Time to play THE GAME (1)

The CPF annuities article is a sidetrack as this is something I felt quite strongly about. Public policies should always be reviewed and evaluated so as to know that they are really able to stand up to the initial test of public response.

Well, recently I met up with some of my friends, some of whom had already graduated from university and started working for a year or so. Somehow, our discussion came into the topic of savings. What caught my concern was they mentioned that after a year or so of work, they had not really stashed up much savings. Now, my aim here is not to scorn at others but really, one of the reason for that could be the obligation to repay their study loan incurred for tertiary education. That works out to take approximately 4 to 5 years for an average person to repay his/her study loan. Considering that the common starting pay among fresh graduates is not very high, they might still have bank accounts savings at rather low levels, after working for 4 to 5 years.
[The above estimation is based on for the majority of students, who might not be from extremely well-off families, which can put them to studies without them taking up a loan.]

So now, we have people who might be about 26, 28 years of age and having nothing much to their name, except for a college degree. As time comes, they may decide to settle down, buy a house, and... They are saddled with another new loan (again), a mortgage loan!! This time, this loan is bigger than ever, bigger than their study loan. TA DA!!!!! Here we have, an average working adult, ensnared in debt, working hard trying to repay their debt. This housing loan may well take even more years to clear off.

I am not trying to say, strictly not to incur any debts at all. The current system of credit and loan enables people to immensely increase their purchase power. This plays an important role in expanding the economy and money supply. Imagine, that without the system of credit and loan, it would take ages for a person just to save and pay for a house [but come to think of it, without the availability of loan, prices of houses would not have risen to this value too?].

Asset	Liability
current valuation of 'your' house	outstanding amount left for the loan

In accounting terms

Yes, in accounting terms, 'your' house could be an ASSET, if the "current valuation of 'your' house" is higher than the "outstanding amount left for the loan". The point here could be, not to incur home mortgages too big that the interest payment alone would be unbearable, not to mention repayment of the principal sum. It is important to know how much of your monthly loan servicing goes to paying interest to your bank, and how much goes to repaying the principal sum. For many, a home loan might be a very big and long term commitment. So it is essential to consider carefully and work out the fine details.

I feel a compelling need to tackle the following issue. In accounting terms, the house is an asset… However, a personal house is highly illiquid, i.e. it takes quite some time for the whole procedure of sale, and everybody needs a shelter above their head. Would one readily sell their house and claim the cash proceeds as their asset, ending up without a shelter above their head? In addition, your abode also takes money out of your pocket every month for interest payment. Some can claim that houses always rise in value. Home values may rise over the long term (really long term, measured by the decades).

- But, can anyone guarantee that within the time frame of every person buying then selling the house, the value of the house will rise?

- What if a person bought a house during a house-buying frenzy at a very high price, then when the frenzy subsides, only to find that the price drops?

- How long will it take to come back up to its previous peak price?

- What about heavy interest payment while waiting for the price to rebound? (Opportunity cost)