Archives for category: Economics

Given the rally in the markets from the start of the new year, a friend and I were discussing the likely direction of the markets. Now, we aren’t chartists nor are we professional economists or analysts* but my friend has a good sense for business and I…, well, I read a lot.

He was wondering about the potential implications of a slowdown in the Chinese economy and its impact on the world economy, and by extension, the world’s stock markets.

Based on what I’ve read, I think some serious shit could happen and I’ll lay out the conditions for it.

The Chinese Economy

It’s no secret that China’s economy is slowing down. It’s also no secret that the Chinese government has been trying to transition the Chinese economy from an investment-driven one to a consumer-driven one.

To a certain extent, China has been pretty successful in helping Chinese companies grow and gain the technological capabilities necessary for them to be world-class competitors.

If we just look around us today, many Chinese brands like Alibaba, Huawei, and Xiaomi have sizable shares of their respective industries. Within Asia, countries like Tencent (which owns the all-in-one app, Wechat) has also become so entwined with people’s lives that it’s going to be hard for their Western counterparts to gain a foothold. So, the bottom line is that it’s no secret that China’s investment-driven strategy has produced some results.

However, what many people outside of China probably don’t realise is how the Chinese government directed investment spending in China. It turns out that the Chinese government was leaving it up to the banks and its related entities.

And while the rest of the world recovered, this worked fine. Unfortunately, the returns started to slow down once the low-hanging fruit was picked and obviously, lots of money has been either lost through corruption or just bad investments.

The best examples of this are how much money was flowing into overseas property markets like Canada’s and Australia’s or how Chinese companies with non-existent business models (think bike-sharing firms like Ofo) expanded in so many markets so quickly.

In short, to paraphrase the Washington Post article in the link above, China’s debt-fuelled stimulus is getting less and less effective. Which brings us to the better question: What’s next?

China’s Gameplan

I’m not an expert on China but if I had to guess, China realised that returns on investment were slowing down due to diminishing returns and/or corruption were those who had access to the money were just misappropriating it and moving the money overseas into property and other forms of wanton spending.

Therefore, their solution to “pay off” the debt that was circulating in the economy was to have their domestic economy take over. If their households started to consume more and take on more borrowing in order to do so, the previously issued debts of the firms could be “rolled over” into newly created debts that would be borne by the consumers.

The second thrust would be for Chinese firms to expand overseas as much as possible to earn foreign currency. This would directly help pay off the debts created as it would be a return on the investment.

The third thrust is to have the RMB become more widely accepted as a reserve currency which is pretty much a variant of the first strategy as the world takes on more debt which “offsets” the amount of debt owed by Chinese firms.

What Could Go Wrong?

As 2018 showed, the Chinese consumer is not exactly picking up the slack from the firms. Although in part due to Trump’s trade war and the Huawei situation, Chinese consumer spending is projected to slow and evidence of it is showing up in the projected fall in iPhone sales as well as the drop in car sales.

As for the second thrust, Trump’s trade war, as well as a projected slowdown in most major economies, is making this strategy a no-go. Ofo looks like it’s preparing to go bankrupt which shows you how tight credit is in the startup space.

The third thrust is also unlikely to work even with China’s “One Belt, One Road” idea because that idea pretty much depends on China lending money to developing countries to build all sorts of infrastructure like ports and railroads. This means taking on more credit risk for the Chinese financial system which is the opposite of what China needs.**

Conclusion

Don’t get me wrong. It’s not like I don’t want China to succeed. China’s economy slowing will mean a lot of pain for the rest of the world. After all, it is the world’s second-largest economy. Much of Asia also depends on China to buy raw materials or supply us with goods.

What I’m saying is that China needs a lot to go right for it to restructure its economy and given the state of affairs in the world today, it really needs Trump to stop his ridiculous trade war and the fed to loosen credit so that Chinese firms can breathe easy.

Notes:
*Well, not likely those guys are likely to be any more accurate.
**Lending money to third world countries for infrastructure projects in which neither borrower nor lender has much experience executing is a disaster. China may have another agenda through this but that’s another story altogether. See Sri Lanka’s experience with their Hambantota port.

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Markets have had a horrible December so far. For those outside the U.S., the whole year has been terrible. The problem with all of this is it only seems like it’ll get worse.

Here’s an opinion piece by former banker, and author, Satyajit Das, that was on Bloomberg and republished in The Business Times:

THE “everything bubble” is deflating. The fact that it’s happening relatively slowly shouldn’t blind us to the real threat: The world is dangerously underestimating how hard it’ll be to deal with the fallout once it pops. 
 

Frothy markets can’t disguise the warning signs. The shift to tighter monetary policies in the West is putting pressure on global equity and real-estate values. Even more critically, it’s weakening credit markets. Over-indebted emerging markets face headwinds from rising borrowing costs and dollar shortages. 

I don’t have any particular insight into the financial sector or the rumblings in the corporate debt markets but from what I’ve been reading, it seems that tighter credit markets have finally hit home.

What we’ve yet to see a a major default by a corporation that is Too Big To Fail. Once we have that, it’ll be the catalyst for a further drop in the markets that will take markets down to bargain bin territory.

A Market of Our Making

The funny thing is how this whole mess is a market of policy missteps. Barry Ritholtz made a good case for how Trump basically did everything wrong – he did a terrible job replacing a Fed Chief that’s more partial to a gradual tightening with one that’s more hawkish. He also screwed up on trade with his trade policy, and now it seems that he’s bent on taking the U.S. close to a shutdown.

Over in the U.K., things aren’t looking so hot either and you can argue that it all started with David Cameron’s promise of a referendum on Brexit. Now it seems that lawmakers can’t agree on Brexit and the deadline is looming.

Closer to home, one Dr. M across the Causeway isn’t making things easy for us. What and how big the fallout will be from the increase in tensions between Singapore and Malaysia remains to be seen but I’m pretty sure that any major hit to our economy and markets isn’t going to come from Malaysia.

Take cover but be ready

In short, I think things could get worse before it gets better. This is particularly true for U.S. markets because valuations there haven’t come down as much (major indexes there have only just reached correction territory).

For the local markets, things are cheap but we’re not quite at basement bargain levels. We’ll need at least another 7-10% drop in the index to take us there. And at that point, people invested in more leveraged counters like REITs will be feeling a lot of pain.

It’s been a terrible week for me. I was pretty much in bed for the first two days of the week and I couldn’t eat much until Thursday. Thankfully, I’m feeling close to a 100% now.

Hope your week ahead won’t be anywhere near as bad as mine was this week.

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The Big Read: Cryptocurrency crash offers industry the reality check it needs (TODAY Online)

Great read on the aftermath (yes, you’ve read it first. I’m calling it an aftermath) of investing in Cryptos with accounts from those who had substantial (relative to probably their own net worth) skin in the game.

Good lessons abound and I wish I had kept better records or accounts of what was happening in ’07, ’08 and ’09. I was only in university then and beginning to start learning about the markets but I remember how some guys were trading warrants and making/losing 5-figure sums in the room that us Honours year students were given to use.

That was in ’07 and of course, we know what came after. I would have liked to remember a little better how I felt about the markets in ’08 and ’09 because the sentiment now in 2018 certainly fits those times better.

Of course, in recent times, we haven’t seen the participation of the masses in any widespread, crazy speculation (apart from a tiny group in crypto) so my question now is: What is the next shoe to fall?

As Singapore’s population ages, I suspect we’ll see this sort of thing start to pop up as well. I mean, we hear of elderly folks being conned of their CPF savings through various means (appealing to their vices, taking advantage of their less-than-once-stellar mental faculties etc.) but I’m waiting to see if it happens at the financial institutions level.

I suspect it’ll come from the financial institutions offering a product that isn’t actually designed to give returns much better than the risk-free rate but with all the “protection” of a bond. That sounds like Structured Products which kind of gave banks a bad rep but if you know of anything new, do let me know. It’s fascinating stuff really.

Russell Napier: Equity Markets and Structural Change (Enterprising Investor)

A plausible sounding narrative for where U.S. markets are headed in the longer term. Not optimistic but if it does happen, it would provide a good buying opportunity.

Could we Model Our Retirement Spending like Endowment Funds? (Investment Moats)

Sharing this not because it’s a new idea to me but I think it could be a paradigm shift for many people.

Most people aim to accumulate a certain sum before they retire and upon retirement, spend down the sum and upon their deathbed, leave the rest for their beneficiaries.

It’s not that I think that’s wrong but I think the pros of acting as if your money should last forever outweigh the idea behind spending it down.

For starters, aiming to have the accumulated sum grow/last forever means greater prudence in spending. It also means greater prudence in investing as it requires a proper plan for investing the money instead of sticking to investments that guarantee the principal at the expense of purchasing power.

The biggest downside is what the growing sum of money is meant to do. If the beneficiaries are too few, you end up with a generation of spoiled heirs who will eventually squander it all.

In case you weren’t following the crypto scene, “hodl” is a typo for “hold” and someone that became a meme for crypto fanboys to buy and hold crypto for the long run.

close up of coins

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As Josh Brown reminds us, this week is roughly the one year anniversary of when most of the world suddenly realised that people were “making tons of money” from investing in something called “bitcoin”.

Plenty of other cryptocurrencies followed but we haven’t really heard of the widespread use case being implemented. That basically means that the usefulness of bitcoin and other cryptos have not been proven yet. The only thing that has been proven is that the technology consumes a shit ton of energy.

I hate to say I told you so but I told you so (here, here, and here).

The next shoe is already dropping

airport bank board business

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By the way, remember when I said that bitcoin and cryptos were just a symptom of easy money going into certain areas of the market and those areas ride a lot on optimism which has a high chance of not coming true?

That whole setup largely explains why tech has been getting hammered the way it has. Just a few months ago, we were talking about companies with trillion dollar market caps. As of today, Apple’s market cap has fallen to just under $750b and is no longer the largest publicly-traded company as measured by market cap. As of writing, that honour belongs to Microsoft.

Now, don’t get me wrong. I’m not saying that Apple is a lousy investment or a company on the brink of disaster. What I’m saying is that the fact that what’s happening in the markets right now is all a reflection of Mr. Market’s mood swings. Just a few months ago, he was totally positive on tech which propelled Apple and Amazon to trillion dollar market caps. Right now, the bipolar Mr. Market is obviously running the other way.

 

In local news

So what does all the above mean for the local market?

Surprisingly, the STI has held up relatively well despite the carnage in tech. Possibly because the STI is financials-heavy and our markets don’t really have a huge pie in the tech sector. The property and financial sector will hit the STI much harder than anything in tech and to be honest, those sectors have been hit pretty hard already in the last few months.

However, MAS has come out to warn that interest rates are on their way up and that households need to “be prudent”*. For some months now, I’ve been saying the same thing. That if mortgage holders aren’t able to service their loans with an interest rate of at least 3%, then they need to be very careful.

The STI is going to fall much further if an economic downturn happens and interest rates in the U.S. continue to march upwards as that will directly impact defaults in the loan sector. I mean, what could be worse than losing your job while your loans get more expensive?

Having said that, valuations on the STI are not demanding. If you ask me, it’s on the cheap side (but not dirt cheap!) but the macro headwinds seem to be blowing hard.

Notes:

*It’s nice that MAS gives a mention that interest rates in SG are closely linked to rates in the U.S. If you want to know why, here was my take on it.

Kyith over at Investment Moats really nailed this one.

athletics blue ground lanes

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I’m not going to link to the original article that Kyith based his post on because I don’t want to give rubbish articles any more traction than they deserve but the article provides a good example of how you can easily mislead others with badly designed surveys.

In another life, I actually interned at a market research firm and I’m pretty sensitive to how questions are crafted and the conclusions that one can reach based on misleading surveys.

 

Background of the article

The article is based on a survey commissioned by an online e-commerce company and the demographics should set alarm bells off:

The survey polled 700 Singaporeans from different age groups and monthly income brackets, with about 65 per cent of females to 35 per cent of males. – from the original source

Furthermore, as Kyith has pointed out, the back-of-the-envelope calculations don’t make sense. $17,000/year on food is equivalent to spending slightly over $15 per meal per day.

Problems with the survey

Now, last I checked, Singapore doesn’t have such a terribly lopsided gender imbalance. If we did, I’d be part of a very prized demographic here in Singapore. I didn’t see the numbers for the age groups but I suspect a fair number of respondents were those in their late teens or early 20s — hardly representative of the working adult demographic.

In Singapore, we have coffee shops and hawker centres where a meal will only set you back around $4-5. At best, if you decide to be lavish, you’ll spend $10. That’s not going to $15 per meal per day unless one of your meals is at a fancy restaurant. Every. Single. Day. If you cook or do meal preps, that’s going to reduce your expenditure on food even more.

Of course, the survey reported the average numbers and anyone who’s taken a course in statistics will tell you that averages can be skewed by outliers. Perhaps 8 out of 10 respondents only spend $5-10 per meal per day and the number got skewed upwards by the 2 out of 10 that spends $20-25 per meal per day. But if that’s the case, it’s still bad reporting because the average numbers don’t represent the truth.

Numbers do lie

In short, clickbait articles like the one mentioned often try to exaggerate the truth so that lots of people click through to read it or share it on their social media to provoke some discussion. If we want to be both media-savvy and financial literate, we need to be able to call bullshit on articles like these and if you do share them, share them to shame them.

Every month, the relevant government agencies here in Singapore release the latest data on inflation. Inflation, being the increase in the general price level is something that most denizens of a country should be concerned about because it affects their lives in a very direct way.

When prices go up, the same dollar that you have buys you fewer goods and services. If you don’t have the power to negotiate for higher wages, then inflation causes a hit to your purchasing power. We can argue about whether being able to buy more stuff is necessarily equal to an increase in one’s standard of living but I’m quite sure that when inflation leads to a problem with affording necessities such as food, shelter, and medicine, that counts as a hit to one’s standard of living.

What some people may not realise is that here in Singapore, we have quite a few different inflation measures. And this can be a problem when you read the news. A simple search on Google reveals this situation.

sg_inflation.JPG

Sometimes core inflation gets highlighted while other times, it’s just inflation. What gives?

 

Headline vs. Core inflation

Headline inflation is basically the textbook measure of inflation. It tracks the percentage change in the Consumer Price Index (CPI) which is an index of price changes to a basket of goods and services that the average household purchases. Of course, the basket differs from country to country but it should reflect what the average household spends on.

However, Singapore’s situation is quite unique in that private road transport (i.e. cars) prices are highly influenced by governments policies (i.e. our COE system and tariffs on cars) in a bid to keep our roads relatively less congested. This makes Singapore one of the most expensive places in the world to own (not so much driving) a car.

Similarly, the homeownership rate in Singapore is one of the highest in the world. This means that any changes to rents do not affect the purchasing power of most households. Most households in Singapore are affected more by changes in mortgage rates than the actual price of rentals or property.

 

So, what matters?

Therefore, in Singapore, if you are like most people and you want to figure out if price increases are getting better or worse, you should focus on the Core Inflation numbers.

Sadly, in recent years, core inflation numbers have been higher than the headline inflation numbers for the simple reason that rents have been falling along with the increase in rental vacancies.

In 2017, the core inflation number was 1.5% while the headline number was 0.6%.*

What more perceptive readers should realise by now is that saving money for the long run is a losing proposition if you can’t get a return of anything more than the inflation rate.

In Singapore, interest rates on savings accounts are pathetically low (~1% p.a.). The implication is that you should only have minimal savings in a savings account to meet liquidity needs. Even putting your savings in accounts/assets that return 2-3% p.a. are mostly rubbish as, at best, it helps you preserve the purchasing power of your savings.

 

What to do, what to do, what to do?

What to do, indeed?

This is where financial literacy comes in. Minister for education, Ong Ye Kung, recently announced how, starting from next year, all ITE and Polytechnic students will have to go through a financial literacy module in their first year of study

It’s a good first step but I hope the module will actually get students to be financially literate rather than giving them the simple impression that budgeting and saving money is all there is to become financially literate.

I also hope that the financial planning industry doesn’t get involved in these programmes in a big way. I can understand how it may seem wise to get financial planners to teach people about financial literacy but as Buffett once wisely said, “Never ask your barber if you need a haircut.”

Getting the financial planning industry involved in promoting financial literacy is precisely that.

 

Notes:

*Statistics Singapore has wonderful infographics for a variety of other economic data. It’s really easy to understand and instructive.

Dang, it’s been a wet, wet November. Let’s hope that November Rain ends soon.

books on bookshelves

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There is a fine line between stupid and clever (The Undercover Economist)

I never thought I’d see Tim Harford do a piece that’s more finance than economics but here it is. As usual, it’s a very good piece that explores both the pros and cons of Dollar-Cost Averaging (DCA). Unlike all the simplistic self-help personal finance articles that one often sees in Singapore, Harford rightly points out that DCA is in theory, inefficient. Even in practice, DCA hasn’t worked very well. However, for retail investors, the benefits of inefficiency would be that they get invested at all.

I hope that if you read this, realise that DCA is not the panacea that many personal finance books and blogs make it out to be.

In short, I think DCA is stupid if you just know a little something about valuation.

 

What’s Missing from Buy & Hold Critiques (The Big Picture)

To balance out the views of those may lie on the other extreme of DCA and Buy & Hold, here’s a piece that may make you reevaluate your ability to time the markets. Good read and valid points.

In short, I also think that trying to time the market in the short run (weeks or days) is futile.

 

The Painful Fall Of British American Tobacco (The Compound Investor)

Historically, tobacco stocks have been big winners. Is this a sign of opportunity? Do note that value has been getting killed relative to growth for many years now. Tobacco stocks have also come under fire because of a much harsher regulatory environment and its popularity seems to have fallen a lot. I can’t remember where I saw it but apparently, the proportion of people in the U.S. who smokes cigarettes have never been lower (at only 14.7% or so). So it appears that smoking is getting less popular in the developed world. I guess it all depends on Asia and SouthEast Asia now.

 

The GE End Game: Bataan Death March or Turnaround Play? (Aswath Damodaran)

The guy who wrote the book on valuation (literally) gives his take on GE. Nice brief history of GE and its fall from grace. Also, a stab at valuing the company right now.

 

All Weather Portfolio for Singaporeans (Financial Horse)

Conceptually interesting but for the person who wrote to FH, I think this portfolio won’t help. In my opinion, the person who wrote for advice has an earning or spending problem. Investing in a low volatility portfolio is probably going to address the issue of a low wealth base.

Also, FH needs to backtest this in order to make the recommendation worthwhile.

img_20181108_204838

Who can resist those cute, kitty eyes?

 

Lately, when I feed my cat in the morning, he’s been displaying ‘hyperbolic discounting’.

Hyperbolic-what?

Hyperbolic discounting is what economists call the concept of valuing the present much more than the future.

It explains why people choose to light up a cigarette even if they know that it increases their chance of getting lung cancer or why some people choose to have that extra helping of butter pudding even though it could lead to all the costly downsides of obesity.

My Cat and his Food

So, when we feed our cat his breakfast which consists of one can of tinned food (usually chicken), we usually top up his timed feeder with dry food as well. Funny thing about him is that prefers his dry food to his tinned food. In my mind, it’s like preferring bread to meat.

It’s weird but hey, that’s our cat for you.

Anyway, lately, he’s begun to pause when I start to top up his feeder and to get him to eat, I add some dry food to his dish of tinned chicken.

What he should know is that the sprinkling of dry food that I add to his dish comes from the dry food that goes into the feeder. In order words, my cat is consuming some of his future food in the present.

But it all makes sense

Actually, if you were my cat, discounting the future heavily should make sense. After all, his timed feeder goes off a few hours after breakfast. In cat terms, that is probably an eternity.

More importantly, there’s no compounded interest from leaving the food for later. Five pieces of dry food now are still going to be five pieces of dry food later. So why bother waiting till later?

Of course, he also does it because unlike my wife, he knows he can bully me to do it.

 

Light selection this week because I was reading the very good Atomic Habits by James Clear as well as a few articles on value traps in stock selection (more on these in the weeks to come).

books on bookshelves

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November Macro Update: New Employment Among Highest Since 2000 (The Fat Pitch)

A collection of statistics on the U.S. economic situation. Key points being that the U.S. economy is still going strong and therefore we can look forward to more rate hikes in the not-so-near future. The Fed didn’t raise rates in November but they are still expected to raise rates once more in December and three times next year.

Anyway, the money shot from this link is (emphasis mine):

Equity prices typically fall ahead of the next recession, but the macro indictors highlighted above weaken even earlier and help distinguish a 10% correction from an oncoming bear market. On balance, these indicators are not hinting at an imminent recession; new home sales is the only potential warning flag (its most recent peak was 11 months ago) but it has the longest lead time to the next recession of all the indicators (a recent post on this is here).

As Chuck Prince, former CEO of Citigroup famously said, ““When the music stops, in terms of liquidity, things will be complicated. But as long as the music is playing, you’ve got to get up and dance. We’re still dancing.”

I guess the party’s still going strong in the U.S.

 

The New Three-Legged Retirement Stool: You, You, And You (Financial Samurai)

U.S. context but still very applicable to Singaporeans.

There used to be a lot more levers you could count on for retirement in Singapore. All civil servants used to have pensions (an auntie who’s in her late 60s was in the last batch that qualified for pensions).

Right now, I would say that Singaporeans have to rely a lot more on themselves. CPF is a decent system IF you have any money left in there after paying for your home.

If you have a big mortgage that is being paid off over the next 25-30 years, then you must hope for either (a) an increase in your pay and/or (b) an increase in home prices. That way, the burden of housing will decrease and there will be an option to cash in your home equity in your retirement years.

There is one more lever for some Singaporeans: hope that you inherit enough from your parents. For people in my students’ generation, this will be an increasingly attractive proposition as the demographics will be in their favour. Of course, this is provided there’s anything left after their parents spend on healthcare.

 

So what, we retired at the peak of the bull market? Here are seven reasons why we’re not yet worried… (Early Retirement Now)

A good take on sequence risk and it’s always good to point out that most people end up retiring at the top of the cycle. Subsequent drops in the market can cause a (temporary) drop in wealth and this may affect your standard of living in retirement.

What to do about it? Go on to the link to find out.

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So check this out.

CNBC reported that Southern California suffers its worst housing slump in over a decade with home sales and prices much lower than the year before and historical norms. I’m not too surprised that prices are much lower than recent history because you have to remember that the housing boom of the first decade of 2000 caused prices to be inflated.

From the article, what’s more worrisome is this (emphasis mine):

LePage noted that while the median sale price was up 3.6 percent year over year in September, the principal and interest mortgage payment on the median-priced home was up 14.2 percent because mortgage rates increased about 0.8 percentage point over that period.

It appears that interest rate hikes are beginning to have an impact on the housing market in the U.S.

 

Mortgages in Singapore will get more expensive

In Singapore, things are still pretty ok. I haven’t heard much about homeowners complaining about the interest on their mortgage.* Most homeowners in Singapore are on some form of 25 to 30-year loan with floating rates so interest rate hikes in the U.S. will definitely hit home at some point.

The reason why it hasn’t hit home is probably due to some combination of the fact that we’ve allowed the U.S. dollar to appreciate against the Singapore Dollar (the USD has gone from about 1.31 since the beginning of the year to about 1.38) and the fact that regional currencies (like the IDR) are doing worse than us**.

If the SGD moves in line with the USD, we’ll kill our trade with Indonesia but if we don’t allow a full adjustment of the exchange rates, we’ll have to run our stash of USD in our reserves down. I suspect this is the middle of the road scenario that MAS prefers unless interest rate hikes in the U.S. start to pick up even more. When that happens, we’ll have less choice but to have rates in Singapore follow the path of U.S. interest rates a little more closely. If you want to understand the mechanism, I have a post on that here.

Back to interest rates, our 10-year Singapore Govt Bond yields have been moving up which is great news for the many mom-and-pop investors that love the Singapore Savings Bonds (SSB) but from the yields, you can also see that short-term yields are heading north (see the chart in the post).

 

Back-of-the-envelope Calculations

I’ve said it before. Singaporeans are obsessed with property.

Recently, two close friends of mine bought new properties for their own stay. A reasonable guess is that one of them took a loan of $1m and the other, a loan of $1.5m. This means that a reasonable estimate of their mortgage payments (assuming it’s a 30-year, 2% p.a. loan) comes up to $3,696 and $5,544 per month respectively.

Just picture that. The median household income in Singapore is $9,026 so obviously, my friends are doing much better than most people.

Both their spouses work (albeit one less than the other) but even so, to service the loans from their CPF contributions alone mean that their household monthly incomes must be $16,069.57 and $24,104.34 respectively. That’s certainly possible for two adults working white-collar jobs close to the peak of their careers. However, if their incomes are any less than those numbers, then they will be servicing a decent amount of the loan using cash.

My worry for them is that it doesn’t leave any room for bad luck or errors.

For the next 30 years, they will essentially have to hope that the family doesn’t experience any shortfall in income due to loss of jobs. It will also mean that they have to find a job that either pays as well or better in the event their current work environment is no longer as fulfilling as it once was.

Looking further down the road, if they use their CPF-OA to service the mortgage, then I hope they are putting some of their cash aside for life after work. If they are using cash out of pocket to service some of the loans, then life after retirement becomes a lot harder.

In any case, what my friends have done is ensure that for the next 30 years, they have to play a very strong offensive game. They have to continue to work as hard as they have or even more to find other sources of income.

Oh yes, and they have to hope that interest rates don’t go up much.

 

It all comes down to rate hikes in the U.S.

Which way the markets are going to move will depend heavily on future rate hikes. I’m pretty sure we haven’t seen the end of rate hikes because the U.S. economy has been reporting strong numbers on the employment front. That’s also what the markets seem to expect and the Fed could even throw everyone off by hiking more than expected.

The point is, I’m quite sure I’m not alone when I say that no one is expecting interest rates to get lower in the near future. If anything, we need to expect that interest rates will go up. And if you’re not comfortable seeing the interest rates on your mortgage go up at least a percentage point, then I guess you’re in trouble, my friend.

 

Notes:

*This would apply more to investors that own private property in Singapore. HDB flat owners have the choice of taking the loan from HDB directly which pegs the interest on the loan to the CPF rate + 0.1%. I don’t think CPF rates will move up and cause more pain to flat owners with a mortgage.

**Against the USD, the IDR has depreciated more than it has against the SGD.