Wages growth rate supporting housing growth rate?

On and off I did provide commentary on the rising property prices (when they were rising). The main point is that there is a prevalent ‘analysis’ by the average folks that prices of property in land scarce Singapore should go up and its the main way to build wealth. This works well because, in this world, we tolerate inflation much better than deflation.

The main crux of why I find the growth rate of the recent times challenging is that, HDB, BTO or Resale, have to remain within the affordable range. By that we mean standard metrics such as price to annual income, price to rent, mortgage below the MSR.

For a property to remain as a good retirement asset, you need people to be able to buy from you. For people to buy from you, the average wage have to rise. That have been the latest debate.

15HWW wrote in his latest post Asset Enhancement & Its Negative Consequences on how this asset enhancement have made the kids next generation in a better position than those who failed to take advantage of it:

Therefore, it’s not surprising to see asset prices rising at more than 7% since it’s in line with growth in median wages and GDP. With leverage and historical low inflation rates, many Singaporeans’ wealth increased tremendously just by owning their home.

However, as our economy matures, median wages and GDP have both started to slow in the past 2 decades, and especially so in recent years. Coupled with tighter emigration policies, it’s unrealistic to expect asset prices to increase at rates like 7% in the forseeable future.

I deduced this link on my own, but this is more of a common sense analysis, which sometimes can be very wrong because I may not know a subject well. The link between wages and housing prices can’t be far off, but I always wonder whether there are other factors that changes this equation.

Business Times published this article today talking about banks seen a rise in non performing home loans, as a result of problems with high end properties. What I find more interesting is what Mr Tharman Shanmugaratnam, the finance minister and deputy prime minister, said:

“If we do not get a meaningful reversal after each upswing, property prices will run ahead of the growth of household incomes over the long term, which we should avoid.”

Its one thing to know on a personal finance level, whether average housing is affordable. It is another to determine the signals that the government looks into to observe if housing prices are running ahead. This seems to point that, in order for housing to grow well for your retirement and to be able to take advantage of it, wages have to rise in tandem with housing prices.

Housing prices past 34 years have been rising at 7% per annum, food prices, wages and the rest is around 3-4%.  I don’t think wages are slowing down. I think wages are slowing down for those that ‘fail in society’. By this, I meant the folks that didn’t take advantage of the education system to carve a good career later on, or the less enterprising folks who do not work hard to chase after the business opportunities out there.

Housing prices can rise at current rate, when the economy does well, because they will drive the demand for people with the right expertise. Mr 15HWW mentions that in a matured economy, the growth seems to be slowing down.  It remains to be seen if this country can generate a second economy miracle.

If they do, I am sure there are more opportunities to build wealth other than housing.

Knowing that you have enough wealth. Staying in the game instead of taking excessive risks.

Knowing that you have enough wealth. Staying in the game instead of taking excessive risks. 1734195

There is a difference between a plan to  building up your wealth and there is another plan to staying wealthy. The key is to know how much is enough.

If you have $50k trying to build up to $500k to be ready for retirement or financial independence,  you tend to take more risks because you have a longer time horizon. You are probably 25 years old thinking  of having wealth to be independent at 50 years old. That’s 25 years old.

You could probably have a 70% equity versus 30% bond allocation. Stocks tend to be very volatile in that at certain points, the equity portion can go down 40-70%. That may be ok (if you have the stomach to take that!) if you are somewhere far from needing the wealth to provide cash flow for financial independence/retirement.

However, suppose you are at 48 years old.  A 70% equity allocation will cause your overall portfolio to take a severe dip. That is ok, if you are not dipping in to get cash flow for expenses.

However, if you draw it down its a double whammy your portfolio loses 30-40% AND  you cut it further by drawing down a percentage of the assets for your expenses. You have less assets to grow back to the previous size or even to an adequate size. This is known as sequence of return risk.

If you are high net worth

This situation gets more pronounced if you are rich with say 15 mil in assets. You can adequately cover your expenses and even more.

Yet, we tend to be very risk seeking in the way we deploy our capital. We always want to grow more.

As a retiree you can put up your full allocation in an ETF that mirrors the NASDAQ index, which are primarily tech and biotech companies. These are higher risk. Or you could put up your full allocation in Gold stocks or Gold ETF.

This portfolio is very speculative, and if you have a good crystal ball you will do ok.

However, if you don’t what happens when they move down 50% and you realize your withdrawal amount is going to take a chunk that will satisfy your expenses but will leave an even smaller asset size to continue to grow.

In both the rich and not so rich scenario, it gets worse if you realize you do not have the stomach for such volatility.

You sell out before the market can recover. This happens a lot.

A lower weightage to equity for preservation

When it comes to preserving wealth, it may make more sense to understand your risk tolerance.

Most of all, it may be more important to know that at 15 mil, you have enough. You do not need to take that exceptional risk.

Larry Swedoe sets up his portfolio with 70% bonds and 30% equity, with the equity deployed in USA small caps, international and emerging markets value. These have historically statistical evidence to outperform large cap by 3-4%.

Setting up this way ensures that even with the higher volatility, a 70% decline would still leave the overall portfolio down by 21%. A wise planner would be able to focus you on structuring a portfolio taking into consideration the behavioural tendency.

You still be able to sleep at night.

Sometimes the name of the game is not to beat your neighbour or the friends you are interacting with.

It is knowing how much you need, what is the way to get there and staying in that game. What is the point of chasing a huge return, when you might sell off at the bottom because you didn’t know its going to be that bad.

A good planner would have been able to explain and help you with stuff in this area, so its important to find one.