When we have low interest rates, it could lead to speculative activities. Everything seems ‘cheap.’ For example, buying properties because of lower mortgage payments and even pushing up prices in the stock market because many withdrew their Fixed Deposits to invest in the stock market instead. In Malaysia, typical returns to fixed deposits are 2 percent or lower currently. This is also the reason why some are moving these parked money into the stock market with the focus on higher returns. Just need to remember that higher yields also mean higher risks too.
However, the low interest rates are also accommodative to the economic growth if the sentiment is too negative and no one is buying / consuming / investing. Bank Negara Malaysia (BNM)’s next meeting to determine the Overnight Policy Rate (OPR) would be in March 2021. There is a forecast that they may reduce the OPR further. My personal views on their decision is here. (click to read) When it comes to low interest rates which are causing too high interest in the stock market, one country’s leadership has spoken.
Article in nst.com.my Singapore’s deputy prime minister Heng Swee Keat warned warned that low interest rates can lead to distortions in asset prices.
He said, “The interest rates today are ultra low, and in some cases even negative, so this can lead to a significant mispricing of asset prices and a significant risk of investing in the wrong places.”
“When individuals commit to buying a property, they are making a big part of their life savings in it and we want to make sure that it is something that’s sustainable.”
He also shared that since the global financial crises, “we have developed a fairly good risk dashboard for the whole economy.” Please do read the full article here: Article in nst.com.my
Low Rates are definitely an issue
If we look around the world today, we would notice that many countries are having very low interest rates. The thinking behind these low rates is that they needed to stimulate the economy. This tinkering via interest rates is also known as monetary policy. Yes, usually this involves making the money supply in the market becomes much larger than usual. This is why when there are such measures, the stock market is usually very vibrant because there is just no incentive to keep the money in the bank!
Sometimes, government still know best
Governments should not interfere too much in what the people want to do with their money, correct? Well, not totally correct. We have many who may not understand the risks of taking out all their money and “investing” it into some other high return “assets.” Furthermore, the sales and marketing people for these higher rates yielding assets are very good with their work and they would easily reach out to these people when they use social media too.
This is why cooling measures undertaken by the government is definitely necessary to prevent the situation from getting out of control. Remember this from Singapore’s deputy prime minister. He said, “When individuals commit to buying a property, they are making a big part of their life savings in it and we want to make sure that it is something that’s sustainable.”
My wish for property prices
This is why I do think that property prices should just rise slowly and preferably below the increments too. Great enough for me. Earlier article here: Property prices rise following inflation. By the way, even if the percentage rise in property price is lower than the dividends from the dividend stock, it’s still way better yeah. Poperty investment usually requires just a 10% downpayment while the ROI is based on the total property price and not the 10% downpayment.
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