Income inequality’s a big issue here, and we know why. It’s just that no one wants to point the accusing finger, and mouth the “P” word. Yeah, I’m talking about private property, which is one of the biggest causes of Singapore’s income divide. Property investments make bridging the income gap about as easy as pole vaulting Mt. Everest:
Why the Property Situation Keeps You Rich…or Poor
In Singapore, private property defines wealth. If you own more than one house, the closest you will get to being hungry is whining that the Haagen Dazs man forgot to throw a cherry on your double scoop.
And your gravy train probably won’t end in your lifetime. For various reasons, private property tends to make the rich keep getting richer. That’s because of:
- Potentially Lower Interest Rates for the Rich
- Tolerance for Interest Rate Spikes
- CPF Interest Rate
- Asset First vs. Home First
1. Potentially Lower Interest Rates for the Rich
Okay, between rich and poor people, who pays more for their property?
It should be the rich right? I mean, HDB flats cost less and stuff. And that’s true if you’re talking about loan quantums (the total amount borrowed). But when it comes to home loan interest rates, most private property owners actually pay lower rates than HDB dwellers.
How much less? Try anywhere from 0.9% – 1.2% less.
Let me explain the witchcraft: if you can afford a cash down-payment of 5% (minimum) on your house, you can opt for a bank loan (and for private property, you always use bank loans). The typical rates for a bank loan range from 1.4% to 1.7%. They’ve stayed at that level for the past 10 years or so.
The HDB concessionary loan (which is what the average Singaporean will end up getting for public housing) is pegged at 0.1% above the prevailing CPF rate. That’s 2.6%. So if your loan is from HDB, you are almost certainly paying higher interest than the rich guy in the condo across the road.
That’s a pretty important contributor to the whole “rich get richer, poor get poorer” scenario.
But, I hear you asking, why does everyone not rush out to get a bank loan?
In the interest of fairness (and 50,000 other good reasons), let me explain that HDB is not ripping you off. It’s just that you may not be rich enough to consider that bank loan, which comes with its own set of risks and conditions. For example, there’s your…
2. Tolerance for Interest Rate Spikes
Bank loan rates are variable. So they’re 1.7% now, but if there are cooling measures, or Ben Bernanke’s lips twitch, they might shoot up.
Maybe they rise to 1.9%, maybe they rise to 3%. Whatever. Either way, it’s the main reason poorer Singaporeans shy away from bank loans. If the rate does climb, they may not be able to afford repayments. A HDB loan may be expensive, but at least that 2.6% will probably not change for the loan tenure.
So all’s fair right? The loans balance out in the end?
Yeah, think again. The rich can go ahead and risk that interest rate spike, because they could give a cow’s backside about a 3% rate. Let me explain:
Say you’re wealthy enough to buy a second house for investment. You rent it out to a tenant, for maybe $4,000 a month. One day, the interest rate spikes to 3%, and now you’re paying maybe $3,500 a month. Oh no! Now you only lose negative $500 a month! Big deal that is.
But let’s say you’re poor. Chances are you just have your one dinky flat. What happens to you if the monthly repayment shoots up?
Let’s see, what’s your rental income? Oh right, $0, because you can’t rent out the place that you sort of have to live in. Can’t help noticing you’re kind of disadvantaged there.
Is the message sinking in yet? The rich can afford a low-rate bank loan, because they can afford the higher risk. The poor are better off with the HDB route, because paradoxically, they can’t afford the cheaper rate.
(But what if the rich guy only has one private condo? Well easy. When the bank extends a loan, they check if you can afford it based on an interest rate of 3.5%, regardless of what the real rate is. So even if the rich guy is paying 1.7% interest, his finances have already shown he can handle 3.5%).
Speaking of rental…
3. CPF Interest Rate
Say you buy a house, and you qualify for a bank loan at 1.7% interest. Congrats, moneybags. You then decide to make payments for the house via CPF (yes, you can do that for a bank loan).
Now, considering that your CPF money appreciates at 2.5% interest, what’s exciting about this situation?
Bingo! Your CPF money grows at a faster rate than what the home loan costs you. It’s 2.5% vs 1.7%. Also, remember that your CPF grows at 2.5% compounding interest, whereas your home loan is gradually amortised; the monthly repayments get lower as you pay off more of it.
But what if you needed to use a HDB loan?
Then I refer you to point 1. Your interest rate is 2.6%, or 0.1% above the prevailing CPF rate. Maybe this is the sort of thing that, you know, keeps you poorer?
(Although if you are rich enough to handle the downpayment and risks, talk to the brokers at MoneySmart. They can set you up with a bank loan for free).
4. Asset First vs. Home First
HDB needs to ensure that flats remain public housing. In other words, flats cannot be allowed to appreciate like private condos or bungalows, lest our children end up wearing Salvation Army clothes and living out the lyrics of a Nirvana song.
So several recent measures, like de-linking new flat prices from resale flat prices, or forcing Permanent Resident buyers to wait three years, have smashed resale flat prices to pieces. And then HDB started selling flats to singles and ramping up supply, thus smashing the pieces into even smaller pieces.
Stuff like this just doesn’t happen in private property (well, not often).
The prices of condos and bungalows have trotted along merrily these past months, while resale flat sellers weep into their peanuts in cheap bars.
Simply put, your flat is an asset second. It will never rival the private property gains of the rich. And that’s why many of them keep gettingt richer, while you can’t seem to catch a break.
They have access to the property game, which middle and working class Singaporeans can only watch from the sidelines.
What are your thoughts on our income divide? Share your thoughts on any other factors with us here!
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