General Household Inflation Hits +5.2% for Yr 2011

Singapore General Household Inflation Hits +5.2% for Year 2011.

This is when interest rate remains low. Saving at local banks interest rate is at 0.05%. In other words, money is loosing its value at 5.15% annually if it is to be placed in a bank.

A good explanation of the relationship between interest rate and inflation is shown in the link shown below.

Dividend in local equity pays between 2 to 6% annually, This is insufficient to cover inflation, given the risk involved in equity purchased.

This will encourage people to seek other alternate form of investment, eg property. With the interest rate going so low, money is chasing or being converted to other asssets.

Recent launch of property in Punggol Waterfront is seeing a 99 leasehold with average selling price of $1200psf, this means that a 800 sqft apartment (smaller than a 4 room HDB flat) will be selling at S$960,000. Assuming a couple has a household income of $10,000 per month and assuming that they have a total of $200,000 in CPF. They will need to borrow $760,000 if no cash outlay is used. Over 25 years loan, the couple will need to pay $30,400/year without interest or a monthly of $2535 in mortage. With interest, it will likely to be $3000/month. The couple take home pay will be around $8000/month less $3000/month on mortage, disposable income is $5000. This is on the assumption that the couple makes $10,000 per month. The couple will need to service the loan for the next 25 years, and hopefully there is no retrenchment along the way.

To make the property appreciate, the said unit at Punggol Waterfront will need to sell for say $1500 psf. The current psf of HDB flats in Punggol vincinity is only about $455 to $470 psf. This means that there is a lot of opportunity for HDB flats in Punggol to rise further. However, HDB will continue to build more flats especially in Sengkang and Punggol. Upside is limited unless there is another wave of foreigners becoming citizens.

The lower income segment of the population will continue to feel the heat in the inflation, especially for basic necessity such as food, utilities and transport.

http://plonkee.com/2007/11/27/how-do-interest-rates-affect-inflation