Why loan?

8 11 2016

Most people are so fearful about the property market bursting right now. Anyway, I still think that Malaysia property is worth purchasing, because of some very simple facts:
1. Young population:  as more people are born, land size remains the same. Property value will rise when the supply can’t keep up with the demand
2. Favourable financing option

Let me elaborate more on why this favourable financing environment benefits those who buy properties. As you know, there are two types of return a property can produce, whether you are buying it for own stay or investment.

The first type of return is the rental yield. We normally state the gross rental yield in percentage. For example, if your property is worth RM200k, fetching RM8,000 a year, the gross rental yield is RM8k/RM200k = 4%. If you bought a property for own use, you still enjoy the rental yield because you don’t have to pay rent to other landlords.

The second type of return is the capital appreciation. Due to inflation, materials cost and labour cost rises. So it will cost more money to build a similar property in the future. Logically, the capital appreciation should be at least equal to the inflation rate, around 3% to 6%. At a certain location where demand is much higher than supply, you see capital appreciation rate of 10% to 20% a year. Over the short term of 1-3 years, property prices might drop if there is an economic recession. But over the long term of 10-30 years, most properties rise in value, at least at the rate of inflation.

So if you add up the two returns, a mediocre property still gives you around 6% return a year over a long period of time. Now, let’s come back to the “favourable financing option” I mentioned earlier. Currently, you can get a mortgage as high as 90% of the property value, at a rate of about 4.5% interest only. A mediocre property providing 6% return still beats 4.5% financing cost.



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