I was inspired by My 15 HWW's post - Is buying a more expensive home always a bad financial decision? The main reason is that my wife and I are one of those couples that bought a more expensive home i.e. Private Condominium (PC). Reading his post got me interested in whether we made a bad financial decision.
Why did we purchase a PC?
The year was 2011 and we were still working in Melbourne while planning for a move to Sydney. It became apparent that while we enjoyed working in Australia, chances are we might return to Singapore to work eventually. The centres of business activities were shifting to Asia and it made sense for us to have work exposure there in our accounting and banking fields.
If we moved back to Singapore, we anticipated a preference to stay together and not with our parents. We also took into account the possibility that we will get married then in view of the number of years my wife and I have been together.
As such, we enquired with the Housing & Development Board (HDB) on our eligibility to purchase a Build-to-Order (BTO) flat based on the qualifying monthly income ceiling of S$8,000 then. We were informed that we were not eligible due to the way they calculated the S$ equivalent of our gross A$ monthly income. Basically, it exceeded the S$8,000 because HDB included the high monthly PAYG withholding tax and the A$ was stronger than the S$ at that time.
In fact, we were also not eligible to purchase an Executive Condominium (EC) since it exceeded the qualifying monthly income ceiling of S$10,000 then as well. As the Singapore property market was picking up, we made the decision to purchase an off-plan PC in the east close to my parents-in-law's house. We were young, impulsive, overconfident and figured the high purchase price was worth it for the following reasons:
- Increased flexibility with the purpose as an investment or owner-occupied property from not having to meet a Minimum Occupation Period (MOP).
- Proximity to my parents-in-law will translate into lower living costs, better support infrastructure and access to greater resources.
- Interest rates were expected to remain low for a number of years and this will keep the monthly housing loan payment to 30% of our combined monthly income.
- Salaries were expected to increase and the mortgage payments will become more manageable going forward.
- Property prices should still increase slowly over time and we can sell by the time we returned to Singapore if we can't afford the monthly housing loan payments.
How have we fared financially so far with the PC?
This is what happened over the next five years from 2011 to 2016 for each of the reasons we considered:
- The qualifying income thresholds for purchasing a BTO flat or an EC were subsequently raised. This had little impact because our Australian salaries had increased as well and we would still have been ineligible since their method of calculation had not changed.
- We moved back to Singapore in 2014, which was earlier than expected and the increased flexibility helped because the PC was completed soon after our return.
- Living close to my parents-in-law has its trade-offs. While we appreciate the benefits of home-cooked meals, access to the family car and carpooling, this has translated into a greater level of involvement of my parents-in-law in our life. However, we must admit that the benefits outweigh the costs and probably more so if we decide to have kids.
- Interest rates have climbed recently and the increase was rather quick over a short period of time. Although the monthly housing loan payment is still within 30% of our combined monthly income, there might be problems if the interest rates rise much further and/or our income drops significantly.
- Although our salaries have increased over the years, lifestyle inflation means the housing loan payments have not become more manageable. Nevertheless, we have always tried to keep our housing expenses (whether rent or mortgage payments) to within 30% of our combined monthly income.
- The market value of our PC is only slightly higher than our purchase price and it's not easy to sell in a depressed market.
As you can see, we were really fortunate not to have this financial decision of buying a PC blow up in our faces. We made decent money in our jobs and have not yet been retrenched over the years. Our efforts to maintain a savings rate of 30% - 40% have translated into a respectable asset portfolio with time despite lifestyle inflation. However, the large mortgage and potential for exponential increase in monthly housing loan payments continue to be a cause of concern.
In conclusion, buying a PC was not a good financial decision but the costs were mitigated by factors within and beyond our control. We can't make too many of these bad financial decisions and we might not be so lucky the next time.