Home prices and average salaries

Some readers have commented that the benchmark of 3 years income to pay for a home is outdated. I agree.

In my book on financial planning, I have used the benchmark of 4 to 5 years. I consider 5 years to be on the higher end of the scale. Some people have commented that they are not able to buy a decent home using this benchmark, as prices are high, even for HDB flats.

My advice is not to go beyond 5 years. It may mean that you have to consider other options, such as renting your home or buying a smaller flat.

Some people pay 6 to 8 years of income for their home. They calculate that they can afford the monthly repayment. But, they forget to take the following factors into account:

a) Interest rate may increase in the future, from the current low levels. The higher interest rate will increase the amount of repayment.
b) Jobs are uncertain. If they lose their current job, they may not be able to find another job that pays the same salary.

If more people take this advice and act prudently, the property price will not continue to escalate, as it had in the past years. Do not chase a property bubble. Do not think that you are making a good investment. An overpriced property can drop in value by 30% and leave you with a large financial burden. This has happened in USA and Europe. It can happen in Asia. The low price may be stuck for a decade or longer, as it has happened in Japan.

 My book on Financial Planning can be purchased here.

Tan Kin Lian