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Thread: Can you afford your dream home after taking the 3-3-5 test?

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    Default Can you afford your dream home after taking the 3-3-5 test?

    http://propertysoul.com/2014/06/20/c...he-3-3-5-test/

    Can you afford your dream home after taking the 3-3-5 test?


    June 20, 2014


    Earlier this week, a repost of my article “A Simple Affordability Test” by Yahoo News and Propwise.sg from my book No B.S. Guide to Property Investment has sparked off some debate online.

    Below is the original article in my book for your reference:


    A simple affordability test


    Daniel is a single in his mid-thirties. He is staying with his parents now but is considering moving out on his own. He has a savings of $120,000 and is drawing a monthly income of $6,000. He is eyeing a studio unit in a newly-launched private residential project downtown as his bachelor’s pad.

    Joshua and Esther are newly-weds. They have been looking for their ideal home for some time. They want to buy a three-bedroom flat in a condominium near to where Esther’s parents stay. They have a combined salary of $10,000 and savings of $150,000.

    Both parties write in about buying their dream home, and drop the big question at the end:

    “Is our money enough to buy the property?”

    When buying properties, most people only focus on whether they have sufficient funds to settle the downpayment. But they miss the more important aspect of whether they are able to service the housing mortgage in the future.


    The 3-3-5 rule

    There are some general guidelines to check whether a property is affordable to you. For the sake of easy memorization, let’s call it the 3-3-5 rule.

    Rule 1: 30% of property price

    Your initial capital should at least be 30 percent of the property’s asking price, in order to pay for the downpayment, transaction costs and other miscellaneous expenses.

    Rule 2: 1/3 of monthly salary

    Your monthly mortgage payment should not exceed one-third of your monthly salary.

    Rule 3: 5 times of annual income


    The purchase price of the property cannot exceed five times of your annual income.

    Using the 3-3-5 rule, the property purchasing power of my two groups of readers can be summarized in the table below.


    For Daniel, he can only afford to buy a property priced below $360,000. Since he relies only on a single income to support his property, he has higher risk than the couple. His approach should be more conservative.

    As for Joshua and Esther, their budget cannot go beyond $500,000 because of the limitation in their initial capital. If they want to increase their budget, they should find ways to save more before plunging into the market.


    Why you need to be conservative?


    Sounds tough, doesn’t it?

    But so far for all my property purchases, I have been able to stick to the 3-3-5 rule.

    To buy an investment property, you’d rather be conservative than aggressive. To support your home, you’d better be safe than sorry.

    If you have problems even paying for 30 percent of the property, you can’t really afford it.

    If the value of your target property far exceeds five times of your annual income, you are either buying an overpriced property or buying a property out of your reach financially.


    Many people buy their home without thinking carefully. They are tempted to use the government housing grant or subsidy for first-time buyers.

    You may not aware of the fact that this small amount of subsidy, say, $30,000 or $40,000, can easily be offset by the fall in your property’s value when the bear market comes after your purchase. You are left to pay the outstanding loan from an overpriced property.

    Interest rates can go up. Property prices can go south. Jobs can be lost.

    Do you have the holding power to go through the next property cycle? Would you still be able to service your housing mortgage under all circumstances? Do you have the cash reserve to top up the difference in case your property’s value drops below the market price?

    If you can’t give a definite answer, you are not ready yet.


    In a sea of comments, let me clarify three points here:

    1. Income level and savings out of reach?

    The characters in the case study probably fall into the ‘high-income’ group. And the income gap between the rich and the poor is getting wider in Singapore. Read the article “Ultra-rich club gets bigger and wealthier” in today’s Straits Times and My Paper.

    Nonetheless, how much you earn may be out of your control, but how much you can save is completely determined by you.


    2. The 3-3-5 rule unrealistic?


    Some readers think that practising the 3-3-5 rule is infeasible in today’s property market.

    I understand that it is unpleasant to find out that you can’t really afford your dream home after taking the 3-3-5 test. If I were a developer or an agent, I would definitely come up with a 1-2-10 rule so that everyone could happily jump into the market and buy something.

    We are having the ‘boiling frog’ phenomenon here: When people are in a high-price environment for too long, they will gradually think that it is normal and acceptable to pay high prices. Similarly, when people are in a prolonged boom of the property market, they will forget what is a ‘value-for-money’ home, or why it is necessary to calculate the ROI of an investment property.

    When market prices are climbing rapidly, salespeople will tell customers that it is impossible to go back to the low prices in the past. However, history has proved time and again that they are wrong. Cycles do repeat themselves over the past few decades.

    And it is when market prices have been corrected sharply that people begin to realize that many buyers have overpaid for their properties bought during the last peak of the property cycle. These buyers are going to pay the price of holding their overpriced properties ‘for the long-term’ to wait for break-even, while missing the opportunities to buy when prices become reasonable again.


    3. Use your own judgment


    Developers can sell at future prices and sellers can market at unreasonably high prices. But as buyers, it doesn’t mean that we have to take whatever we are offered. Before we commit to any big purchase, we have the right to exercise our individual judgment to determine whether the product prices are reasonable.

    As a conservative value investor, I can say that I bought all my private properties strictly in compliance with the 3-3-5 rule. And I certainly know many people who can do the same too.

    It is not it can’t be done. It is people who don’t know that it can be done, or they choose to believe that it can’t be done.

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    Bravo. Let's continue to keep this reminder in mind.

    One issue with affordability - if you can comfortably afford based on the 3-3-5 rule, does it mean you should definitely progress with it?
    The three laws of Kelonguni:

    Where there is kelong, there is guni.
    No kelong no guni.
    More kelong = more guni.

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    Quote Originally Posted by Kelonguni View Post
    Bravo. Let's continue to keep this reminder in mind.

    One issue with affordability - if you can comfortably afford based on the 3-3-5 rule, does it mean you should definitely progress with it?
    Absolutely!

    As an investor, I go for value-for-money, return, quality, etc.

    As I said in my book, simple living rule number one: "just because you can afford it doesn’t mean you have to buy it".

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    Quote Originally Posted by vip View Post
    Absolutely!

    As an investor, I go for value-for-money, return, quality, etc.

    As I said in my book, simple living rule number one: "just because you can afford it doesn’t mean you have to buy it".
    Humm..if I remember correctly I don't think thats true lei. Your first few properties were shared with your friends or something lei. Buy liao rent out then sell...

    Never intend to hold on for long.

    Or its the other property blog I have been following. ..?

    Anyway your article intended audience is condo or flat buyers?

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    Quote Originally Posted by Yuki View Post
    Humm..if I remember correctly I don't think thats true lei. Your first few properties were shared with your friends or something lei. Buy liao rent out then sell...

    Never intend to hold on for long.

    Or its the other property blog I have been following. ..?

    Anyway your article intended audience is condo or flat buyers?
    The person you are talking about is not me.

    1. I only bought private properties using my own savings and CPF.

    2. There's once I don't have enough money. I asked my friend to buy it and the property was solely under my friend's name. (I won't earn a single cent out of a "friend".)

    3. I held all my properties for 6 to 7 years or longer before I sold them.

    I am against buying properties with others and flipping properties because of the implications behind.

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    Quote Originally Posted by vip View Post
    The person you are talking about is not me.

    1. I only bought private properties using my own savings and CPF.

    2. There's once I don't have enough money. I asked my friend to buy it and the property was solely under my friend's name. (I won't earn a single cent out of a "friend".)

    3. I held all my properties for 6 to 7 years or longer before I sold them.

    I am against buying properties with others and flipping properties because of the implications behind.
    Can share what are the implications behind flipping properties, what I can think of is paying tax.

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    Quote Originally Posted by Arcachon View Post
    Can share what are the implications behind flipping properties, what I can think of is paying tax.
    You never know when the government will label you a "property trader" and goes after you for your capital gain.

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    Quote Originally Posted by vip View Post
    You never know when the government will label you a "property trader" and goes after you for your capital gain.
    You mean Singapore got capital gain tax??????

    -----------------------------------------------------

    Gains from sale of property
    Generally, the gains derived from the sale of a property in Singapore is not taxable as it is a capital gain.


    When is it taxable
    When a person is deemed to be trading in properties, the gains from the sale of property in Singapore is considered taxable income. Whether a person is deemed to be carrying on a trade will depend on individual circumstances.

    Some criteria used to assess if you are trading in properties are as follows:

    Frequency of transactions (buying and selling of properties)
    Reasons for acquiring and selling of property
    Financial means to hold the property for long term
    Holding period


    http://www.iras.gov.sg/irashome/page04.aspx?id=152

    -----------------------------------------------------------

    CAPITAL GAINS TAX

    There is no capital gains tax in Singapore.

    http://www.globalpropertyguide.com/A...axes-and-Costs

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    Quote Originally Posted by vip View Post
    The person you are talking about is not me.

    1. I only bought private properties using my own savings and CPF.

    2. There's once I don't have enough money. I asked my friend to buy it and the property was solely under my friend's name. (I won't earn a single cent out of a "friend".)

    3. I held all my properties for 6 to 7 years or longer before I sold them.

    I am against buying properties with others and flipping properties because of the implications behind.
    On to your article. .not sure if you noticed the typos..

    As for Joshua and Esther, their budget cannot go beyond $500,000 because of the limitation in their initial capital. I

    It should be 600k not 500k. N 10k multiply by 12 not 13, by 5.

    Anyway for both the income they should go for hdb or at most a small ec unit.

    If I try to relate your article to buying resale flats bto or ec..its ok.

    Think most are looking at buying condo context which is unrealistic.

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    Quote Originally Posted by vip View Post
    You never know when the government will label you a "property trader" and goes after you for your capital gain.
    http://www.skyscrapercity.com/showth...=521222&page=3



    A couple of my clients has been invited by IRAS for coffee for they deemed my client for property trading and I have told a couple of the forumers about this. Be careful when you buy sell too many within a year or 2. My client sold 2 in the same year and IRAS invited her for coffee hence when i offered a super good price for the 3rd property she told me sorry for she cannot sell else she will be taxed heavily. Last nite news on the 7 properties within 8 years was a big shocker to me and is dated to far back then.


    Originally Posted by LittlePig View Post
    Anyone can set up a company... it takes less then a day to get a company up and running...

    Company tax rate is 18% and for the first three years of assessment, your effective tax rate is only 6% on the first $300K chargeable income and 8.85% (first $300K) subsequently...


    Now I know why that guy who bought from me decided to use a different company to buy from me. It's the 6%-on-first-$300k thing.
    __________________

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    Quote Originally Posted by Yuki View Post
    On to your article. .not sure if you noticed the typos..

    As for Joshua and Esther, their budget cannot go beyond $500,000 because of the limitation in their initial capital. I

    It should be 600k not 500k. N 10k multiply by 12 not 13, by 5.
    Total savings is $150,000. So maximum price of property they can buy is still $500,000 only (30% of property price).

    Thanks. I will change it back to a 12-month-pay just to play safe.

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    Ride at your own risk !!!

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    Quote Originally Posted by vip View Post
    Total savings is $150,000. So maximum price of property they can buy is still $500,000 only (30% of property price).

    Thanks. I will change it back to a 12-month-pay just to play safe.

    So when do you expect yourself to buy properties again???

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    Quote Originally Posted by Wolverine23 View Post
    So when do you expect yourself to buy properties again???
    At the point of maximum pessimism ... when all signs of funds are drained from the property market.

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    May be you have to wait till 2020 or even later?
    In the mean time, "CASH" value is depreciating faster than inflation.........
    Based on my reading of the economies, this coming bull market will extend for quite long extended period of time because of unprecedented monetary expansion..................
    We may not not even see next recession in 2021 !!!!!!!!!!!!!!!!!!!!

    Quote Originally Posted by vip View Post
    At the point of maximum pessimism ... when all signs of funds are drained from the property market.

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    Quote Originally Posted by vip View Post
    At the point of maximum pessimism ... when all signs of funds are drained from the property market.
    Seems like a textbook model answer reply. If only the real world is so simple.

    No hard feelings. Just being honest.

    Can you visualize or forecast the events leading to this scenario?

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    Quote Originally Posted by Arcachon View Post
    You mean Singapore got capital gain tax??????

    -----------------------------------------------------

    Gains from sale of property
    Generally, the gains derived from the sale of a property in Singapore is not taxable as it is a capital gain.


    When is it taxable
    When a person is deemed to be trading in properties, the gains from the sale of property in Singapore is considered taxable income. Whether a person is deemed to be carrying on a trade will depend on individual circumstances.

    Some criteria used to assess if you are trading in properties are as follows:

    Frequency of transactions (buying and selling of properties)
    Reasons for acquiring and selling of property
    Financial means to hold the property for long term
    Holding period


    http://www.iras.gov.sg/irashome/page04.aspx?id=152

    -----------------------------------------------------------

    CAPITAL GAINS TAX

    There is no capital gains tax in Singapore.

    http://www.globalpropertyguide.com/A...axes-and-Costs
    When the govt comes after u the gains will be classified as trading gain. Trading gains are taxable.

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    Quote Originally Posted by vip View Post
    At the point of maximum pessimism ... when all signs of funds are drained from the property market.
    ….When it comes, probably you will see the current group of PC buyers finally drain up, leaving behind unsold PC at new record number, the up-grader’s plan to PC may gradually reduce as many of them make U-turn to realize HDB and EC is good enough after all, old PC owners awaiting retirement(wish to downgrade) will release more PC to the market generating higher supply of PC as well, more developers will realize they need more crazy sale to clear stock at the same time, PC rental will down to a point where people think twice about the rental yield, interest rate rise may cause more multiple PC property owners thinking to sell and new home buyers think twice about buying more expensive PC....
    A bottle of Lafite '82 for all my coffeeshop friends yesterday...many don't know what is it....haha...

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    Quote Originally Posted by vip View Post
    At the point of maximum pessimism ... when all signs of funds are drained from the property market.
    The reality is that the property market has reached a " new normal". The 3-3-5 rule is applicable 5 or 10 years ago. In today's situation, where the property market in Singapore is controlled by the government's measures, it is unlikely that the prices of property can revert back to 80's or '90s. You have to revert the economy back 10 - 20 years to get back to the old normal.

    If you look at the world 's situation today where the developed economies ( US , Europe and even Japan ) are printing monies to stimulate their economies and where liquidity is in excess supply, it is unlikely that the old normal will resurface , unless of course, the government decides it to be so.

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    there is a EASY way to solve this problem ... 6.9M population

    Quote Originally Posted by walkthetiger View Post
    ….When it comes, probably you will see the current group of PC buyers finally drain up, leaving behind unsold PC at new record number, the up-grader’s plan to PC may gradually reduce as many of them make U-turn to realize HDB and EC is good enough after all, old PC owners awaiting retirement(wish to downgrade) will release more PC to the market generating higher supply of PC as well, more developers will realize they need more crazy sale to clear stock at the same time, PC rental will down to a point where people think twice about the rental yield, interest rate rise may cause more multiple PC property owners thinking to sell and new home buyers think twice about buying more expensive PC....

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    Quote Originally Posted by wt_know View Post
    there is a EASY way to solve this problem ... 6.9M population
    ...No worry, government has all plans to create more spaces for these people as well...this adding on to the current sentiment....
    A bottle of Lafite '82 for all my coffeeshop friends yesterday...many don't know what is it....haha...

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    Quote Originally Posted by Wunderkind View Post
    The reality is that the property market has reached a " new normal". The 3-3-5 rule is applicable 5 or 10 years ago. In today's situation, where the property market in Singapore is controlled by the government's measures, it is unlikely that the prices of property can revert back to 80's or '90s. You have to revert the economy back 10 - 20 years to get back to the old normal.

    If you look at the world 's situation today where the developed economies ( US , Europe and even Japan ) are printing monies to stimulate their economies and where liquidity is in excess supply, it is unlikely that the old normal will resurface , unless of course, the government decides it to be so.
    Price will never to go back 80s...let's be real...if price remain flat for many many years, all will think twice about investment in PC in Singapore... going back in 80s could only mean that people realise Singapore home is mainly for home stayer... nothing more...
    A bottle of Lafite '82 for all my coffeeshop friends yesterday...many don't know what is it....haha...

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    Quote Originally Posted by Wunderkind View Post
    The reality is that the property market has reached a " new normal". The 3-3-5 rule is applicable 5 or 10 years ago. In today's situation, where the property market in Singapore is controlled by the government's measures, it is unlikely that the prices of property can revert back to 80's or '90s. You have to revert the economy back 10 - 20 years to get back to the old normal.

    If you look at the world 's situation today where the developed economies ( US , Europe and even Japan ) are printing monies to stimulate their economies and where liquidity is in excess supply, it is unlikely that the old normal will resurface , unless of course, the government decides it to be so.
    Look at how strong is Singapore, you realise local policy has much more impact than global.
    Singapore is flexible to know what to remove to help business go on, if global issue happen, the government know what to do, all well prepared.
    A bottle of Lafite '82 for all my coffeeshop friends yesterday...many don't know what is it....haha...

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    This will happen only if the govt stop importing foreign talents forever.........
    But when govt stop importing foreign talents, Singapore sure DIE!!!!!!!!!!!!!

    Quote Originally Posted by walkthetiger View Post
    ….When it comes, probably you will see the current group of PC buyers finally drain up, leaving behind unsold PC at new record number, the up-grader’s plan to PC may gradually reduce as many of them make U-turn to realize HDB and EC is good enough after all, old PC owners awaiting retirement(wish to downgrade) will release more PC to the market generating higher supply of PC as well, more developers will realize they need more crazy sale to clear stock at the same time, PC rental will down to a point where people think twice about the rental yield, interest rate rise may cause more multiple PC property owners thinking to sell and new home buyers think twice about buying more expensive PC....

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    Quote Originally Posted by teddybear View Post
    This will happen only if the govt stop importing foreign talents forever.........
    But when govt stop importing foreign talents, Singapore sure DIE!!!!!!!!!!!!!
    Don't worry too much, this wouldn't cause price to another runaway either, how to provide a shelter for the new population ...all in the their plan.
    A bottle of Lafite '82 for all my coffeeshop friends yesterday...many don't know what is it....haha...

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    If u follow tis rule, u will be worse off...... wen u are younger u can afford to take more risks and take a bigger loan, what is the fear.... so tat wen u are older u can afford to slow down! I have friends start to Cheong a few properties wen they are 50+, finally the fear of crash cause him to liquidate all except one with a small profit...... I always tell myself tat I must go in wen I can loan from the banks, bfo the tap is shut!

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    Ironic isn't it?
    On the contrary, policies are crafted to force you to be unable to take more loans, loan for longer period etc when you can most afford to take the risks.............

    Quote Originally Posted by henryhk View Post
    If u follow tis rule, u will be worse off...... wen u are younger u can afford to take more risks and take a bigger loan, what is the fear.... so tat wen u are older u can afford to slow down! I have friends start to Cheong a few properties wen they are 50+, finally the fear of crash cause him to liquidate all except one with a small profit...... I always tell myself tat I must go in wen I can loan from the banks, bfo the tap is shut!

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    Quote Originally Posted by teddybear View Post
    Ironic isn't it?
    On the contrary, policies are crafted to force you to be unable to take more loans, loan for longer period etc when you can most afford to take the risks.............
    Cannot blame the garment, they are taking care of the whole population, ...but u yourself know ur own strengthen and weakness, u are in control or our of control..... If u are confident, wat is the problem?

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    Quote Originally Posted by teddybear View Post
    This will happen only if the govt stop importing foreign talents forever.........
    But when govt stop importing foreign talents, Singapore sure DIE!!!!!!!!!!!!!
    Sure DIE?

    I think if Government keep importing, then we DIE!

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