Personal Finance Part 12 - Indebtedness

In this next article on personal finance, I would like to touch on the subject of debt. No doubt the news has been going on about credit card balances being rolled more often, amounts getting larger as well as people purchasing flats which are (to me) getting more expensive. The latest HDB flats which are part of the DBSS Scheme cost a cool S$720,000 for a 5-room larger unit, which is even more than the price of some mass-market condos. Yet there are people taking up these (over-priced) units. The TODAY newspaper also recently reported a jump in the number of luxury sports cars and marquees being purchased, as if Singapore was not going through its worst recession in 70 years. So what's up and can this seemingly strange phenomenon be analyzed ?

Perhaps I can start off by commenting on the general mentality of the youth I encounter these days. "Youth" in this case represents the Generation "Y", who are in their early to late 20's to early 30's. These youths have not been through the struggles which our ancestors have been through and have been living a life of economic prosperity and relative abundance compared with most of our peers in other South-East Asian countries like Indonesia and Vietnam. Some would say that this has made them spoilt and pampered and their thinking has also evolved to reflect this. Youth nowadays think nothing of splurging on fine dining, a new mobile phone or the latest gadget, all in the name of keeping up with the Joneses. In addition, most of them also have no qualms about taking up loans to finance huge purchases like cars and property, as they feel that they can sustain a steady cash inflow through their career and/or passive income which can help pay for their lifestyle. This view is inherently flawed and risky as the future is always uncertain and one should maintain a "margin of safety" (i.e. buffer) when taking up such long-term liabilities.

On to the subject of properties, there have been lots of news articles and advertisements recently in the Straits Times, Business Times and TODAY newspapers featuring mass-market condominiums and the new condo-like HDB flats. These are generally priced around $500K to $700K and the difference is that for condos, there is no salary limit while for the condo-like HDB flats there is a salary cap of S$8K combined for the married couple. Many of my peers have chosen "quality of life" by buying condominiums worth about $600K to $700K (one even bought one exceeding a million SGD !) and taking up loans as long as 30-35 years. For some, this means that they would be indebted to the bank for most of their adult life (and probably part of their retirement years as well), while for others who can afford to put down a larger downpayment, their loan tenure may be shorter but they will be more severely starved of cash once they had made the down-payment.

If you think about it logically, one is paying for a premium space in the sky as well as amenities which come at a high price. Condo living is considered something most people yearn for as a status symbol and I would argue that most would treat upgrading from HDB to condos as a sign that they have entered a new strata of social status. It's also one of the original 5 "C"s which continue to dominate the mentality of Singaporeans - Car, Cash, Condo, Credit (Card) and Country Club. Of these 5, car and condo are still considered prestigious and command a certain level of respect, even though it may set you back by thousands of dollars and put you in debt for most of your life. When friends of mine tell me they took up a big loan (e.g. $500K and above) and are paying for 30-35 years (sometimes even using cash in addition to CPF as CPF OA contribution is capped at S$4,500 gross salary), the first thing I ask is whether they had prepared for contingencies and whether they plan to be able to save any money. Having things as they are now are fine until you consider the fact that children may come next, as well as probably a domestic helper too. These increase the financial burden significantly and within 30 years, if one assumes 3 recessions in total (1 every 10 years), then there is a significant chance of either losing your job or getting a pay cut throughout this period. Putting this in context, it simply means that one should NOT over-leverage based on today's conditions as tomorrow may be very different indeed. A mortgage loan is not something one can shed off easily and one may end up being a financial prisoner to the bank or HDB without recourse. For me, I choose to live in an HDB 4-room flat and have a remaining HDB loan of about 8 years remaining (cut down from an original length of 21 years through consistent increments in installment payments in addition to partial loan redemptions, all through CPF). My aim is to be able to reduce the remaining tenure to about 5 years so that I can finish paying off the loan before I hit 40 years of age.

Another aspect to discuss are cars. Somehow, I can never understand why Singapore is one of the most expensive countries to buy a car. A brand new car (including COE) can set one back by about S$70K to S$80K, and higher-end models like BMWs and Mercedes S-Class can set one back by $150K to $250K. It's no joke because some cars cost as much as a 3-room HDB flat, and remember you can't live in your car and it doesn't have an attached bathroom ! Generation "Y" seem to be more obsessed with cars as I see many young people fresh out of University buying a car with zero downpayment using their first few pay packets. The banks have not helped either by extending the previous maximum 7-year loan to the present 10-year loan system, and with no downpayment required, one can chalk up quite a huge debt just to drive away with a fresh set of wheels ! I am always of the impression that behind every set of beautiful wheels is an equally beautiful loan. The TODAY article on the increase in sports car purchases is believable, as nowadays I can spot one sports car (2-door variety) almost once every five minutes as I sit in an SBS Bus. The driver usually looks very young and these days the incidence of young female drivers behind the wheels of such "cool cars" is increasing. Car loans are NOT amortizing loans are the interest is computed on a flat basis at the start of the loan tenure and divided by the loan period, so there is no help in paying off a large sum during the loan tenure as it does NOT reduce the remaining liability. In addition, cars are assets which depreciate extremely quickly and a second hand car about 3 years old may not even give you 50% of its original purchase price, even though the COE can last for 10 years. This is why I think cars are a bad proposition when it comes to building wealth, as they tend to drain a lot of financial resources and can be considered more of a liability than an asset (if you discount the "convenience" factor).

It's not unusual for people to own cars these days, especially when couples start having children and maids and need to ferry them around to their parent's place or the nearest child-care centre. Most married couples I know own cars, and many single young guys and girls also own cars, though I am quite confident most of the younger ones don't earn a salary exceeding S$3.5K a month. The thought of a car did cross my mind, until I considered how indebted I would be to the bank, and the fact that about S$1,200 a month would be spent on car-related expenses like petrol, ERP, parking, insurance and road taxes (including the installment). So for now, I am very happy to continue taking public transport like SBS Buses, MRT and the occasional cab.

So to summarize, I have discussed some aspects of indebtedness and my stand is that I avoid excessive debts when I am young so that I can enjoy a better chance of retirement when I am older. By controlling our WANTS and differentiating them from our NEEDS, we can endeavour to save more and ensure we do not build up long-term liabilities which will be hard to shake off when we approach our retirement years. One should also note that CPF OA contributions decrease with age and the chances of one finding another job are lower the older one gets. Hence, one should pay down more of their housing loan at the start of their productive working life rather than at the tail end of it.

Would any readers care to share comments and views on being indebted ? Do you think this is good or bad and what are your experiences to share in terms of owning cars and condos and other lifestyle products ? Do you think this consumerist culture should be encouraged or discouraged ? Feel free to comment, thanks !