Brother, Where’s My Car?

It seems that many initiatives were rolled out in the Singapore budget speech 2013. Most of the items were mostly for the lower or higher income group with little touching the lives of the bulk of the population, the middles class. Hence, most of the issues were over shadowed by one that strikes the hearts of the majority of people belonging in the sandwich class. And that is the new measures on car financing, indirectly affecting car ownership.

The new rule is for a maximum financing of 60%, i.e. down payment of 40% required, and maximum loan tenure of 5 years. (Unfortunately, I just read that it does not apply to unlicensed credit firms that can are legally allowed to work with car dealers to provide financing.)

The common complain is on the analysis of how much down payment and loan installment to pay. Here is how it goes: A reasonable price of a common new salon car, $120,000. Down payment = $120,000 * 40% = $48,000 (Close to $50,000). Monthly loan installment over 5 years without factoring interest yet = $120,000 * 60% / (5 * 12) = $1,200. And so the story on affordability for car ownership is that one has to have a ready cash sum of close to $50,000 and be prepared to spend about $3,000 every month on car usage and installments (assuming $1,500+ of usage, factoring in petrol, parking, maintenance, road tax and insurance and some rounding up due to loan interest). So, can the average middle class have their lifestyle wants (some may say it is a need) expectation of owning a car fulfill?

I cannot argue with maths and the sums are in order. However, what I am wondering was what has changed fundamentally before and after the budget announcement? By fundamental, I mean the price of the car, the $120,000 in the example. So, are we saying that when loans were flexible, cars were affordable and now with loan tightening measures, cars are no longer affordable?

In my opinion, the crux of the issue is why cars are so expensive in the first place. In fact, with more flexible loans, cars are even more expensive due to factoring in of interest. The new budget measures are just a wake up call for people to make more prudent financial decisions. If one cannot afford the cost of the car, regardless the terms of the loan package, do not over stretch oneself. It is similar to purchasing smaller items, if one cannot afford that, does it make sense to buy on credit and pay over the next few years on revolving credit with high interest rates?

Back to big purchases, it is similar to making financial decision on selecting a property. If one cannot afford that Condo/Exec Condo or 5 room flat, there are options for 4 room or even 3 room flats. Just because the loan can be stretched to 30 years or more with only 10% down payment, it does not make the place any more affordable for the same selling price. However, point to note, before people flame on this, one major difference to take into consideration is that a property is an asset that has the potential for appreciation, but a car is almost definitely a depreciating liability (not an asset, considering the on going requirement for maintenance whether it is used or not). My point is more on financial prudence when making major purchases.

Again, keeping political issues aside, on WHY Singapore has reached the current levels of affordability of car ownership, the situation is as such. Hence, it is important not to focus on the loan financing but to focus on ones lifestyle needs and affordability. As the financial freedom concept goes, to be financially free, one should not have any debt and passive income exceeds lifestyle expenses. Therefore being debt free means any lifestyle requirement as far as possible should not be financed with debt.

Read more...

The Magic 6.9 Million

Happy Lunar New Year!

With the festive visiting throughout Chinese New Year, the hottest topic was about the “passing motion on white paper”. It is without a doubt something close to the heart of every Singaporean. It is something everyone is feeling the effects of: roads are congested, trains are packed, buses overcrowded and nothing short of a miracle to walk around without knocking into anyone.

Well, let’s not get into politics further. Airing unhappiness and voting one small SMC opposition into power is not going to change everything overnight. Let’s face it, 6.9 million is going to be a reality whether one likes it or not. Instead of complaining, let’s take advantage of the opportunity that is presented.

There is only so much land in Singapore. How is she expected to house these 6.9 million people? As we all know simple economics, supply is limited but demand is surging – what will happen? Prices will continue to climb up. This is an almost risk free assurance from the government that property prices in Singapore will only go up. So, you are either holding on to some of them for capital appreciation or waiting to lose out by getting them at a higher price in future.

No matter what, these 6.9 million people will require the basic necessities. As already mentioned, the transport network is at its brim. What does that mean? It means more profits for the same amount of operation cost - more passengers per trip. The government does not want to nationalize these operators and allows everyone to invest in them. Instead of complaining that their profits been increasing year on year while fares are also moving up, invest in them and enjoy the profits as well.

Communication is also essential and there are only the three main operators here. Do they need to build significantly more infrastructure like base stations to cope with the additional people? Probably not much more, again, it translates to more usage and hence more profits with little increase in cost.

Compared to countries that may have stagnant population growth like Japan, these industries will suffer from renewal cost without additional users. Hence, this projection has effectively given the endorsement of reducing the risk for these industries. So, just sharing my thoughts on where my ang pao money is going for this year of the Black Water Snake.

Cheers! Huat ah!

Read more...

The House Always Wins

A new year represents new beginnings and new hope. It is also a time to reflect on past lessons, to look forward wiser.

Recently, an article about the interview with Warren Buffett caught my attention and his comment about transaction charges particularly left an impression.

The logic is simple. Transaction based Companies are in the business to of making revenue by the number of transactions made. Similar to insurance sales, the prestigious Million Dollar Round Table (MDRT) is based on the number of new business sales brought in. Similar also to property agents whose main revenue is made by transactions closed and gets nothing if no deal is made. Hence, how can their emphasis be on getting the highest price for sellers and lowest price for buyers? Brokers are paid based on the number of trades carried out and not based on the net asset value the clients are holding.

This represents a conflict of interest between “advisers” and client. Investment banking firms provide the advice to keep trading, buying and selling, generating a lot of transactions and it is reflected by the amount of liquidity in the market. The quote I like from Buffett was that it was harder to purchase 10% of land in Nebraska over 3 years than it is to purchase 10% of IBM over 3 months. I think this applies to Singapore as well.

It does not help that there is so much proliferation of technical trading. Encouraging many to trade for a living, doing short term flipping based on indicators to generate an income. This is normal based on the human instinct of greed, hoping to make a quick profit with little or no effort, simply by following magic indicators that seem to miraculously predict the future based on past performance alone as illustrated by the gurus' numerous past results examples.

However, the overall winners are the dealers. As the saying goes, the house always wins, which is why the bookie industry is as lucrative as ever. Imagine a simple coin flipping game that is absolutely fair, 50% chances of either head or tail. However, the catch is if you wish to join in the game, you need to pay a 10% transaction charge. The long term probability is 0.5*(-110%) + 0.5*(90%) or even ignoring the complicated formula, a net loss of 10%. The losers compensate the winners and the winners compensate the house. Everyone loses except for the house.

When some of these brokers give advice, I sometimes feel like they are giving advice equivalent to the casino showing the trends of opening big or small in the dice games. You feel powerful thinking you have the knowledge and edge for winning. Right, it has opened big ten times; it will surely open big now. If only gambling and trading were that simple.

This is also timely to mention, having read that MAS FAIR review has concluded a "no go" for fee based advisory after so much hype. So, it is back to commission and the conflict remains. Talking big about a major revamp, causing much up roar in the whole industry for a year and conclude that little is going to change. Well, the official statement is yet to be seen, however, I am not too optimistic on its outcome to benefit the customer having confirm that fee based is out of the picture.

Happy New Year! Huat Ah!

Read more...