Can You be “House Poor”? (How to Make Sure It Never Happens to You)

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In a cramped city-state with limited land, it’s not surprising that many see property ownership as the path to wealth (or at least security). Add this to our expensive housing market plus the traditional mindset that property is a “sure” investment, and you have an emerging phenomenon – that of the “house poor”.

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In this article, we will dive into the world of the “house poor” – from how they likely got there, the challenges they face, and more importantly, how you can avoid falling for this trap. Let’s begin by looking at the definition of being “house poor”.

 

What Does It Mean to be “House Poor”?

In a nutshell, a house-poor person is someone who spends too much of their income on their house. This isn’t just limited to the home loan instalments, but also things like property taxes, utilities, and maintenance. A house-poor person may be the owner of a nice asset, but they may struggle on a month-to-month basis to meet their obligations. It is also known as “house rich, cash poor”.

The consequences of being house poor are obvious. A house-poor person:

  • Has less to spend on discretionary items, which may limit their day-to-day enjoyment and happiness
  • Might have trouble building up their emergency funds, investment portfolio, or other savings (such as for their children’s education)
  • This makes them less resilient against sudden downturns – a medical emergency, for example, might result in them having to borrow money

Over the long term, being house poor can have drastic consequences. Just read this Straits Times article about retirees who live in multi-million-dollar properties but are forced to eating plain bread and rice for meals.

How does a person find themselves in that position?

 

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The Journey to Becoming “House Poor”

There is a prevailing view that property of any kind is an asset. And since owning assets are a good thing, this can lead to a kind of thinking where people try to own the largest asset they can afford.

But they forget that property is a different kind of asset. Unlike other assets such as stocks or cash, properties require money for upkeep. Although you can both obtain capital gains and generate income from properties, you must also put money in for instalments, taxes, and maintenance.

Related article: What Does Property Annual Value Mean And How Do You Check Yours?

Further, the only way to realise a return from your property is to either sell it (capital gains) or rent it out (income generation). But the average Singaporean is occupying their own unit, meaning income generation is typically out of the picture. Capital gains is possible (and likely), but that usually involves selling and upgrading – and a new mortgage, putting them in a similar situation. Home equity loans are also an option, but they are not a long-term solution.

With income generation largely out of the picture, it is easy to see how someone can easily fall into the “house poor” trap. They forget that the only way they can realise any returns on their asset is through sale or rental – difficult to do if they still want to live there – and end up overreaching when buying property.

We don’t want that to happen to you. So here’s what you can do to avoid falling into the trap.

 

3 Questions to Ask Yourself to Avoid Becoming “House Poor”

An ounce of prevention is worth a pound of cure. Before committing to a property, make sure you’ve considered each of these questions in detail.

1. What are my total housing costs compared to my net after-tax income?

Yes, the MAS mandates that your total debts cannot exceed 60% of your income. But if your home loan instalments will consume close to 60% of your gross monthly income (assuming no other loans), you are firmly on the path to becoming house poor.

Instead, what you should do is to estimate the total housing costs – which also include maintenance, taxes, and utilities – and compare it to your net, after-tax income. 

Now, there are no hard and fast rules about what that percentage should be. It all depends on your personal situation. If you are more conservative, you might use 20—30%. If you think you have more leeway, you can go higher – perhaps up to 50%. But the idea here is to compare net income against total housing costs for a more precise picture.

Pro Tip: Use our Mortgage Affordability Calculator to make sure you never bite off more than you can chew

2. How much cash will I have after paying the downpayment and other closing costs?

The biggest risk of being house poor comes from depleting your liquid cash savings. Therefore, ask yourself how much cash on hand you would have left after paying the minimum 5% cash downpayment plus other closing costs. Would you have to tap into your emergency fund? If the answer is yes, you might be aiming too high.

Now, your CPF funds are also available to help you cover your home loans and most of the downpayments. But as we’ve discussed, it may not be wise to use them given the opportunity costs

Also remember that, even after buying the property, you still want to grow your savings. So, when making your assessment of your post-purchase cash balance, don’t forget to also factor in how much you want to add to your savings and investments each month.

Related article: Margin of Safety: How Much Should You Buffer When Buying Property?

3. How does homeownership fit in with my financial goals?

This question is more qualitative than quantitative, but it is just as – if not even more – important. Many people buy a home almost on “autopilot”. They simply accept it as part of an invisible life script ingrained into them by family, friends, and society.

An intelligent property owner questions this script and considers it in the context of their larger financial goals. Some sub-questions to drill deeper are:

  • How do you envision your retirement life? 
  • Do you have a target retirement “nest egg” figure and/or a targeted monthly income you would like to receive in retirement?
  • How on track is your investment and savings to be able to achieve the above?

Remember that a home is probably the most expensive purchase you will ever make. And which property you choose to buy can greatly influence the answers to those questions. You don’t want to buy a property “just because”. Instead, spend the time to take a step back, evaluate your financial life plan as a whole, and see how and what type of property would best help you achieve this.

 

The Goal – Becoming “House Smart” Not “House Poor”

The house-poor person is so fixated on becoming a property owner that they don’t consider its full long-term implications.  We don’t want you to do that, and in this article, we have given you some guideposts to help you on your way to becoming “house smart”. That is where you understand how to properly fit a property into your overall financial life – instead of the other way around.

 

If you would like more detailed and personalised advice (or perhaps you think you may be house poor and are looking for a way out), we can help. Just fill out this short form and one of our expert Home Finance Advisors will get in touch. And for the best information on everything home finance-related, we invite you to browse through the rest of our Home Financing Guides.

 

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This article was written by Ian Lee, an ex-banker turned financial writer who hopes to use his financial background and writing skills to help raise people's financial literacy levels - a necessity in our modern world"

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