When we have a credit card, we have ‘extra cash.’ Regardless of our salary, the credit card limit will usually be higher. Probably 2-3 times higher. In other words, instead of just being able to spend what we have, we could spend what we could have in the future. This was what our Bank Negara Malaysia Assistant Governor Nazrul Hisyam Mohd Noh said in 2018. “Forty-seven per cent of Malaysian youths have high credit card debts while 38 per cent have been identified as having personal loans.” (full article here)
Credit card may not be the only issue. Personal loans are and HOME LOANS are becoming a huge issue. Many home buyers, especially those who got persuaded to invest for fast returns were given ‘extra cash’ too. Let’s not talk about whether future prices will be as high as that predicted by the developer. Maybe it will be, maybe it will not be. Let’s not even look at whether banks’ own valuers were able to detect some of these overpriced properties or not. We assume the banks continue to lend to the buyers.
Let’s however talk about what happens if nearly everyone who bought into a property was given a 30% cash back. This will distort the property prices tremendously versus similar properties nearby or elsewhere. By the time the property is completed and everyone wants to sell, what do we think will happen? Well, at first everyone will try to sell higher than the LISTED price. In a slow market, this is unlikely to happen. After some time, some owners will think, ‘I can sell at 10% lower since the price I actually paid was 30% lower.’
Soon, nearly all the owners are now selling at 10% lower, some owners who prefer to sell faster may be willing to give 20% discount instead the price they paid was 30% lower in the beginning anyway. This continues until the property prices come to that ‘breakeven’ point of the actual price the owners were paying for it (they got the cash backs earlier…) At this point, it’s more of selling as soon as possible to cut losses because the rental could not cover the mortgage too. This is why it’s so dangerous when everyone was buying into a property for cash back and simply believing that future buyers surely could afford to buy from me at the listed price while I enjoy the block of cash now first….
How low will the prices go? It really depends on whether the development is full of home buyers or investors. When it’s full of home buyers, the price should be stable after some time because these home buyers are definitely not looking to sell so soon. If it’s full of investors, especially the not so quality ones or those who had to over-stretch themselves to get that place, then soon we will see auctions for the units and this will drive the price perception for the project even lower.
So, should we only buy projects without cash back? Personal answer is no. I think the viability and potential of the project should be the main consideration and not the cash back. What we must understand is that we must not be blinded to a bad project just because they put a stack of cash in front of us. It’s always best to buy for own stay first and as for buying for investment, it’s best to buy a good valued place instead of huge discounts right from the beginning. Happy investing.
<Featured Image is courtesy of Stock Photos from Andrii Yalanskyi >
Next suggested article: Real preference? It means we could afford but chose not to. Period.