Some call them mental models. Some call it frames.
For me, it’s just a way of thinking about the world and the evolution of the situation.
I adopt mental models as a way to focus on the important levers – the key anchor points that will make a significant difference in any decision-making process.
In the context of Singapore’s property market, what worked for our parents’ generation will no longer work for us.
Here are 5 mental models to guide you in thinking about your next real estate move.
Mental model #1: Become the last sandwich generation
For some of us in Singapore, we find ourselves caught in the middle as we juggle careers, children and aging parents.
We are considered the sandwich generation as we discover how to prioritize competing needs and heavy responsibilities. Being a caregiver for 2 different generations can be taxing – both mentally and financially.
Although it is a difficult situation to live in, it can also be a powerful mental model because it can be used to galvanize, gather our resources and motivate us.
For some parents, it’s about making sure our kids never become the next sandwich generation.
Being fully resolved not to depend on our children for our own retirement will require us to become more strategic in building our own retirement savings and nest egg.
We can make the conscious and active decision to become the latest sandwich generation – by making quality decisions about our real estate choices and taking strategic action early.
Mental model #2: Your retirement is in your property
This brings us to the next mental model on retirement in Singapore.
We can say with certainty that the majority of Singaporeans will finance their first property with funds from their CPF OA.
Unless you are self-employed with limited CPF contributions, you are likely to withdraw a significant portion of your OA CPF and park it in your first home.
Like it or not, you are essentially borrowing from your retirement at a cost of 2.5% interest.
This does not include the cost of your home loan.
If you took out a home loan with an interest rate of 2%, that means your total opportunity costs increase to 4.5%.
If your property prices increase by 4.5% per year, you will essentially break even.
If your property prices stagnate, you will lose 4.5% per year.
If your property prices fall by 1% per year, you will lose 5.5% per year.
It’s important to be aware of this accumulation of interest accrued by the CPF – otherwise you risk losing track of how much of your retirement nest egg has been depleted.
You also need to be able to track the performance of your own property, so you know if its value is depreciating or increasing.
It doesn’t matter if it’s privately owned or an HDB, the same rules apply.
Unfortunately, most people only get this rude awakening when they decide to sell their home.
Find out if your property is “performing” and if it covers the “costs” of the loan you have taken out.
Mental model #3: ABSD is here to stay
ABSD is a form of cooling measurement that was first released in 2011 and became more punitive in 2013.
In 2013, you would only have to pay 7% ABSD for your second property as a citizen of Singapore.
In 2021, the ABSD rate was revised to 17%.
It is an excellent deterrent against real estate speculation.
It also prevents people from owning multiple properties.
It’s not worth paying that 17%, because that 17% could have been part of your real estate gains instead.
It means this: you only have one chance to get the best choice of property.
The most for your money.
Once your name is attached to a property, you are somewhat locked in until you decide to sell.
Since you are going to be investing a lot of money into your residence anyway, this means you really need to think about how to make full use of this chance.
Choose wisely and you essentially stay for free and earn money.
Make the wrong choice and you will pay for this mistake for years.
These are leveraged returns for you.
It can be very good or very bad.
Mental model #4: You don’t know what you don’t know
Being aware of our own limitations is essential to achieving our goals.
I have covered this in detail here on how humility is the best investment strategy and being aware of our shortcomings and blind spots is necessary to achieve an investment goal.
Although I have worked with various real estate agents over the past 7 years, I do not consider myself an expert in selecting the best property that will bring me the best returns.
Instead, I will be too focused on selecting a home that fits my family’s needs instead of considering future financial returns.
So someone – preferably an agent with proven track record, experience and expertise is needed to guide me on the pitfalls and issues that certain properties might be facing.
For example, a development with low transaction volumes becomes very difficult to sell – bank valuation is an issue as the most recent transaction may be from a few years ago.
And how do I know this?
It was only after an experienced agent shared this information with me.
So no matter how good I am at research, it can never beat the experience of someone who is out in the field every day – talking to buyers, sellers, renters and landlords.
Mental model #5: We will grow old
It could be morbid to think about it.
But I consider Effective Habit #2 by Stephen Covey which is “Begin with the end in mind” as a good form of orientation and reminder.
As we age, our choices become more limited.
Here are some of the things that could happen:
- our earning power is weakening
- our ability to take out loans becomes limited
- our physical bodies are failing
If you are 35, you can take out a loan for 30 years.
If you are 45, your loan term is only 20 years. It also means higher monthly repayments, which could affect your cash flow.
As Oliver Burkeman mentions in his book “Four Thousand Weeks: Time Management for Mother Mortals”: “…mortality makes it impossible to ignore the absurdity of living only for the future.
Where is the logic in constantly postponing fulfillment until a later time when, soon enough, there will be no “later” left? »
So don’t delay and don’t procrastinate.
We only have a short time to achieve our dreams and goals.
Do you want your dream home or your dream retirement lifestyle? Focus on the steps you need to take to get there with the time you have left.
(The title of the book “Four Thousand Weeks” – refers to the average lifespan that we humans have.)
In the long run, we are all dead.
Thinking about death is a form of memento mori and is a good mental exercise to clarify what is really important in life.
Financial numbers and serious analysis are all important, but to achieve balance in life, you need to consider what really matters in the end.
Doing our own research, figuring things out for ourselves, and making mistakes in our own financial journey is fine – as long as we learn something in the process.
But if the trip isn’t generating valuable new ideas or breakthroughs in your decision-making process, it might be time to talk to someone who has the experience, knowledge, and expertise to help you.
This year, inflation is expected to get worse. This basically means that our liquid assets degrade in value in real time.
The first-hand shock of seeing how much S$50 can get you in the supermarket or how much petrol prices have jumped is numbing at first.
But it should also spur you to action.
Real estate can be a good hedge against the rising wave of inflation.
Do you have questions about your own ownership options? Want to explore what is possible for you?
Send us a message and our team at Stacked will do their best to help you.