Danger is when property prices are below mortgage. Beware.

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Banks have to be conservative if we are to avoid that potential for another property bubble bursting. Earlier article here: Borrowers should qualify for their mortgages, period. This is why these days, for some places, banks are no longer approving 90% loan even if the buyer is a first-timer. The reason? Banks own valuer may feel that the property price is just too high for comfort and thus they no longer just take whatever price which the property developer is selling. This is the reason why many potential buyers also think that banks are not so supportive of their loan applications.

Let’s understand that when property prices are below the value of mortgages, it spells trouble; building up of property bubble. It’s also very important to ensure if we buy today, the rental should be able to support it. Earlier article here: Rental as a determinantofproperty price, sounds clearer. Using rental as a determinant is one way to ensure we are not buying something too expensive and have to take a longer time to wait for the potential capital appreciation.

Article in foxbusiness.com Over 20% of properties in these cities have median home prices which are below mortgage. These cities also have high vacancy rates which meant that it’s empty. The cities are Hartford in Connecticut, Baltimore and Bridgeport in Connecticut. These are not the top 2 cities with the highest potential for property bubble bursting. The top two are Detroit where the median home value is just $161,300 and it’s well below the national average of $226,300. This is not considered affordable because a whopping 33.4 percent of those homes have negative equity. (meaning mortgage is higher than property price). The top is Newark in New Jersey. In this state, 6.4% of all mortgage payments are LATE. It’s 6 times the national rate. Please do read the full Article in foxbusiness.com

What we must learn from all these numbers are three important things. The first one is NOT to buy an overpriced property, regardless of whether we could get the loan approved or not or even if we get lots of money back. Remember, price is what we pay and value is what we get. Second one is to only buy if we intend to stay or easy to rent out. Else, if we bought at a slow time like currently, we may have to be subsidising the mortgage every month and that will take a toll on us.

Please remember that a RM400,000 property will already have a RM2,000 mortgage and if we keep paying for 12 months, thats RM24,000. Crazy numbers, really. Third is NOT to over-stretch. Look at the numbers, the defaults will start to get worse. We are fortunate that the Non-Performing Loans in Malaysia remains low by any standard and hopefully manageable even with the prospect of a prolonged trade war between the US and China. Happy reading and understanding that if it starts to happen in advanced countries, theres a high chance it will reach here in the near future. Happy understanding.

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written on 3 Aug 2019

<Featured Image is courtesy of Stock Photos from Bankrx>

Next suggested article: Property? Investment? Home? Then? Today and Future?

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