Louis Blanqui was a French socialist revolutionary who devoted himself to his ideology and fought against the world.

He advocates the dominance of the proletariat and extreme violent revolution. The word ‘Blanquism’ became synonymous with armed struggle. He fought fiercely during the French revolution in 1830 and participated in many fights and demonstrations. He spent 30 years or nearly half his life in jail.

Karl Marx was greatly influenced by the ideology of Blanqui and was expelled from France. Marx published Das Kapital in 1867, while he was in exile in London. During the 15 years spent writing the book, he and his family lived in poverty.

He dedicated himself to research, but his family lived in miserable conditions. Of his seven children, only three survived.

This was the part that infuriates me the most.

I think we can commit to our passion or our interest in something. But I think you have to be aware of the need to put food on the table at least. If you do not work, food seldom magically appears (unless you go and scavenge for them)

Karl Marx’s influence on economics is just one economist profile that I learn from Principles of Economics.

I was asked to review this book, so it took a few train rides for me to eventually finish it. When they pitch the idea of this book to me, I thought the idea of a manga style economics book will be interesting. (Stay tuned till the end of this article. There will be some discount promo code and a giveaway)

I scored A2 for Economics during my JC time.

That was really lucky because prior to my A levels, I have never passed ANY of my economics essay question paper.

My economics teacher used to teach in such a formulaic way that we would be able to answer the questions. After that, I did not comprehend why things are this way. I would also struggle with how economics relates to real life.

Principles of Economics by Gregory Mankiw came at a time to see if I could refresh some of these economic principles. Gregory Mankiw is a Harvard economics professor. When I started learning about the markets in the early 2000s, Mankiw’s blog was one of the blogs that I followed.

This book is nearly 300 pages but you would not have a problem reading it because it is mostly illustrated. It focus on a few areas:

1. How people generally make decisions
2. How people interact
3. How the economy as a whole works
4. Thinking like an economist
5. Ten propositions most economists agree on

Personally, 3 to 5 was pretty good to read.

The Destructive Nature of Rent Ceilings

I somehow have the idea that rent ceilings and floor creates a lot of inefficiency or losses. My favorite part of the book was where they highlight the 10 propositions most economist would agree on.

Placing rent ceilings, on the surface seem to be implemented to help the poor. Imagine if your REIT could not raise rent. Your maintenance and replacement costs go up with inflation but you could not raise the rent.

So eventually they fall into disrepair.

The ones who benefit the most are the rich because they can rent at such a relatively cheap rent. This free up a lot of free cash flow for them to even grow richer.

The page above shows the unscrupulous things Donald Trump can do to kick out tenants (which he could not due to rent control laws)

The Problem with Populism

I was surprised how great Argentina was last time.

If we do not exercise some fiscal restraint and do not have the capability to meaningfully reform, we just make the situation worse. A large federal deficit, in the long run, will create many residual problems for the country.

Designing the Right Incentives

Left on their own, the free market might make some people better off than the others. The government should not interfere more than they should.

But where is the middle ground?

That is where putting thoughts into design comes in. Mr. Mankiw mentioned the importance of knowing how to set conducive incentives. If you are able to do that, you can create extraordinary results.

The page above shows how that by changing how captains are renumerated, it shifts the incentives of the captains thereby resulting in a higher survival rate for people they care much less about.

This is how different governments try to police their countries. When things do not go the way where it benefits everyone, they shift the incentives.

At one of my short finance course, I attended as an engineer in my last job, the course trainer shared with us a part of his old job.

He worked in Shell back then and how do we motivate people to have good focus?

You put a pool of money in front of them and make them think about how they can earn it.

We may always have passive colleagues that ride on the success of others. A bit too much sometimes. In an environment where everyone has a common goal that is motivating enough, those that subtract more from the team rather than add to them will be called out. You have more people willing to put in the effort if they can really see how their work translates to a better life for themselves.

How to Use This Book

The Principles of Economics is better used as a primer if you are trying to get immersed in the world of economics.

Economics can be a very dry subject, and this book helps us by introducing us to the important economics players in history.

You can become interested in these players from another perspective. When you dive deeper into the economics texts next time, you are better able to connect with the whole subject better.

I suggest having this book lying around so that some of your younger siblings, nephews, and nieces can pick up and start reading. They can then ask you questions that may lead them down the economics path.

This book is better as a primer than the be all end all guide to economics. It explains demand and supply, Philips curves but not to a deep enough level that you can actually make use of it.

Book Giveaway and 20% Discount

As readers of Investment Moats, the distributor of Principles of Economics (Graphic Edition) can get a 20% discount if they use our PROMO Code: POEMOATS20.

Here is where you can get more information of the book @ CENGAGE.

This code is only valid if you purchase from CENGAGE directly and valid till May 2020.

I will get an affiliate fee if you purchase the book through CENGAGE with my promo code but really, only buy the book if you find it useful otherwise don’t waste your money.

I have 5 books to give away for the readers of Investment Moats.

Those who win the book can personally meet up with me. If you have some doubts about your financial independence or investing path, you can ask me about them.

Here is how you can win them:

All you have to do is write in ([email protected]) about what you need help on what kind of problems you faced along your wealth-building path. If I think I can help, you win the book and we can have a conversation.

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

One of the keys to fulfilling your financial goals is to clearly articulate it.

I was listening to a two-part series by Joshua Sheats on setting financial goals, and this stuck out to me.

“If you know exactly what you want, to get it is easier. “

If you do not know precisely what you want, then to get there is harder. You would argue that if your goal is to have a wealth machine that gives you rather reliable income that keeps up with inflation for 100 years, it is rather hard.

I would say not true.

You need $10 mil and put it in a broadly diversified Global stock and Global bond portfolio. This should grow between 2% to 10% a year depending on the future sequence of return.

During the initial year, you will spend 1% of that $10 mil, and for subsequent years, adjust the $100,000 a year with inflation.

$100,000 should be enough for your family.

You do not need to go to a financial planner. Just need $10 million.

A problem for many… is that they are clear what they want… but they want too much. They want so much that, they did not even get to enjoy a little bit of what they desired. They think that anything less than what they want is totally not functional.

I would say… you do not know what you really want.

Securing My Accommodation for the Rest of My Life

If I know what I want, then the solution is usually more simple.

Readers know I am the odd one in Singapore that owns no residential property.

Currently, I do have a place to stay but what if there is a dispute next time and I could not find a place to stay?

There is this common train of thought that due to inflation and growth, it is infinitely better to secure a home today, then in the future.

But I think let me practice some wargaming / red-teaming / contingency scenario planning, and clearly articulate what I want:

1. How long is “the rest of my life”? I am almost 40 years old, life expectancy due to health problems might not be long. Could be between 70 to 100 years old. Thus, looking to secure the place for 30 to 60 years
2. Due to how my life is set up, do not need close proximity to town for work purpose
3. However, prefer about 5 minutes walk to MRT station. In that way, if I need to visit somewhere it is almost close to doorstep.
4. Prefer the east side but for whatever reason, if I need to be in the other part of Singapore, I could switch easily
5. I don’t need the asset to build wealth. Have my own wealth machine that generate cash flow on the side. So I can treat this as an expense
6. As long there is a market for me to sell off the present value of future rent and get another place, I am OK
7. I want to have the option of having some privacy or the ability to sub-let out. A four-room or three-room HDB flat would be good

I wonder if this differs from what my readers are looking for. You can let me know.

If I can clearly articulate this, then I can find a solution to it.

My requirements looks like I am buying some sort of term life insurance HAHA. In fact, many have said paying for rent is a waste of money, just like paying for life insurance without cash value built up.

Would Renting or Buying Fit What I Need?

So would I prefer to rent or buy if it comes to that scenario?

I think sometimes if prices move up too fast too soon, we needed to see the effect. If I do not buy a residential property today and growth is 3-5%, I might be priced out.

But that may also mean that my wealth machine grows even better than the growth it is doing now.

Net-net, my cash flow from my wealth machine in the future can afford me the more pricy rent. That will depend on the inflation rate versus the growth of my wealth machine.

If I am not forced to buy it immediately, what are my considerations?

Mainly is this:

1. If the present value of 60 years of future rent is cheaper than the current price of HDB flat in the region, rent
2. If the current price of HDB flat in the region is cheaper than the 60 years of rent, buy

A valuation metric which is similar to this is the price to rent. It values whether a residential property is expensive or cheap relative to the rent it provides.

If the price to rent for a place is above 16 to 20 times, perhaps it is cheaper to rent. This is just a rule of thumb. There is no study there.

Let us look at some case studies.

Yishun HDB Flats Next to the MRT

I used to live in some parts of Yishun 19 years ago. It is not an unfamiliar place for me.

The places around the MRT looks pretty good. There is a huge Northpoint City to meet up with people, the MRT has an NTUC to buy the groceries.

The blocks of 740 to 760 looks to be ideal for my situation.

At 35 years old, these flats are rather old. As long as the flat I purchased is younger than 44 years old, I should be able to use CPF for financing (read the 4-year max rule).

The flat costs about $370k to $400k for 4 rooms and $290k for 3 rooms.

If I were to rent, the rent is currently about $1700 a month for the 3 room and $2000 a month for the 4 room.

The Price-to-Rent Ratio for the 3 Room HDB is 14.2 times.

The Price-to-Rent Ratio for the 4 Room HDB is 16.6 times.

Both Price-to-Rent are pretty low compared to the 16-18 times I use to determine between renting and buying. The higher the Price-to-Rent the more it feels it is better to rent.

Now let me compute the rent that I would pay if I were to rent for 60 years.

The Present Value of 60 Years Worth of Rent

Your 60 years worth of rent goes up with inflation. The rate of inflation will vary depending on luck. As a reference, for the past 30 years, the inflation rate in Singapore averages below 2%.

A lump sum that you set aside to generate this rent may grow at 2%, 4% or 6%. For those who are more investment savvy, your investment rate of return is higher at 6% for those who are less savvy, that would be between 2% to 4%.

Your investment rate of return is also your cost of capital.

In the table above, I worked out the present value of a stream of rental expense for a $1700 a month 3 room Yishun HDB flat.

If your estimation of inflation is 2%, and you are conservative with your investment rate of return (2%), then by choosing to rent, you would need the equivalent of $1.22 million in today’s money in rent.

Any of these figures are lower than $290,000.

If I throw in some much-needed renovations and furnishings, my first-year cash flow would be $80,000. My mortgage would be $1,175 a month for 25 years. At 2% investment rate of return, the present value of the mortgage is $275,280. The aggregate present cost is $80k + $275k = $355k.

By paying $355,280, it is much cheaper than choosing to rent for 60 years, unless my investment rate of return is higher than 6%.

In the table above, I have presented the present value of a stream of rent for the Yishun 4 bedroom flat. Readers would realize it is still much cheaper to pay a 25-year mortgage and buy this lease.

The margin of safety is narrower if the inflation rate is 1% and I have an investment return greater than 6%.

Punggol Flats Near the MRT

My friend told me about his place at Punggol Walk.

It sits pretty close to a large shopping center and a little off the MRT. Punggol is a town that is really out of the way. If you are still working, and work somewhere in the west, then living in Punggol can be quite a nightmare.

For someone who has a different set of life configurations, this could be a good place to operate in.

His 4 Room Flat in that area rent for $1800 a month. It used to rent for $2100 a month. He could rent it out due to special permissions but a flat that is so close by should fetch close to $500,000.

The Price-to-Rent Ratio for his 4 Room HDB is 19.8 times.

At 19.8 times, it is quite out of my buying range.

His rent would put the rent or buy an HDB leasehold decision to be more narrow. We can see that if we have a high return on investment, perhaps renting might not be a relatively poorer decision.

In all honesty, most of us would assume a large margin of safety by assuming our cost of capital/investment rate of return is closer to 2%. In this case, buying a $500,000 Punggol HDB flat that is close to Waterway point would be worth it.

If You Know What You Want, Open to Options, Life is Better

I decide to put 2 examples here but I believe if I am serious about this, there are many ideal options that fit my criteria.

I should not need to be forced to make a tough decision.

You can arrive at a good decision for a lot of your financial decisions that you need to make in life if you know very well what you want.

The decision is good if you have a good mental model about it, or have someone that has a good mental model that helps you.

Knowing what you want can be very difficult because we tend to have a herding mentality. There are some aspects of what I presented that might be difficult to swallow, such as purchasing an old flat.

If you know what you want, what you needed to do next is to be able to make the most fundamentally sound decision you could.

This sounds simple but from our experiences, people come to our office at work because either they do not know what they want, or can’t figure out the fundamentally sound solutions.

When it comes to these housing decisions, I have time to slowly evaluate because there is less of a fundamental need to move to another place. There is a non-monetary reason this is a preferred place to stay at right now.

Sometimes the non-monetary part is an important criterion. We just have to be sensible to our own situation. It cannot be the case that you decide to buy a condo near MRT because you have gotten used to living near an MRT as a child but both your finances is not ready for it. This is just one example.

A Good Article to Frame the Decaying Leasehold HDB

This week, I read this thought-provoking article by Charlie He on the Decaying HDB Lease.

Charlie’s piece is good in that I struggled to frame how to look at leasehold and freehold well. Charlie is an investment person and explains the contrast between leasehold and freehold as a combination of

1. Land Value
2. The Future Stream of Rent that You are Buying Upfront

All things being equal, if you wish to buy a stream of rental expense upfront, you can forgot the land value.

As the lease runs down, your leasehold will be worth close to nothing. However, that is OK because the amount you saved from not buying freehold can be invested in your own stock and bond portfolio at your required rate of return. e.g. 4% a year.

Charlie also explains that while your HDB lease might have 20 years left, if the property is well maintained, there should be little difference between your rental income earned and a flat that is newer.

There may be a sweet spot that for the next 20 years, your internal rate of return may be very high. This is because your purchase lease is low and rental income is comparable to a flat that is newer.

If there is one good article to read on the subject, it is this one.

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

In the past 10 years, the government has stepped up ABSD 3 times to halt the demand for property purchase.

This kinda threw some of my peers into disarray. After you got your career going, have surplus free cash flow, you would like to build wealth for your retirement.

These ABSD serves as a deterrent for some to purchase. For others, they would still go ahead and purchase because they have no alternative, or believe that property investment is good long term.

I decide to build on last week’s post on the short term and long term returns of a 24-year-old private condo purchase with a look at how that property would do if ABSD was levied at different rates.

The long story short: If you are in it for longer-term, the ABSD seem to matter less.

The Additional Buyer Stamp Duty (ABSD)

Singapore Citizens, Permanent Residents, and Foreigners thinking of buying residential property in Singapore may have to pay an additional buyer stamp duty (ABSD). This is on top of the buyer stamp duty (BSD) that they have to pay.

For Singapore Citizens:

1. They do not have to pay ABSD on the first property
2. ABSD is 12% currently for the second property
3. ABSD is 15% for third and subsequent property

For Permanent Residents:

1. ABSD is 5% currently for the first property
2. ABSD is 15% for second and subsequent property

For Foreigners:

1. ABSD is 20%

For Developers, entities, trustee:

1. ABSD is 25%

The ABSD was lowered in the past. They could range from 3% to 10%.

A high ABSD is impeding people from buying these properties.

The reasoning is that, with low returns, they are not sure if paying the extra ABSD will be worth it. Many prospective investors, homeowners are very reluctant to make a bet using their money.

And the government is perfectly fine with this.

But the question on my mind is… how badly does this affect your property investment?

What if ABSD was levied in 1995?

My last post broke down the long term returns we will get if we invest in a private leasehold condo Astoria Park during 1995.

The property value gain 73% from 1995 to 2019. This is an annualized gain of 2.31% a year. Not super fantastic.

However, if we include the rental expense that you save if you were to invest in stocks and bonds, the return ranges from an XIRR of negative to 8% to 5%, depending on how long you hold on to it.

What I could simulate is how the returns would be, if we have ABSD levied on our property in 1995.

How ABSD Affects Your Property’s Returns.

If there is ABSD levied back then, it should psychologically impede investors from investing in private condos just like now.

The range of ABSD can be between 3% to as high as 25%.

If I need to pay a 5% ABSD on Astoria Park in 1995, the returns will range like this:

Your returns do go down.

You would pay $37,500 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 25%.

Instead of a peak XIRR of 8.41% in 2005, the peak XIRR was 6.92% in 2008.

The stabilized XIRR is still around 5.58% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.

This means that if you held the private condo long enough, the effect of a 5% ABSD is not felt.

What if the ABSD is like 12% Today?

This is the kicker that turned many away.

You would pay $90,000 more, on top of the $150,000 down payment. Your cash outflow is jacked up by 60%.

Your compounded total return curve would look like this:

Instead of a peak XIRR of 8.41% in 2005, the peak XIRR is 5.71% in 2012.

The stabilized XIRR goes down to around 5.12% in Year 40, compared to the 5.96% if we did not have to pay the ABSD.

What we observe is that the XIRR curve becomes smoother and smoother between the peak XIRR and the stabilized XIRR.

What the ABSD Does to Investors

Here is the Range of Returns if a different level of ABSD from 0% to 21% is applied:

There are a few things you might notice:

1. The Peak XIRR goes down. No surprises there.
2. You needed more initial cash outlay. No surprises there. It restricts additional property purchases to those who could.
3. The Peak Year goes down. The maximum that you could extract from your property gets delayed longer and longer.
4. The Stabilized XIRR goes down but in terms of percentage not as much
5. In the grand scheme of things, this affects the absolute gain if you sold off at year 40, but not by a lot
6. The Peak XIRR approaches close to the Stabilized XIRR with greater ABSD

And I guess this is how the ABSD lever work. It delays your return and make investors wait longer. Unless there is a short term price spike (that is speculation)

For foreigners, if they wish to extract value, they could still do it. Same for locals and PR. They just have got to sit on this long.

If you are long term into a residential property like this, the benefits that you could extract from your property can be much more than these short term measures.

This can be rental income, can be rent saved so that you do not have to rent another place or price appreciation.

The unique thing about the Astoria Park example is that many commenters expressed that this is not a good example because it is at a peak in the 1990s.

If you asked me, this is probably the best example since, if it is so challenging, and it does decent, then what about times when it is less challenging?

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