The property market has gone up too high, due to low interest rate. When interest rate increases in the future after quantitative easing is over, it will cause a drop in the property market. The impact is more severe in a place like Singapore, where property are financed on short term interest rate. When interest rate rises, the impact will be severe.
Let me quote a simple example. Suppose the buyer pays for a property on a 20 year loan at an interest rate of 2% per annum. With a monthly repayment of $5,000, the borrower can afford a property worth $981,000. When interest rate increases to 4%, which is a more realistic interest rate (given that inflation is now 2% to 3%), the monthly repayment will increase by 17%. Some borrowers cannot meet the higher payment, so they have to sell the property. The next buyer can afford to buy the property at 17% lower. So, the property market will drop by 17% due to the increase in interest rate.
What can you do now - to prevent this financial disaster? You should have a 20% buffer. If you can afford a monthly payment of $5,000, buy a property that requires payment of only $4,000. The additional $1,000 is to meet higher repayment in the future.
You may not be able to get the property if you pay 20% less. In that case, it is better to wait for the property market to correct. Meanwhile, you can rent a property. Even if the rental is high, you are paying for it one year at a time. You can wait for two or three years, to see the correction in the market. It will come!
Tan Kin Lian
Let me quote a simple example. Suppose the buyer pays for a property on a 20 year loan at an interest rate of 2% per annum. With a monthly repayment of $5,000, the borrower can afford a property worth $981,000. When interest rate increases to 4%, which is a more realistic interest rate (given that inflation is now 2% to 3%), the monthly repayment will increase by 17%. Some borrowers cannot meet the higher payment, so they have to sell the property. The next buyer can afford to buy the property at 17% lower. So, the property market will drop by 17% due to the increase in interest rate.
What can you do now - to prevent this financial disaster? You should have a 20% buffer. If you can afford a monthly payment of $5,000, buy a property that requires payment of only $4,000. The additional $1,000 is to meet higher repayment in the future.
You may not be able to get the property if you pay 20% less. In that case, it is better to wait for the property market to correct. Meanwhile, you can rent a property. Even if the rental is high, you are paying for it one year at a time. You can wait for two or three years, to see the correction in the market. It will come!
Tan Kin Lian
3 comments:
Very sensible advice :)
It is nothing to do with low or high interest rates.
An economy that involves the use of interest rates is bound to doom to failure.
Check the Islamic financial system, no interest rates are used and you don't hear their economy in a state of uncertainty!!!
The Western economic system of using interest rates will ultimately FAILED.
I think the market is ultimately swayed by sentiments. The interest rates are low and will continue to be low for a period of time. If its status quo and nothing good or bad happens to the world economy, I dont see anyway the property market sentiments in Singapore are going to be dented. People are still going to be willing to invest in property vs putting it in volatile stocks or a bank account.
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