Friday, June 8, 2018

Rent or Buy House In Singapore?

As I reach MOP for my house, I face 2 choices: To cash out and rent or to buy (another one). Conventional wisdom (or culture) states that we should always buy, otherwise we are subsidising the landlord. This mindset is especially prevalent in Singapore where house ownership is more than 90%; public housing is highly subsidised and housing instalments are paid for via CPF.

Due to the CPF restrictions, many people feel that they are not paying for housing as it is paid for via CPF contributions. This reasoning is flawed as CPF can be cashed out at age 55 and pays a respectable 2.5% risk free rate. If we were to ignore mental accounting and view CPF as really our own money, the tendency of owning a home may differ substantially.

Let's breakdown the cost of my home ownership and determine if it makes sense to rent or buy.

Owning a home (calculations exclude utilities)

20% Downpayment for a 1.2M private property: SGD 240k (add 10k for basic renovation to round up to 250k)

Yearly interest payable base on 2% (long term rate) approximately = 960k x 2% = SGD 19,200. I am assuming interest rates rising gradually but the principal is reduced hence yearly interest paid works out to be 19,200. It is hard to forecast the total interest paid but let's just simplfy it to SGD 19k.

Yearly maintainence: SGD 4000

Property tax: $400

Spending on servicing of aircon, repair/change appliances - $600

Hence per annum, the cost of maintaining a 1.2M home for own stay is $24,000.

I am not factoring monthly instalments (of $3500) as the principal paid is your own money and can be recouped upon sale of property.

They key deciding factor is whether you can generate enough returns on the SGD 250k downpayment such that renting makes more sense to buying.

Assuming a 5 year investment horizon (on non leverage basis), a 250k investment if lucky enough, can generate a 5% return or 12,500 per annum return. If we were to be risk adverse and purchase the 4.35% Astrea 4 bond, assuming a buy price of 102, redemption of 100 at year 5, total return is 49375 or 3.95% (assuming interest accumulated reinvests at 0%).

The base case scenario will be to park the funds idle in CPF at 2.5% and thus earning $6250 interest per year.

Looking at the calculations, the cost of owning a 1.2M home works out to be

Opportunity costs (6,250 to 12,500)+ Interest 19,000 + Tax, servicing, maintenance 5,000 = $30,250 to $36,500

Renting the same house works out to be $2,500 - $3,000 per month assuming it is either a 2BR in suburbs or 3BR in further flung places.

How do we make a property purchase decision if we are indifferent to buy or rent? I think a key differentiator will be a person's investment ability.

For a person who can generate 10% P.A on 250k, it is intuitive selection for him to rent and invest the rest. However, not many people I know (myself included) can invest at that rate (especially when equities markets are at record highs).

The selection is much easier (no brainer actually) when the person is deciding whether to purchase or rent a HDB. HDB is highly subsidised (and conditional, not everyone can buy) and cost probably just 2.5k/month to rent a 4 room flat (in central areas). The interest cost is halved and home ownership expenses works out only to be less than 20k including opportunity costs. (Renovation costs more for HDB flat though).

(I am not factoring utilities or other expenses which need to be paid if one were to rent as well)

Furthermore, buying a home provide you with an option (up to lease expiry) to hedge against housing/rental inflation as long as you continue servicing your mortgage. It comes with a piece of mind that you own the place and not be at the mercy of landlords when markets are rising. However, it places a unnoticed strain on retirement income due to constant depletion of CPF savings.

So how? Rent or buy?

For people who choose to stay in HDB, buying makes perfect financial sense.

For people who are at the cross roads between renting and buying private property, take note that renting is akin to shorting the property market - you borrow a house, pays interest (rental on it) while waiting for housing markets to come down. If it comes down, you can buy for instance at 10% discount from current levels thus profiting $120k savings (10% of 1.2M). The rental you have paid eg 5 years x 30k = 150k; Add on the 250k returns of 3.95% = 49,375, the difference is SGD 19,375. Not too bad since the future savings on the original 1.2M property is compounded over the long term (on purchase).

It is not an easy decision to buy or rent, long or short. If we are in the middle of a financial crisis, it is an easy decision to rent (a year) first, buy later. Since rental is low and home prices will continue to fall. However at current juncture where there are no foreseeable crisis on the horizon, shorting the housing market may not yield positive return over next 5 years. There is always the risk that investment on the initial 250k goes sour or markets run flat or higher for another 10 years. Then one would have to continue renting for even long period to ride out the market.

In summary:

Buy HDB is always better than renting if you can

Rent private housing only if you can invest and earn at least 4%-5% P.A on your downpayment + reno budget

Buy private housing if market is trending upwards and be prepared to rent at least 5 years if one is timing entry into the property market. This is to provide the runway to allow cash investments to reap their intended returns while waiting for housing markets to show signs of bottoming.

That said, refer to my blog post in 2013 on HDBs. I think I am fairly accurate here.

Monday, March 7, 2016

Knowing my willingness and ability to take risk

In finance world, willingness and ability to take risk belong to 2 different concepts. Willingness to take risk refers to one’s character, education, investment experience, culture and even religion.

For instance, many colleagues around me are high income earners. However, they only invest in time deposits as they are either conservative, have poor experience in investment or simply cannot invest due to religious constrains. They are unwilling to take risk for mainly emotional reasons.

On the other hand, ability to take risk refers to quantifiable criteria like level of wealth, investment horizon, liquidity preferences and investment objectives. A investor with $5M in his account will most likely not hesitate to invest $250k into a high yield bond. His ability to take risk comes from his ability to lose (more) compared to the investor with a much lower level of wealth.

Similarly with a lower liquidity preference and longer time horizon; investors are recognised as having higher ability to take risk and hence often advised to invest in riskier asset classes to enhance returns.

In a bullish market, investors’ ability to take risk increase dramatically as their wealth increase in tandem with the rising market; the euphoria sets in, reinforcing their positive experience and thus raising their willingness to take higher risk. Unfortunately, all bull markets will eventually lead to high levels of speculation towards the end cycle of bull markets. For instance, the China market rallied more than 50% within 1 year of mutual fund investment. I took profit then, realising close to a 50% gain as seen below due to the unsustainable yearly returns.

Vice versa, a falling market will always lead to lower stock trading volume as investors become poorer and reduce their ability and willingness (due to poor experience) to buy risk assets.

However, the above definitions are purely academic. Ability and willingness to take risk, really, is subjective and varies for an investor sometimes even at different times of a day!

Nobody truly knows their willingness and ability to take risk until going through at least one bull and bear market cycle. Suitability tests on investments are just a rough gauge at best to determine one’s risk profile.

This is the same concept for inflation figures. Our official figure for inflation is between 2%-4% over the past few years. However, the inflation figure is only true for us if we consume products in the exact same composition of the basket of goods used to calculate inflation.

In reality, every one’s inflation figure is subjective; by the same token, every individual’s risk profile is unique and cannot be measured using standard questionnaires.

The current bear market is into its 11th month. Till date I have reinvested all the dividends (for funds) and traded bank bonds (which have rallied due to risk aversion) to higher yielding bonds. At times, I do have regrets of not selling EVERYTHING at the peak (who doesn't!) and purchasing now instead. However, every bear market I experience will only reinforce my mindset to stomach risk, enhancing my willingness to take risk. It also serves as a test of my current portfolio's Value at Risk and its ability to resist market shocks like now. In fact I have a better idea of how my portfolio will behave during stressful market conditions.

Thus, in order to maximise your return on investment given your risk profile, stay invested in bear markets and lime me, you will know yourself better on your ability and willingness to take risk!

Sunday, April 12, 2015

Modest Gain in my Unit Trust Portfolio

I seldom keep track of my Unit Trust portfolio as I have spent extensive time to construct it at the onset. It is engineered to pay monthly dividends as a form of consistent profit taking and ideally, the $600k portfolio should be paying 5% dividends and having 0% growth. It was constructed with a balance portfolio in mind, diversified between equities and fixed income; invested across different currencies, geographies and having negative correlation with different asset classes such as US treasuries, equities and soft currencies. 

By and large, the portfolio exhibits low volatility month on month basis. I am actually please to see negative positions as this means that there are some form of negative correlation within the funds. I will be worried if everything is positive (or negative!). 

The investment horizon for the Unit Trust  portfolio is for extended period and rebalancing is not required (ie selling underperformers and buying more winners) as I ignore market noises and continue to receive the monthly dividends. I will opt for dividends reinvestment should a bear market comes. 

The Unit Trust portfolio excludes my CPF and SRS funds. I still hold a concentrated portfolio of Singapore equities comprising of 12 stocks. 

Wednesday, January 28, 2015

Good bye textbooks..

Today my maid was clearing my room and asked whether she could (finally) clear my unwanted texts, files and notes I have not touched for years. I gladly agreed.

I used to have the habit of keeping ALL my textbooks religiously for fear that I may need them if I ever meet an unsolvable problem at work. My belief was shattered as over the past decade, nothing of such happened. 

No wonder I do not see any plumber or air con technician bringing along their work manual to my home! The notes and text I have “saved up” no longer serve any purpose other than giving me lift to nostalgia lane. Over the years I have accumulated a lot of books but not knowledge; a lot of information but not intelligence; learnt a lot of case studies but not actionable plans. Are they worth keeping if they no longer serve the purpose of education?

I am a firm believer that the purpose of education is to fill an empty mind to an open one; thus I would gladly trade them for a cleaner room.  

Finally, I have more breathing space to fill up an open mind!

Friday, January 16, 2015

SBC predictions: Elections will be this year 2015 (2H), BEAR market after.

In my course of work, I am rewarded directly how accurate I read the future. If I get it right, clients make money and I am rewarded with trading fees.

Often, I base my decision on a combination of logic, pattern observation and intuition. Sometimes the trend are extremely obvious, eg we should be buying USD or HKD ever since there are talks from the Fed to hike rates last year; we should have been (and still) borrow in Eur, in which the interest rates is below 1% and buying into higher yielding assets like USD or good grade SGD bonds. When Capitaland issued a new 10 year bond paying 3.8% (reduced from initial price guidance of low 4%), everyone who has money should have bought it, as banks are willing to lend at least 70% of the purchase price and your outlay is only $75,000 for a $250,000 nominal value bond excluding fees. Today the bond trades above 102 bid. The upside in H shares look extremely glaring with good banks like ICBC, ABC, BOC (and many more), trading dividend yield of 7% with PE ratios of 5. Warren Buffet has made a comment that this is as good as money on the ground. Just pick it up. It was a no brainer that SIA and other airlines will benefit hugely from the massive oil correction; local banks will benefit as interest rates are expected to go up (3 years ago till now) etc.

I thoroughly enjoy the satisfaction that comes with monetary reward when I am proven right at work. Sometimes I do get it wrong as well. For instance, I did not expect HK gaming stocks to take a 40% hit within a short span of 6 months, oil to correct more than 50% or CHF will be rallying 30% last night. Good quality china property bonds are still paying more than 7% coupons but yet trading less than 95 and many more. I don’t get it wrong often, but sometimes not expecting an event means getting a forecast wrong due to the ripple effect of events. That’s life.

Today let me make a free forecast on the timing of Singapore elections. Again, I have a 50% chance of getting it right, if its not this year, it will be next. However, it is more likely to be this year, after National Day and PM rally for the following reasons:

The SG50 is an elaborated celebration. I rarely follow what it is about, but it seems to have propaganda to let Singaporeans have a euphoric feel on our past achievements and be ecstatic about the future.

Mediacorp channel 8 shows are advertising blatantly in their drama on the pioneer generation cards and other excellent policies the government has administered. Ministers are attending talk/interview shows on TV frequently!

Mediacorp is 100% Temasek subsidiary.

There will be more COE supply from Feb 2015 onwards, alleviating our cost of car ownership.

The earlier the elections, the better for the ruling party. Less youngsters turn 21 to vote against them (if you have been reading SMRT feeback and The Real Singapore on Facebook), while more elder generation are alive to vote for their favourite elites.

The bull market started in 2009 March, it is in the 6th year and we all know we are nearer to the next bear than an extended bull. Will the ruling party want to take the risk of having an election where there is a financial crisis, where unemployment will be higher and less votes for them?

Revamp of IPPT and RT this year. This will please many reservists, including myself. I will only need to pay a fine if I do not attend IPPT after elections this year. Good job for that. I appreciate the grace period.

Low oil prices will mean inflation will be lower this year, giving MAS more leeway to weaken SGD and this will be a boost to our GDP as we are 300% dependent on exports. Oil prices will not stay low forever anyway. Many countries need it to be at US$100 to balance their social budgets.

What’s the use of predicting? It is useful for me as I can have a view of what will happen this year and plan my investments or even my career according to my central view of the world.

I used to work in a civil service and I could not stand the hypocrisy of incapable people playing politics to hide their incompetence. Though I have seen many good people in mediocre roles (myself included! Haa!) who on hindsight could achieve much more if they have worked in the private sector. Yet the environment was so stifling and many doubted themselves thus not daring to venture out of their familiar zones but stayed in the old place, suffering. In 2009, I made a prediction that the markets will definitely turn around sooner than later; studied a masters in finance then and started a junior role in banking while studying part time. Today I have enjoyed a good 5 years in banking and grown my personal investment to a 7 figure sum, pretty much in tandem with the bull market. Hence I am a firm believer that everyone should have some form of predictions that will aid them in earning their first and subsequent pot of gold.

Back to my predictions; look at the return on STI on the following election years

2 Jan1997 general election, STI contracted from 2449 (2 Jan 1996)- 2216 (3 Jan 1997), loss of 9.5%. 1.5 years later, STI hit 856 in August 1998.

3 Nov 2001 general election, STI contracted from 1952 (3 Nov 2000) - 1341 (1 Nov 2001), loss of 31%. STI was nearly at the bottom then but 1.5 years later, on 1 April 2003 STI fell to 1281.

6 May 2006 general election, STI rose from 2161 (6 May 2005) – 2632 (2 May 2006), gained of 21.8%. The bull market saw STI at 3805 in Oct 2007. 2 years after elections, STI fell to 1594 in Feb 2009.

7 May 2011 general election, STI rose from 2752 (7 May 2011) – 3099 (2 May 2011), gained of 12.6%. STI is around 3300 now.

If my prediction that 2015 Sept is the elections, by past 4 patterns, it seems that STI will always be lower after elections, meaning a bear market will occur. There are no visible patterns on whether STI will hit higher before elections.

Be careful of your investments, after elections.

Tuesday, September 2, 2014

Annuity plans are just a function of compounded interest benefits

Today I read an annuity benefit illustration on a brochure:
40 year old male contributes 24,200 yearly for 5 years.

At age 65, he receives $2,000 per month (non-guaranteed) till 85 with a lump sum maturity of $72,000 (non-guaranteed). 

Hence the total potential return is $552,000.

The insurer has a track record of meeting its projection. Hence for simplicity sake, let’s assume above are guaranteed returns.

At the onset, it sounds extremely attractive to me. I can have an income to complement my CPF life of about $1,200 per month and about $2,000 a month I will be able to retire comfortably assuming inflation is at 0%!

However, as a discerning citizen, I tried to replicate using a balance funds portfolio of unit trust. 

Assume I purchase a balance equity fund of Fixed income + Equity. The fund is likely to be able to meet its 4.5% payout and at the same time at least maintain its NAV.

The 40 year old male contributes 24,200 per year for 5 years. Let’s assume a 3% return at 0% sales charge for the first 5 years. 

5 Years later, he would receive $128,481.

Using the 128,481, he invests for the long term at 4.5% per annum for the next 20 years. 

He would receive $309,859.

Thereafter at 65, he elects to pay himself 9% P.A and he would receive $27,887.31 yearly and after 20 years he would still receive $127,573.20, which was roughly the amount he started at age 45.

The difference? 

If he outsourced his retirement planning to an annuity product, he receives $552,000. If he does it himself diligently, he may receive $685,319 or more, assuming his investment average return is no more than 4.5% per annum. 

That’s a huge $133,319 difference!

On top of that, the DIY route allows flexibility to bring forward the pay cheque if required and still get a better return. There is no early termination charges neither is there insurance coverage though.

So what does this exercise mean? To me, it means the following

- Most Singaporeans are rich. They can afford to earn $133,319 lesser over the long term. Singaporeans are not bothered with retirement planning and putting the blame on others for having to work past retirement age. This is why the market is filled with so many retirement products that earn no more than 5% on projection basis and yet selling like hot cakes.

- The effects of compounding has been used repeatedly by annuity companies to give seemingly huge returns at a paltry investment return rate of less than 5%.

- Consider instead to contribute to SRS and CPF special account instead while investing for the long term and enjoy the benefits of compounding instead of trying to buy 1-2 products and call retirement planning a day.

- The present value of money must always be considered and discount back to present value in order to make sense of the projections you are looking at. In reality, SGD 1M at 45 years from now at 4% inflation rate is really only worth $171,200. That's probably a 2 room flat future value with a lease of 99 years. Hence receiving $28,000 yearly 45 years later is only $4793 or no more than $400 a month! 

Tuesday, July 1, 2014

My thoughts on CPF minimum sum, retirement and risk hedging

If you were to receive $155,000 and asked to stop working for 5 years, would you agree? How about stop working for 10 years?

I have written articles on retirement and income investing long enough to know that one can never solely rely on CPF for retirement. The main reason is because majority of CPF savings are often used to fund your home purchase, the OA account usually has very little left to be set aside for retirement. Hence more often than not, the minimum sum is usually what is left after property usage.

Using myself as a case study, I can work out on how much CPF is to be used for housing

I have paid about 720k for a property.

Assuming a 2.5% interest rate averaged for my home loan, I would have paid a total of $815,000 base on my current loan quantum and a loan of 30 years tenure. The total usage from CPF would be $923,000, inclusive of the 15% downpayment from CPF.  

At a hypothetical combined monthly income of $12,000, 20% to OA contribution (averaged over the working life); at the end of 30 years, nothing is left in the OA account. It is likely that I would have met the required minimum sum (at that point of time) with little excess.

The monthly payouts of CPF life provides about $1200 if the minimum sum is met. I believe for a comfortable lifestyle, at least $4,000 monthly (in today dollars) is required in Singapore. This is only about $130 a day. Hence, there is a shortfall of $2,800.

$2,800 can be easily achieved using a portfolio of $500,000. Hence it is extremely important to create a portfolio of recurring income. The larger the portfolio, the easier it is to create cashflow and the less reliant on CPF minimum sum.
Buying a home within my means also help to stem cashflow out from my income and portfolio and rely completely on CPF funds for monthly installments as long as I am working.

I am also mindful the following risk that would derail my retirement planning:

- health risks that early terminates my working life
- interest rate risks that wipe out my CPF account prematurely before my loan tenure ends and I have to cough out cash for monthly repayment
- career risk in which I lose my job in the event of a mistake, complain or economic downturn
- portfolio risk in which a global economic downturn wipes out all my gains and my portfolio drops 50% which triggers a margin call to top up funds.

Strategies to hedge against the above risks:

Health Risk: Purchasing various health term insurance to provide payouts and hospital bill coverage upon illness

Interest rate risk: Invest my excess CPF funds at higher rate of return while keeping $20,000 in my CPF OA to earn the additional 3.5% interest and paying the monthly installment at current 1% mortgage interest rate. I am prepared to redeem a significant portion of the loan when interest rates move above 2.5%. Hence I chose a floating rate home loan with no lock in and flexibility to switch to a fixed tenure loan

Career Risk: Invest in my career by constantly upgrading through studying (just completed my postgraduate), reading and meeting with professionals within the industry to ensure I am up to scratch with my cohort

Portfolio risk: Continue to take profit on my portfolio (through monthly dividends) while we are still enjoying the ride up and continue to pay down my portfolio loan using my dividends and monthly income.