If I had a dollar for each time I’m asked the golden question “is it the right time to buy?”, I’d have accumulated a tidy sum by now.
Similarly, if I were blessed with such prophetic vision, I’d probably be dictating this blog post to a personal assistant whilst sipping cocktails on some idyllic island resort in the Caribbean.
The thing is, a property bubble will mean very different things to different people, so it’s not so much a question of where the property market is headed (which nobody will be able to tell you will absolute certainty), but where are YOU headed?
The Home Buyer
So much has been said about speculators who flipped properties they could ill-afford for fast profits in the heady days of 2007, but what of the other form of property market speculators that aren’t normally recognised as speculators – those that hold off their home purchases indefinitely in the hopes of a property market crash? Is it wise to hold off getting a permanent roof over ones head in the vague hopes of buying in “cheap”?
Teh Hooi Ling’s article “Property bubble? Read the numbers.” in this weekend’s Business Times shared some compelling statistics that further convince me it’s a risky gamble to be taking on your own home. For one, based on one-year interbank rates less official inflation figures, Ms Teh found that the real interest rate today is minus 4.6 per cent. What does this mean for a bubble hunter?
If you’re renting a home while waiting to buy into the property market, you’ll typically be paying about 3-4 per cent of the market value of the property in annual rent. Rental cost, combined with inflation eating away at your savings, would work out to be about 7.6-8.6 per cent. Does it really make sense to take on an absolutely certain 7-plus per cent drop in value on your cash assets each year, just to hold out for a potential property market crash of which you can confirm neither the date nor the magnitude of the drop?
Instead of grappling with pure postulation and telling yourself that you’re going to buy in “when the property market crashes”, have a long hard look at your portofolio as it stands today, and how much you want/need to have in 20-30 years time. Then do an honest assessment of whether you can realistically achieve that target at your current projected earnings and investment returns.
For us, we have a target passive income that we intend to achieve through a mixture of rent, dividends and interest. In order to reach our target passive income, we can’t rely on simply saving up to acquire income-yielding assets along the way, we need to snowball our capital through strategic trades, liquidating certain investments to crystalise capital gains once yields dip and more attractive investment vehicles present themselves.
Another fast-track strategy that some self-styled gurus propose is to take out equity loans on your existing properties to finance down payments for your next property purchase, but personally I find this a little too aggressive to stomach at present. It can work well in the right situations and circumstances, but can be catastrophic if and when things start to unwind. More on this another time.
If you still carry hopes of a property market crash, by all means carry on if you can afford to stay out of the property market for the next two years. As Ms Teh pointed out in her article, interest rates would have to rise to 4.5% per annum before real estate investors with an 80 per cent loan would start suffering negative cash flow based on current rental yields. (That is, for their monthly loan installments to start exceeding their monthly rental income.) For a 60 per cent financed asset (which is more likely the norm for investment properties now), the threshold interest rate would be about 5.6% per annum. I certainly don’t see interest rates spiking to that level in the near future.