If we go by the recent HDB Built-to-Order trend, it might be the case that future central BTO will be smaller in sizes.

I observed that the latest HDB build to order sales launch was out and it seems rather peculiar that there were no launches in matured estate that is bigger than 4-room.

The biggest size flats for Toa Payoh Ridge and Kim Keat Ripples is 4-room. The sizing of the flats is deliberate and HDB should be under no constraint in their sizing.

Here are some of the past year launches:

My eyes were not playing games with me. But if you were to be strict about it, HDB is still releasing 5 RM HDB flats for a matured estate like Tampines.

A possible explanation is that they are starting to rationalize the supply of the new flats in these areas that are more central, and more in demand.

This would cause some frustration for newlywed young couples. For a long while, my friends prefer to stay in 4 RM or 5 RM HDB. They even lament that 4 RM is too small.

I always think that the sweet spot between affordability, cleaning, enough space, government subsidies is the 4 RM HDB.

Yet, when I spoke to Heartland Boy recently, you realize that there are some nuances that you will struggle to accomplish with a 3-RM flat. Heartland Boy stayed in a BTO similar to the new BTO above and has one daughter.

If you wish to create a better long term sleeping practice for another child, perhaps having only 2 rooms will not be very conducive.

I do get a feeling that there might be a push to rationalize affordability in these central estates.

I was initially thinking the government is saying: “If you want a bigger, yet central flat, go for those older ones. I have already given you the grants to make it more affordable. The leases are shorter but it will fit your needs.”

In matured estates, there should be ample supply of existing 3 RM and 4 RM HDB.

If this trend continues, it may be bad news for some couples. I know of folks who cannot stand living in a place that was inhibited by someone previously. It is damn weird but if that is the case, you would either

1. get a new BTO further
2. get a new Condo instead

You got to pay a higher cost.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

What would drive residential price growth?

If you were to ask me, that would be the wage growth in a country or a particular area. The second thing is the demand and supply dynamics.

If you wish to assess residential property is a good long, long term investment, it will be your mastery of this topic.

We often say that Singapore is a young country and our housing market going back to 1960, is probably 60 years old.

We have been through a period where the supply and demand dynamics have been in one direction and only until recently, some questions were asked about it.

As a person looking at data to shape my view about things, I am rather cognizant about how good is your conclusion depends on the data. If you have too little data, the conclusion based on the data, might not be as strong.

But how much is a lot or too little data?

Duncan Lamont from Schroders dug through 147 years of UK housing information and gives us a glimpse of UK Housing Affordability over the years.

I found his report interesting because if we conclude that it is dangerous to conclude the future residential growth from a historical period where the markets just went one direction (up), why not take a look at the evolution of housing affordability in a developed country that went through more than us?

It might give us a different perspective on the housing market.

UK Home Affordability Looks Expensive Now, But…

One of the ways we gauge residential home affordability is to use Price-to-Income ratio to determine.

In Duncan’s report that is what he used as well: House prices as a percentage of average earnings.

It gives us a reflection of how long it takes for us to pay off the home if we do not eat, drink and spend any of our income and there is no leverage interest on our debt.

As a lot of people know, London residential homes is not so cheap. But on average the house price as a percentage of average earnings ratio for the UK now is 8 times.

In Singapore, the 4-room HDB flat’s price to income ratio ranges between 3 to 8 times but averages around 3.8 times (read my detail 4-room HDB data article).

You can see the gulf in disparity in affordability.

This price affordability high has only been breached twice previously in the past 120 years:

1. Prior to the start of the Great Financial Crisis (GFC)
2. Once at the start of the 20th Century

120 years is a long time! And based on this, a simple conclusion could be that this kind of price to income unaffordability cannot be sustained.

However, if we extend back to 1845, then we will see some surprising data:

From the 1840s to 1900, the house price as a multiple of average earnings is very high!

It will take you a while to pay off your mortgage if you do not eat or spend. If you do, it will be even longer.

Schroder’s data also show that the disparity in regional home affordability is more of a recent phenomenon. London and the South tend to be more unaffordable but itis only the last 15 years that the gap grew wider and wider.

What Caused the Improvement in Housing Affordability from 1845 to 1915?

Something drove the improving trend of housing affordability from 1845 till the first world war.

Average house prices fell by 23% between 1845 and 1911 (-0.4% a year)

It can boil down to these factors:

1. More houses were available. The stock of houses increased.
2. Houses became smaller. House plot size went down from 913 sqm to 268 sqm on average.
3. Income is higher. Earnings rose by 90% over the same period (+1.1% a year)

Actually, one thing to note is that while 90% growth in earnings looked big, on an annual basis, it does not look very impressive. Presenting numbers in different ways is interesting.

It feels very much like the Singapore situation where

1. Housing prices per square foot is not cheap
2. Developers justify that smaller family needs smaller homes and so the residential home size is dramatically reduced
3. Smaller home’s PSF prices stayed higher but on a unit basis, they are more affordable and thus we can purchase them (A $1.2 mil 2BR now goes for $0.9 mil because the size is smaller)

The only difference is our home prices remain resilient, while in UK’s case, the prices went down.

More and smaller houses should increase supply and control prices while higher-income should increase prices. The fact that home affordability improved over this period feels to me that the greater supply outweigh the rising income well such that prices are still relatively controlled.

The chart above shows the UK housing completions over time. In terms of current levels, the home constructions were on the low side if you compare the period after the second world war.

However, in the period of 1850 to 1910, home completions were lower. We cannot discount that with better technology, home building may be much easier compared to in the past.

We can see the great pick up in home building from 1856 to 1900. The two periods where housing completions took a break was during the war.

The composition of who built the UK houses also shows the role of government in providing the need when the people needed homes the most and how eventually the private sector took over.

A Predominantly Renting Culture Probably Controlled the Price

I felt that given the same situation as Singapore, there would be periods where the supply could not keep up with the demand.

This would have caused some price appreciation.

I think that did not happen because even at the end in 1918, the UK has a higher percentage of people renting than owning a home, despite the improvement in residential affordability.

This gradually changed in the 2000s but the private renters started growing again due to the lower relative income to home prices today.

UK Property Performance Versus Equities Over 25 Years

Since Schroders is an asset management firm, they will always have an equity angle to their research.

Duncan’s research questions whether it is wise for Britons to put their faith in property over their equity pension.

The research shows that UK properties on average, 100,000 pounds in:

1. UK Properties would be worth 416,000 pounds today
2. London: 648,000 pounds
3. Yorkshire: 356,000 pounds

This excludes maintenance, repairs, insurance or taxes, rental income (since this is your primary residence) and the impact of leverage/mortgage financing.

Global Equities would have grown to 787,000 pounds.

What was not factored in was the substantial tax savings that can be saved and the closing costs of buying and selling properties.

I think it is a strange comparison.

If we are talking about living in the property then we should not be compared to equities at all because the purpose is to have a roof over our heads more than the growth of our wealth.

I think property in the UK, like in Singapore, holds a big mindshare and people treat it as their retirement fund as well. If that is the case, then the closing costs of selling the property and the tax benefits of the pension will have to be factor into the equation.

The Global Equities have been impressive but I feel Schroders may be cherry-picking the numbers.

If you are UK person, there should be a home country bias. Your alternative should be to invest in UK equities. That should be a fairer comparison.

My data shows me that from 1994 to 2019, MSCI UK (net of dividends) grow 100,000 pounds to 463,000 pounds.

That is probably not as impressive as the home appreciation.

Conclusion

Duncan asked the question of whether UK homes could be more affordable.

If we draw from history, homes got more affordable when supply increases and wages increases.

This is very unlikely because:

1. Homes today are already very small in UK
2. The majority of homeowners are on mortgage, and if the prices slide, it would be a political suicide
3. Wage growth has not been good

Affordability can be achieved if prices fall due to change in interest rate policies.

A Bank of England study shows that the rise in housing prices can be attributed to the fall in interest rates. An unexpected and persistent 1% rise in interest rate could ultimately generate a fall in real house prices (over a period of many years) of just under 20%.

You can read the paper here.

In Singapore, our HDB homes, relative to the median household income is about $9200 a month or $110,400. If we backed out the CPF SA and Medisave, that will be about $100,400 a year. The median resale price of our 4-room HDB flats is $400,000.

Thus the house price to average income ratio is about 4 times. This is pretty OK. I think the government has increased the supply such that there is no glut that would cause a price increase due to shortage of supply.

The demand for HDB is now more controlled as Singaporeans realize that as a leasehold, the eventual value is zero, and they have moderate their crazy expectations to bid up the prices.

The private sector:

1. The homes are getting smaller
2. There are a lot of supply still
3. Wages of Singaporeans are rising

So in terms of affordability, things will get better. The prices would say in control and as wages go up affordability increases.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

My more financially savvy friends told me that among the stuff that really messed them off the most, it is when their parents go to their local bank branches.

My friends have a lot more control over their finances.

But they cannot just upload their better understanding of financial products and the financial world into their parent’s (siblings & relatives as well!) brains.

When their parents go into a bank to carry out some simple banking needs, they would come home with an endowment plan, structured product or a few unit-trust funds.

I have been proposition products in this way in the past, most recently 2 months ago at a UOB bank branch.

The danger about this to parents is that:

1. These are not simple no-risk financial assets. They carry a certain level of risk. Parent’s risk expectation may be wildly different from what is communicated
2. Not much needs analysis was usually carried out. The selling of products is based on how much spare savings the prospect has. There is no comprehensive evaluation of the prospect’s financial situation and what are his or her immediate and longer-term financial needs.
3. Some of their parents needed retirement income instead of something that will force them to save.

Once their parents committed to the policy or fund or structured product, early surrender of these policies would have caused capital loss (unless your parents decide to cancel the policy during the free-look 14-day period).

A friend of mine was at Bedok Central yesterday morning and saw something that left him pretty disgusted.

He was outside the POSB Bank and observed that the bank have engaged someone to set up a booth where free coconut water was given out.

You can watch a snippet of the scene he observed here:

A female emcee was on the mic repeatedly informing passersby of a great deal that is only available at the POSB Bank.

You can clearly hear in English “Over here at POSB Bank, we have fixed deposits with interest rates of up to 8.88%“.

A fixed deposit that gives you an interest of 8.88% is VERY appealing to anyone (including me). This is especially in the low-yield environment we are in.

Let’s just say that one of the reasons you may have come to read this post may be that you do not wish to miss out on some extremely high interest fixed deposit as well!

But in our current investment climate, it is very hard to get such a high 8.88% interest without taking some form of risks.

Considered this:

1. If you look at the dividend yield of blue-chip dividend stocks and REITs in Singapore, only a minority of these risky stocks have yields in excess of 8.88%
2. My list of safe, short term savings options may be a little outdated, but their interest rates have been less than 3%.
3. The US or Global High Yield Bond Yields around 5%

If investments with risks do not yield 8.88%, how do you find safe fixed deposits that yield 8.88%?

The lady emcee clearly said in both English and Chinese the “interest rate” is 8.88% and not dividend yield or returns.

I did a search, and I could not find anywhere on DBS or POSB website that has a fixed deposit that yields 8.88%.

It is likely this is not a simple product such as a super low risk to no risk fixed deposit. If it is, they should let me know. I will help them market it as well.

Update: Some of my readers have let me know that they encountered the same thing in POSB branches at Yew Tee, AMK.

On further probing, the product is described as a regular premium savings plans. So this is a form of insurance endowment plan. Still, not much is known how to get 8.88%.

It is likely a combination of DBS Multiplier and doing a few different things. Will update more if I know more.

And this is what disgusts my friend.

How Ethical is This Way of Lead Generation?

Bedok is a matured estate.

Majority of those who bank at physical branches are the folks who are more comfortable banking in brick and mortar and likely less trusting or savvy with online banking.

They tend to be the older folks.

They put out coconut water outside the bank branch to attract folks to queue and the relationship managers would station close by to ask them questions. The relationship became transactional, as you would reciprocate to listen to them since you are going to consume their coconut water.

Then after this, they decide to sit down with this RM to hear more about what he or she has to say. The RM can be rather persuasive.

Aside from reciprocating the goodwill shown to them for providing the water, the biggest problem for many people is that they are really bad at saying no and walking away.

The RM will just go on and on and you will eventually fall into the mode where you will think, “Aiya just buy la, this product don’t sound too bad.”

It is quite disappointing to me that they stoop so low as to keep drumming that “fixed deposit interest rate of up to 8.88%” on the loudspeaker over and over again.

Policy-wise, they would not have done anything wrong because as long as they explain the risk of the product before the consumer signs and purchase the product, they are compliant.

You can understand why some of my friends would rather accompany their parents to the bank branches.

To be honest, I expected this kind of practice from insurance companies. We have seen some insurance agents use high returns (without telling them what are the products) to attract leads to them, and that reflects their overall character.

But this is POSB we are talking about.

The older folks trust them based on the brand name that they have built up.

To end this, let me just say that… not all financial products sold are not fundamentally sound. In this blog, I have frequently profiled endowment plans, the range of returns you could possibly get from endowments. At Providend, unit trusts are the recommended investment instruments.

There is a lack of more comprehensive planning.

Endowments lock up your money for a certain durations. There can be short term volatility in the equity unit trust such that when a person needs the money, the value then was inadequate for their needs.

A lot of this can be better planned if holistic planning is carried out.

But if these fixed deposits are truly no-risk deposits, then you do not need so much planning.

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works

Oxford University is planning to increase the size of their 100-year bond issuance.

The Financial Times reported that the university successfully raised 750 million pounds in 2017. This was a period where rates are low and they were able to issue at an interest rate of 2.54%.

This issuance may be priced close to 2.65% and is unsecured. This means that in the case of default, the borrowers will have no recourse over Oxford University’s assets.

There are some institutions that are in a unique situation. They can be likened to our Keppel or ST Telemedia. While they may not be a government organization, their strategic importance gives investors the impression that in case anything, someone would bail them out.

Oxford University happens to be in such a position.

What captured my attention was a crazy price chart of an Austrian 3.5 billion 100-year bond issue. This Austrian bond was issued at a yield closer to 2.3% a year. This is a pretty low rate already.

The bond trades closer to a prevailing yield of 1.1%. The price chart is so beautiful.

For those who think 2.3% is overvalued and madness, they probably missed out on a 60% gain in capital value (I take it the bond was issued at par of 100)

Different bonds are sensitive to the movement of the market interest rate. A rough way to measure how much they would move will be their maturity period.

A bond with 5-year duration will swing around 5% if interest rate swings 1%. A 10-year will swing around 10%. The relationship is not always equal. As the maturity increases the relationship should be more concave, meaning a 20-year bond will swing around 20% but likely less (15-20% range).

So a 100-year bond will have…… some crazy swing. This may make a great trading instrument without leverage lol.

I do wonder in what right mind would I invest in a 98-year bond at a 1.1% yield. It will take like near a century for my family to earn back the money!

Do Like Me on Facebook. I share some tidbits that is not on the blog post there often. You can also choose to subscribe to my content via email below.

I break down my resources according to these topics:

1. Building Your Wealth Foundation – If you know and apply these simple financial concepts, your long term wealth should be pretty well managed. Find out what they are
2. Active Investing – For the active stock investors. My deeper thoughts from my stock investing experience
3. Learning about REITs – My Free “Course” on REIT Investing for Beginners and Seasoned Investors
4. Dividend Stock Tracker – Track all the common 4-10% yielding dividend stocks in SG
5. Free Stock Portfolio Tracking Google Sheets that many love
6. Retirement Planning, Financial Independence and Spending down money – My deep dive into how much you need to achieve these, and the different ways you can be financially free
7. Providend – Where I work doing research. Fee-Only Advisory. No Commissions. Financial Independence Advisers and Retirement Specialists. No charge for the first meeting to understand how it works