Monday, September 23, 2013

Real Estate Bubble?

There has been quite a lot of talk of a real estate bubble in the brew in Asia for some time, but it has never come to me that it would be this heuristic until I read this blog post from a fellow Singaporean investor.

To my limited knowledge, I only knew that we could at best borrow 100% of the value of the property from any financial institution.  Years ago, a Malaysian property expert once told a small group of people that the banks are your best friends, as they will finance your debt, you only need to pay 5% of the value of a property, and the bank will take care of the rest.

At 120% loan ratio, of course people can buy a lot more properties and they will do very well under a very low interest rate environment.  What if the rates go up?  What if there are too many properties available for rent, everyone is a owner and everyone is looking for a tenant?

There are arguments to say that if there is another financial crisis in Asia, then anyway the interest rate will continue to remain low, and some governments will continue to print more paper money to devalue their currency.  In that case, real estate will only become more expensive in local currency terms, and you can preserve the purchasing power of your hard earn money.  It is much better than putting your money in the bank to depreciate every single day.  The fallacy of such an argument is that under that scenario, would you still be able to find a tenant who will pay a rent that can cover your mortgage?  In the worst case scenario, can the rent cover both the mortgage and your & your family's living expenses?  

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