Speculators, Interest Rates and Over-Leveraging

“Prudence is a key accounting principle which makes sure that assets and income are not overstated and liabilities and expenses are not understated.” I seriously think this should be a personal principle that one should have when investing. Reason is because there are so many people who are so desperate to know if the interest rate would be raised soon, perhaps July. They sweat whenever they hear that Bank Negara will adjust the rate. Actually, even if the adjustment is fifty basis point or 0.5%, should it affect you so much if you did not over-leverage? So, this is the reason why so many people are praying that the adjustment would be as late as possible, better still, don’t come.

Bank Negara Malaysia (BNM) governor, Tan Sri Zeti Aziz gave no indication whatsoever when asked about the timing of any policy adjustment. I think that’s the best comment. In fact, she said that any adjustment would be based on the outlook for inflation, growth and risks and any other risk arising from financial imbalances that may be destabilising. At this point in time, the monetary policy is still accommodative and the current economy is on a stable trajectory and this was what BNM wanted.

A Penang friend whom I spoke to few months ago said that if interest rate is raised, it will affect many who are currently paying for their home. Then, he said, Malaysia’s current household debt for property is already so high, any increase in interest rate will make it even higher. I would not say that she is wrong but if interest rates are kept too low, be reminded that a lot of people would take more risks and this by itself is a risk to the whole property market. Just look at US in the years leading to the mortgage crisis and we can see almost a certainty that if interest rates continue to be low and everyone just buy, buy, buy, the market will crash and it will affect everyone.

Looking at demand, looking at cost, looking at the supply and looking at how the economy is progressing, the price should go up. I hate to say this but I prefer for it to be on a stable trajectory instead of a sudden huge increase. I hope everyone has the same thought and to friends who are at this moment over leveraged or very close to the ‘just enough’ to pay every month mode, I hope your prayers are answered. While the interest rate will definitely affect me, I welcome it with open arms and do not wish for it to be too low, too long. Let the market adjust itself with the policy rate adjustment.

written on 22 May 2014

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  1. S B Lim avatar
    S B Lim

    The longest for me to complete paying for a property is 5 years, normally I would have another property/antiques/collectibles running parallel to the property I purchased; the moment I cash in on my collectibles/antiques/property, I would place all excess cash into my flexi housing loan thus it forces me to raise cash when I still owe the bank.
    I have been doing that for the last 15 years & it works but now that the property prices have skyrocketed, I may have to think of another way as the rise in property is more gradual now. My method balances my borrowings & spendings; it gives my courage to purchase property but now that I am above 50s, shorter loan period; I am thinking of liquidating all my property but one & invest in the stock market where there are less taxes & tax free for gains

    1. Agree on the part where property prices have been rising way too fast for a few years. Stock market is a little expensive now but as usual, there are gems to be found.

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