More can “afford” S$1M homes now, but should they really be buying?

Read this on Singapore Business Review this morning. I think it can be highly dangerous to adopt this idea of “affordability” and could land  novice investors in hot soup when markets head south or interest rates begin to climb.

Please don’t ever gauge affordability on current mortgage interest rates. It was not so long ago that lending rates were at 3.5-5% pa. The low rates we enjoy today are more anomaly than the norm, in the long run.

Project how much you can afford to borrow based on a more conservative interest rate of 3.45%pa rather than today’s 1-2%pa.

You need to buffer yourself against interest rates rising (though I expect rates to remain low till at least 2014) and also rental returns dropping in the event of a economic slowdown.

I’ll do up an example to illustrate when I have the time, but meanwhile read below with caution!

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