Your choice of home impacts your financial freedom

Singapore has one of the highest rates of home ownership in the world. Most Singaporeans, including myself, own our own homes.

Your home is your single biggest investment you will make and has a fundamental impact on your lifestyle and your retirement because our retirement fund -- the central provident fund (CPF) ordinary account savings can be used to pay for the home. Thus, your choice of home will determine the amount you can save, invest and ultimately your financial freedom.

Choice of Home
During the times of rising property prices and overall economic growth of Singapore in the 60s to 80s (prior to recession in 1985), the conventional wisdom was to buy the biggest home you could afford because rising affluence, economic and population growth coupled with our small land area meant that property prices for both Housing and Development Board (HDB) flats / apartments as well as private residential property (landed and apartments) only went up one direction. UP!

However, the 1985 recession made some aware that property prices could go UP and it could also go DOWN. But those whose jobs were secure and had extra cash who bought in 1985-86 period made a bundle as property prices continued their onward march upwards until the Asian crisis hit in 1997.

I still remember the time when people talked about the windfalls they could make by upgrading their HDB apartments from 3-room to 4-room to 5-room to executive apartments etc. Many thought that property was the way to financial freedom and wealth for the ordinary working class.


Paradigm Shift - 1997 Asian Crisis
The key takeaway for me during the 1997 crisis was the fragility of this entire cycle of prosperity. Job security became a novel concept because globalisation meant that jobs and sometimes entire industries could be outsourced and lost to lower cost competitors. Along with the evaporation of liquidity and speculative fervour that propped up properties prices, the collapse was dramatic and drastic. Those who could not hold on to their jobs or businesses had to downsize their homes or worse, lose their homes when they couldn't pay their mortgages.

A new paradigm emerged to challenge the long-held view that buying the biggest property you could afford and upgrading was the way to financial freedom. Instead, it became buy what is sufficient for your family size taking consideration your financial capacity as well as security of your job because if you lose the roof over your head and also a lot of your equity.


Property as a home as a hedge against inflation
The reality check brought on my the asian crisis in 1997 hammered home the realities of life in modern Singapore. Job security is an illusion. Your home being the single largest liability in your life has the ability to virtually bankrupt you if you fall behind your mortgage payments. Because if your source of income ceases, the mortgage payments do not and the bank can foreclose on your property if you fall behind your payments.

Those who bought HDB apartments direct from HDB were somewhat shielded in that whilst the loans were from the HDB, the statutory board was not as quick on the draw to repossess homes should lessees default on their loans. This changed dramatically when policies were put in place to restrict the number of times one could get subsidied HDB homes. Hence, some had to finance their homes using commercial loans where banks were not as forgiving compared to the HDB is enforcing their interests should the borrowers default on their loan payments.

If you learn not to over-extend yourself in buying your home, it can be a good hedge against inflation while allowing you to save on rental expenses. Singapore's tight supply of residential homes means that rentals have recently shot up very quickly. Even HDB apartments are renting for $2-$3k per mth in choice locations. Under increasing immigration, the real demand for residential homes will be here. Hence, buying your own home allows you to have your own roof over your head. In addition, because you save on rental expenses, your instalments to pay your mortage can be released back to you in the future should you need to sell your home. If you rent, rental expenses cannot come back to you.

At the current rates of immigration, demand for homes will still be robust. Thus, owning the roof over your head gives you a place to stay and also helps to maintain some value in your property. Whilst property gains can be cyclical, overtime, if you can control when you wish to sell your property, you are able to reap some returns. Your CPF monies will have to go back to your CPF account subject to prevailing minimum withdrawal age and minimum sum requirements but the cash you used to pay for your home can come back to you. For those of you who are facing the empty nest syndrome in your retirement years, you can opt to downgrade and buy a smaller home or rent.


Paying off your loans as fast as your circumstances allow
I realise while managing my own investments is that beating the market and getting returns higher than mortage loan rates are not that straightforward. Some investment gurus claim that beating 4-5% mortage loan rates are easy and run down my approach towards using my spare cash and CPF to pay off my mortgage early. One guru claims that mortgage loans are good debt and should be used to free up cash for investment opportunities. Individual skills, abilities and financial circumstances vary and I know my own lack of expertise in being able to time the markets well most of the time. Thus, I chose the conservative strategy of paying off my mortgage fully whilst my financial means allows me to do so while I am still not near retirement age.

I do this because my experience during the Asian financial crisis in 1997 opened up my eyes to the relative insecurity of the modern job market. This coupled with the knowledge that job security has an inverse relationship with age made me more aggressive in pursuing a pay off your loan as soon as possible (ASAP ) strategy.

I would not recommend my strategy to all because each of your financial circumstances is unique. You have your own ways of approaching financial freedom and how to achieve it. For me, my assumption was that as I grow older, our Singaporean ageist employer mindset would be a risk that I would have to manage. My way of managing it was to rid myself of the single largest liability in my life - my housing loan. By clearing my loan during the relative peak of my earning years, I have created myself a buffer for the next 15-20 years of working life to use my income to support my living expenses as well as to save for my retirement over and above the mandatory CPF contributions.

In addition, I have the backup to downsize my home should I really need to unlock cash from my home as this provides me with the security to know that I have an asset that can be monetised IF I need to. This assurance gives me a lot of confidence in my day-to-day working knowing that I am not a SLAVE to my job as I do not worry about the roof over my family's head. :-)

Each of us have different ways of deciding the type of home we want to live, how we go about financing it, and how we go about paying it off early or late.

Your choice is yours to make, the consequences of your choice are also yours to accept. There are no right or wrong answers as the paths to financial freedom are many and the ways to get there plentiful.

Be well and prosper in whatever decision you make.