investment is high. I know stocks and bonds are not even in the picture.

Speculation means that once value rises by 20% after TOP they can sell it off.

They will earn much because

  1. Leverage: only 20-40% of their capital is in play
  2. Concentration of investment: unlike most who holds a diversified portfolio, a home is concentration

The mood for the next 5-6 years needs to be sanguine else a lot of people will be very sad.


What started off as me reading a complex article became an exercise of drawing parallels to our housing market.

I think there may be some flaws in the writers argument and my own. But I think the likely case is this is a speculative mania by average middle income folks or from a fundamental perspective, they are likely to see a sustainable realization in value in 15-20 years time.

A return on investment in 15 years will be 4% per annum and 20 years will be 3.5% per annum.

Would like to hear your point of view

The Basis Point | Your House is an Undiversified Bond Investment | Read full article


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Saturday 4th of May 2013

This is a very interesting article. So much so, I am compelled to agree wholeheartedly until I think about why 'subsidized' HDB should be kept at a constant affordability rate ie. How many years of average annual income.

But this is not the case.

In the current scenario we see around us, we can tell this has come about through a variety of socio political environments and agendas affecting supply and demand.

Put simply, there will always be a higher concentration of demand on city area housing should cost not be a factor. However, the paucity of choices presented in supply will strike a price with demand curve.

Greater population albeit temporary in form of pass holders will always tempt opportunists to get a speculative home (though they may not see that way.)

If you are lucky, you get a place that is ready and high in demand whereby rental will at least strike a balance with whatever liability you decide to bear in pursuit of yields.

If your timing is off, ie. Change in housing policies and rising tides of protests against foreigners (just ask any of which is currently staying in HDB or private housing in singapore and the most they can do is to shrug it off, not deny the increasing aminosity they can feel) or we get it wrong and we are suddenly no longer the jewel city of the region (most singaporeans will prefer new york city to texas, no offence); you are still with an expensively priced investment that has low 'volume' and a high debt on the other side to sandwich you.

Good! I say. A good part of any chess game is maneuvering one's pieces into advantageous positions to pick off any discounted low lying fruits of rival chess pieces in disadvantageous positins as a result of overly ambitious but not well thought out moves.


Monday 6th of May 2013

hi someone, i think i am referring to average figures. granted most would like to buy condo in good areas, but if all the condos now are taken up, eventually 15 years later you will have to sell it.

would your salary due to inflation keep up so that you can pay a much appreciated asset?


Sunday 7th of April 2013

Thanks for this article. I really enjoyed reading it. All I can say is that I feel the mentality is steadily moving towards one where "property can do no wrong". When I ask around, the reply I seem to get is - buy property and rent out for income. After a few years, I can choose to sell it for a gain. And if no one leases it, I can live in it myself! What happened to margin of safety? Leverage has made many people heady with potential gains instead of being mindful of the risks....


Sunday 7th of April 2013

this is what i deemed as rationalizing. not reflecting.

coward, anon

Sunday 7th of April 2013

Dear Drizzt,

20 years ago, I used to think like you. I have learned some the hard way.

1. Living in one home is critical and something goverments will support for their voters. The same cannot be said for owning a second speculative property. What if you cannot rent it out for the cost of your mortgage? What if you owe more money to the bank for either house than what you can sell for. What if you must move to find a job?

2. Investment Diverisfication is critical. Do not invest in a second speculative SG house before your portfolio outside of your SG housing investments is double in size of your housing investment.

3. Interest rates WILL rise. There is no way central banks will maintain sub-two percent interest rates if wages are increasing at 4% on average. Current rates are artifically low to try to reignite the world economy and in your local case, because SG banks are flooded with foreign investors money. If the world economy restarts, interest rates will increase. If the world economy fails to reignite, there could be a world wide recession and the value of your house will drop.

4. Your 43% of income affordability guideline sounds crazy high to me. Unless you can lock in sub-two percent for 30 years and can pay off the mortgage in that time, you should calculate affordability as being a maximum mortgage payment of 37% of income at an interest rate of 5%.

5. Leverage: Yes if your home goes up 5 percent and you only had a 20% down payment, you doubled your investment. But chances are if you sell that home, you still need to buy another, because you dont want to live on the street. Interest rates will be higher and your next home also went up 5% in value making it still as far out of reach as it is today unless you are putting more money aside during these days of low interest rates. And assume your salary did not go up enough to drastically increase your max monthly mortgage payment. On the other hand, if your home goes down 5%, you lost all your down-payment if you are forced to sell.


Sunday 7th of April 2013

hi anon, you seem to be the folks that belong to the minority group that are conservative in thinking (i know most of my readers are haha)

the 43% is me reverse engineering from folks that are able to afford a 1.4 mil condo. by no means i am using it as a gauge.

you bring up a very good point that they need to realize this investment, and if they have to buy one at open market then, it may not amount to the great returns they thought they had

Koh Kai Xiang

Saturday 6th of April 2013

love the para where u compare do the reverse computation for housing price to double in the next ten years.

To those who's concentrating in real estate in singapore for investments/cap appreciation: beware. 38 of the top 40 richest person in Singapore got rich through real estate in one way or another. like what Warren Buffett says, "What the wise do in the beginning, fools do in the end." When EVERYONE thinks that housing price cannot fall, it can.


Saturday 6th of April 2013

Actually it's some form of reflection kai xiang. I hope I am reflecting and not rationalizing.

For sure it has been a good investment for many but I fear not just properties but stocks and bonds many are late to the party.

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