Monday, May 2, 2011

What your friendly property agent won't tell you

For a broker, "now" is always the best time to buy an asset he is brokering. For a stock broker, "now" is always the best time to buy stock and for a property agent "now" is always the best time to buy a property. But aren't the property prices are very high? "Buy now or they will get higher" your friendly agent will say. The reason must be obvious to you, a broker/agent only earns money when someone buys! And wealth management advises is not their business. It is you who needs to be careful while planning to buy a big ticket asset, especially if you are going into a long debt payment period like mortgage.

A couple of days ago I have read an article written by a property agent telling "5 reasons to buy Singapore property now". One of them was that if you buy a 1 million dollar condo, mortgage payments would be 3,000 SGD now and you can rent the condo for 4500 SGD. So you can actually make money by purchasing a house! Well yes but one important dimension is missing from his equation. Time!

There are two very basic economic rules people never fail to forget even if they look very obvious:

1) If something cannot happen, it will not happen. For example can prices increase indefinitely? They cannot so there will not be an indefinite price increase. But people tend to say "this time different" and ignore this simple rule.

2) What goes up, must come down and what comes down, must go up. Interest went to record lows in the last few years thanks to efforts of FED to rescue US economy by destroying US dollar. It will go up. Rents and prices sharply went up, they will go down. Simple. But you never fail to find people telling themselves and others that this time, it is different.
Buying property is a long term investment yet we calculate affordability based on our current financial situation.  If interest rates are low on a relative basis, they can and probably will increase over time.  These cycles can last for months, even years giving the novice investor the impression that he or she can easily afford to carry the mortgage or even add more property to the portfolio.  Understand that rates may climb and hedge yourself against rising interest rates by diligently paying off debt during low interest rate cycles; when rates climb to 5%, 6%, 7% and above, you will be happy you did.
I am not trying to tell that do not buy now. I am just telling that make your plans by following these 2 basic rules and ask yourself these questions: Can you still effort to pay when what went up comes down and what came down goes up? Are you making your decisions based on an assumption that what cannot happen will happen?

The property agent above makes his calculations based on current ultra low 3-month SIBOR rates. He does not warn you that the equation can turn upside down when rents fall and rates goes up to long term averages of 4%. Can you also weather higher rates which are very likely after a sovereign debt crisis in West?

Ask yourself these questions and do your homework, no one will do it for you. Do not let kiasu to manage your investment decisions.

This blog article is to provide general information only and should not be treated as an invitation to buy or sell any property or as sales material.  Users of this report should consider this report as a one of the many factors in making their investment decision. Users should make reference to other sources of information and specific investment advice to obtain a more objective view of the property market. Asia Singapore shall not be responsible for losses suffered.

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