The U.S. property crash – could it happen here?
Let me share a little about the recent property crash in the U.S. with you. The reasons may be obvious as you read the article. The inflation-adjusted property prices in the U.S. have gone up and down from years 1890 to 2000. Prices dropped well below the 1890 values during the Great Depression, rose after World War II and rose further during the 1970s boom. However, prices simply shot up and rose by almost 100 percent in the six years from 2000 to 2006. In fact, in some places (namely Boston, Los Angeles and Manhattan), prices rose by more than 100 percent.
These are some of the reasons for the boom (I’m giving the abbreviated version due to space constraints):
1. Low interest rate
At that time, the interest rate went as low as one percent. This further encouraged the already high spending Americans not to save money. This also meant that the interest rate charged for mortgages were low – about four or five percent. This is a dream situation for property investors.
2. High loans margins
The loan margins were as high as 100 percent, which meant that the borrower does not need to fork out any money to buy a property. This in turn meant that they could buy a string of properties.
3. Flexible mortgages
While mortgages used to be simple – fixed interest rate and fixed term – they were not user-friendly. So the banks came up with more user-friendly mortgages. These included interest only mortgages, ARMs (Adjustable-Rate-Mortgages), honeymoon mortgages (those with low initial interest rate) and even assumable mortgages.
4. Questionable borrowers
As the party went on and the lending standards loosened, banks and mortgage brokers were giving out mortgages to just about anyone – even people with bad credit history and college students. Yes, you read that right – mortgages to college students, those who are still studying and therefore have no income yet! These are termed NINJA loans – No Income, No job or Assets. One American writer made an interesting comment on this, “Try giving out free booze and see if you don’t attract some winos to your party!”
5. Current owners treating their houses as ATMs (automated teller machines)
Even current property owners got sucked into the euphoria as well. They saw their property rise in value. So they refinanced their property to get access to the cash. So while, the original mortgage was almost paid off, they are now bearing the burden of new mortgages costing hundreds of thousands. Of course, as long prices kept on rising, this is not a problem. Needless to say, the owners also went to town with the money from the refinancing – taking expensive vacations (hopefully to sunny Malaysia), buying new cars, renovating the house and of course, buying other properties.
As a result, prices shot up by double-digit percentages every year after 2000. But of course, such increases cannot be sustained especially when income only rose by two percent per annum in the same six-year period. Once the sub-prime problem surfaced, the property bubble burst. Prices have dropped by 30 or 40 percent, and is still trending downwards today.
As you read the above points, don’t they look familiar? Don’t they look very familiar?
Now I’m not saying that what happened in the U.S. will happen here. Different country, different time. Still, when the warning signs are up in the air, coupled with the uncertainties in the air (possibility of further interest rate hikes and lower LVR (loan-to-value ratio) and the massive challenges (possible collapse of the dollar and insolvencies of major European countries) in this new decade, I’m not waiting to find out. Following my footsteps, many of my clients have sold some of their properties in recent months. By doing so, they enjoy actual profits and reduce their loans’ burden and exposure to the overheated market. And yes, the profits made from the sale also meant that they have more money to capitalise on the exciting opportunities in the near future.
Perhaps you may want to consider doing the same.
Artikel menarik yg saya ingin kongsi bersama utk mereka yg melabur dlm hartanah.