• While it’s difficult to time the market, there’s also no guarantee that property prices will fall
• If you are already struggling to pay the current mortgage rates, it might be wise to postpone your purchase until your financial situation is more stable
With inflation hitting hard and the global economy facing a recession, aspiring homeowners are finding the path to homeownership more challenging than ever.
People are hesitant about whether to buy a home now or to rent first and wait for prices to come down. But unless you’re confident you can catch the bottom of the real estate cycle, timing the market is difficult. On the other hand, there’s no guarantee that prices will fall.
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History has also shown that property prices typically rise during periods of inflation, especially amidst strong economic growth and a reduced supply of land.
Whether to buy or rent should ultimately be a decision based on a combination of factors and personal circumstances.
Higher Inflation and Interest Rates Will Make Buying and Financing a Home More Expensive
With rising interest rates, homeowners and potential buyers will need to pay higher mortgage rates. Homeowners with substantial outstanding loans will find themselves paying more in monthly repayments.
In recent months, Hong Kong’s benchmark interest rate has risen to 1.25%, the highest increase in nearly 22 years, while Singapore’s median loan rate has nearly doubled in the past six months, and Malaysia’s central bank has raised its overnight policy rate to 2%. With the US Federal Reserve expected to raise rates six more times this year, interest rates are likely to continue climbing.
Normally, if your mortgage currently takes up a large portion of your salary, you can cut back on other expenses. But if inflation also causes the price of almost everything to rise, you will spend more on groceries, electricity, and other necessities.
Renters Are Not Spared Either
But if you’re worried about taking on a higher mortgage from the start, be aware that renting won’t save you from the distress either.
As a tenant, you are entirely at the mercy of your landlord’s decisions. If he/she raises your rent or asks you to move out, there is nothing you can do.
Of course, landlords typically don’t bear the full financial burden themselves; they often choose to pass on the rising costs to tenants by increasing the monthly rent.
While we cannot control macro factors, there are always good deals in the market. So, it is more important for us to do our due diligence and take the time to search, rather than rushing into a purchase.
This is why the first question you need to ask yourself before deciding whether to buy or rent is whether you view the property as an asset or a liability.
As a homeowner, you not only own an asset but can also use it to borrow against. The mortgage you pay each month is converted into higher equity and your net worth.
Avoid Price Anchoring Bias
A decade ago, many people already felt that property prices in Hong Kong were too expensive. But now, prices in Hong Kong have nearly doubled.
The same goes for Singapore, where many considered prices of S$1,000 per square foot to be expensive in the past. Last year, when prices rose to over S$1,500 per square foot, people would say that past prices were much lower, so some even chose to postpone their home purchase plans, believing the pandemic would cause prices to fall.
Even cooling measures did not bring down property prices. Now, with average prices approaching S$1,800 – S$2,200, these people wish they had bought back then.
We all want to buy today’s property at yesterday’s prices, but that’s impossible. Be careful not to anchor property prices to past levels.
Let’s remember that at almost every point in time (even for our parents), property was always considered expensive. It is more important for us to evaluate what the property means to us and whether we can reasonably afford it.
So… To Buy or to Rent?
While most people may prefer to own their own property, there is no right or wrong answer. If you are already struggling to pay the current mortgage rates, it might be wiser to postpone your purchase plan until your financial situation improves.
In any case, as long as you don’t pay more than you can afford, take the time to do proper research, and follow an appropriate strategy, you are unlikely to fall into a financial crisis by buying a home.
This holds true no matter how uncertain the market may seem or how high current property prices are.
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