Updated: Jun 24, 2020
This is the common statement we often hear when sharing about real estate investment which can be a useful tool to grow your wealth. This is totally understandable in view of the current uncertainty of the world economy where financial institutions are beginning to be more stringent in approving loans to potential borrowers to finance the purchase of properties or to develop a project. The valuations of properties are also becoming more conservative to support their collateral to the financial institutions.
Central Banks in many countries are also beginning to be stricter in their lending policies as they want to curb speculation and also to prevent the real estate market overheating and eventually crashing, like the recent U.S. Credit Crunch Crisis in 2007.
For example, in Malaysia, the Loan to Value (“LTV”) or Margin of Finance (“MOF”) for any 3rd residential property or thereafter has already been reduced from 90% to 70% or lesser than present property value. In Singapore, the MOF even slashed the rate to 50% or lesser for a 2nd residential property. Moreover, assessments of the credit rating of borrowers are also based on their net income rather than gross income, as previously practised.
Often, even the initial launching property prices by developers cannot be met by the bank’s credit risk department as the requirements have now become more stringent.
Although generally the mortgage interest imposed by financiers in many countries are still relatively low compared to the inflation rate, many home buyers are unable or not willing to put down a huge sum of cash down payment as the MOF is offering much lower loans than expected. The purchasers also need to consider the potential renovation costs and move-in costs for which they have to prepare resources after they purchase the property.
Even sophisticated property investors are also having second thoughts as to whether it is feasible to put down such a huge sum in difference. Those who own luxury properties and have holding power are still not willing to sell their properties marginally lower than earlier expectations and hope that the prices will increase when the world economy becomes bullish again.
Those potential home buyers who are not urgent need to move into new homes are also holding back as they are hoping property prices will be reduced, especially property owners who do not have holding power when the financiers increase interest rates or when their overpriced properties are unable to be rented out or re-sold.
However, it is not all doom and gloom as some developers or real estate investors have come up with a lot of new creative and innovative strategies to sell or to invest even in these challenging times.
To be continued… How to see light in the dark?
There Is Always Two Sides To A Coin