These are good times to own real estate. On average, private home prices have risen nearly 20 per cent in the past two years

These are good times to own real estate. On average, private home prices have risen nearly 20 per cent in the past two years, and the trajectory appears stable. Property purchases become more compelling with each passing week. Who can argue against people building equity through the homes they live in? But as everyone knows, rising prices also have sparked a new wave of feverish speculation. And newly released data from Credit Bureau Singapore give a hint of the level of activity: As of March, the number of people with two or more mortgages had risen to around 41,000, up 58 per cent from a year ago and 106 per cent from two years back.

Is there reason to worry? Not at the moment. A certain level of speculation is normal for any market; it keeps prices buoyant, generating wealth. Without speculation, markets would stagnate. Indeed, so long as price trends remain comfortable, there is little danger. In fact, other figures from CBS show that even as the total number of mortgages has risen, the number of delinquent accounts has actually fallen; in percentage terms, it dipped to 2.23 per cent in February from 2.80 per cent in March last year. The market is in a sweet spot. That, however, is no reason to be incautious. The economy is completely exposed to external factors. Although the internal attributes of the economy remain strong and are gaining vigour, buyers must understand that global macroeconomics plays a role in Singapore’s fortunes. They need only think back to the late 1990s for a cautionary tale.

Because of this, there is no argument for suspending normal prudential calculations despite the bullish tone of the market. Of course, owner-occupied real estate, a favoured form of investment, is one thing; whatever happens, people have to live somewhere and a mortgage payment is not unlike rent. But speculative investments can be a burden if things turn sour for any number of reasons. And property ownership involves maintenance costs, so investors must be reasonably certain of their future cash flow. But the key issue is to be wary of the point at which reasonable speculation tips over into the unhealthy zone, when the bulls become too exuberant. When markets self-correct, they can be punishing. And as properties are illiquid investments, it is harder to get out than to get in. Hence, although times now are good for a punt on properties, nothing comes without risk. It is best to think twice about one’s appetite for risk before signing for a second mortgage loan.

Source: The Straits Times, 18 May 2007