A roof over our heads: Should we buy or rent?

PERSONALLY speaking, I have been faced with this question – to buy or rent a house – many times in my life. While I haven’t quite found a clear answer to that, I have decided to go with both. I have bought a house (or rather acquired one through financing) but am renting it out while I live in a rented premise with my family.

It is a known fact (if not compounded by our parents, and uncles and aunties) that one should, if they can, own a house. Generally speaking, renting somehow has some negative connotations. Ideally, we should buy a property early in our lives to take advantage of the longer loan financing period and if we can, try to settle the financing early.

While there may be no straight forward answer here, there are several pertinent questions we need to ask ourselves. Where do we see ourselves, five, 10, or 30 years down the road?

First, let us exclude investors from our category as they would naturally fall under the ‘buy’ status, and let us delve into the lives of the average man-on-the-street manifested in these four individuals – Robroy, Rizal, Rowena and Rossindra, who face a similar dilemma.

Robroy is 35 years old, married with two children, and works as an senior accountant. He works for a multinational company and therefore is required to travel, and at times is posted overseas for a few years. He also has chalked up some credit card debts from all the travelling, and have been delinquent in payments during his absence in Malaysia. Most recently, he was posted to New Zealand and is now considering migration.

Rizal is 30 years old, married with two wives and six children and is a businessman who owns several restaurants. His income is good, but it fluctuates, and he currently has some savings which he plans to invest. His big family helps him runs the business.

Rowena, is a 28 year old care-free person, whom after graduation could not hold a steady job, but is very happy with part-time jobs that give her the freedom to travel as she loves travelling. She has a boyfriend and plans to get married in a year or two.

Rossindra is 25 years old; she is a social science university graduate who has decided to dedicate her life helping the needy and healing the world. She is currently working under one of the Unesco projects in Myanmar. She gets paid pretty well, and with food and lodging fully provided at her workplace in Myammar, she saves almost all her salary. She recently took over the rental tenancy of her parents who live in a rented house, and is considering alternative options.

Of these four individuals, who do you think should buy a house or rent? The following represents my take, which of course, is open for discussion.

Robroy should rent, mainly because of his work commitment. His work requires overseas posting, which includes his family, especially since he is considering migrating to New Zealand. Furthermore, he has been delinquent in his credit card payments, and this may not go well for his loan financing if he wants to buy.

Rizal should buy, mainly because the nature of his income is uncertain and he has amassed some savings, which should aid in his down payment for a house. He had originally wanted to buy a house in cash but given the size of his family, he decided to buy a bungalow for which he has settled 50% of the payment while the remainder is financed through a loan. As he rents his restaurant outlets and the returns from his business is used to settle the rent, he is confident that buying a house is a much better option for him.

On the other hand, Rowena, quite clearly falls under the rent category. First, she does not have the financial ability and second, she has not quite decided what she wants to do in life. Furthermore, her part-time jobs may not provide her with a good credit standing with the banks. Her boyfriend whom she intends to marry happens to be rich.

So, naturally, if things go as planned, she may be able to solve, to some extent, her financial issues.
Rossindra, on the other hand is in a real predicament. While her position and work do not necessitate her to rent or buy a house, she is undertaking the obligation to pay rent for the house her parents stay in. She is considering the option of buying a small house and naturally, her parents are overjoyed to finally live in their own house.

Buying a house is usually, for many, a once-in-a-lifetime decision. So don’t rush into it. Take your time evaluating the possible scenarios and outcomes and of course, make sure you choose a suitable property. Whatever it is, you must try to avoid putting significant pressure on your financial status.

COMMENT 
By RAYMOND ROY TIRUCHELVAM

● The writer, a business planner with SABIC Group of Companies says: I would rather my parents choose my house than choose my wife.

Ringgit, government bond yields up on rates hike

KUALA LUMPUR: The hike in interest rates, which the market now expects to be the last for the year, drove the ringgit up and saw a rise in yields of short-term government bonds.

The ringgit appreciated against the dollar yesterday following the 25-basis-point rise in Bank Negara’s overnight policy rate (OPR) to 2.75%, with traders now expecting the local currency to continue to strengthen in the short term.

CIMB Investment Bank regional rates and foreign exchange strategist Suresh Kumar Ramanathan said the ringgit, which rose to 3.19 against the dollar yesterday, was pointing towards further strengthening.

He said the hike in interest rates made the ringgit an interesting carry-trade proposition for traders.
“Interest rates are pretty high to attract more capital flows into the market,’’ he said.

The monetary policy statement on Thursday was dissected by the market and the general consensus is that Bank Negara would most likely stand still now after raising domestic interest rates by 75 basis points this year.

Analysts said the previous statement, which alluded to further normalisation of interest rates, was omitted this time around.

They said this was replaced by a fresh stance whereby the Monetary Policy Committee (MPC) now considered the new level of the OPR to be appropriate and consistent with the current assessment of growth and inflation prospects.

“Taken together, these signals suggest that rate hikes are unlikely to come through in the future,’’ said Barclays Capital in a note yesterday.

“It appears that Bank Negara has created enough monetary policy buffer to respond to any downside risks.”
While the MPC’s assessment is for the global recovery to continue, it noted that there was increased risk that the global growth momentum could moderate.

But it pointed out that for the domestic economy, recent trends in key economic indicators such as industrial production, financing activity, labour market and external trade showed that economic activity had remained robust in the second quarter.

“While external developments may result in some moderation in the pace of growth, the domestic economy is expected to remain strong with continued improvement in private consumption and investment, and augmented by public investment spending,’’ MPC said.

Barclays Capital said the statement noted that recent economic indicators and trends would remain strong despite the recent gains in the ringgit. “This suggests that they are comfortable with the recent normalisation in the currency and would not stand in the way of further appreciation, provided this is fundamentally dictated,’’ it said.

RAM Holdings Bhd chief economist Dr Yeah Kim Leng believes the strong domestic economic indicators might have pipped Bank Negara’s decision to let interest rates go up for the third time.

The market was divided over the prospects for such a hike, given the economic situation globally.

“The central bank is confident that domestic growth momentum can be sustained despite the slowdown in the second half-year in the European Union economies,” Yeah said.

Although the current level was still below the historical average, Yeah called it the “new normal” considering the benign inflationary concerns and the weak economic condition globally.

He felt that the hike was important to nip asset price inflation, especially in the property sector which was driven by super-low interest rates, before it got out of hand.

“The double-digit increase in some property segments is of some concern,’’ he said.

While households have seen a debt build-up in recent years to levels considered high for Malaysia, Yeah said the current level of interest rates was seen as a balance between what households could shoulder and what the business sector found it could live with.

“It’s a fine line. We believe this level will stay for the rest of the year,” he said.

Should interest rates plateau at this level, Maybank Investment Bank head of debt capital markets Michael Oh-Lau said the rally in the bond market, which had seen yields dropping as a result of foreign buying of Malaysian Government Securities, should continue.

The impact on the bond market is expected to be positive but Oh-Lau said one risk that could emerge from interest rates remaining stagnant was a rotation of money out of the Malaysian capital markets to other countries that had not raised their rates. “There might be some risk of the exit of foreign investors if this is the last hike,’’ he said.

With interest rates now projected to remain firm for the rest of the year, analysts said all eyes would now be on the yuan and its movement against major currencies.

“The ringgit is seen as a close proxy to the yuan and further strengthening of the ringgit will come from the pace of strengthening of the yuan,” said Yeah. “This will fit in nicely for Malaysia getting a slower pace of strengthening.’’

By JAGDEV SINGH SIDHU

jagdev@thestar.com.my

Is Malaysia in danger of going bankrupt?

If Malaysia has more of the strengths of Japan and less of the weaknesses of Greece, we will have fewer worries

IN a recent speech, Datuk Seri Idris Jala warned that Malaysia could in 2019 end up bankrupt like Greece if the RM74bil annual subsidies are not slashed. That speech attracted a lot of flak, and has been dismissed as more of a “scare tactic” to jolt “us to not live beyond our means”. More of that later.

What are the causes of national bankruptcy? A country can go bankrupt if, as a result of war or blatant mismanagement, it has gambled away all trust, can no longer service its debt or convince anyone to lend it any money, no matter how high an interest rate it promises to pay.

Greece has been in the spotlight with its debt problems. Though it didn’t actually default on its public debt, it is as good as bankrupt, as far as a lot of people are concerned. The European Union and the IMF kept the embattled Greek economy afloat by agreeing to a US$1 trillion loan package.

The crisis began when investors started getting nervous about Greece’s ability to refinance almost 17 billion euro of bonds (about US$23bil) maturing in April and May this year.

Greece certainly did not endear itself to investors when it was revealed in early 2010 that since 2001, it had help from Wall Street firms to quietly borrow so that it could continue to spend beyond its means while meeting the euro-zone’s deficit rules.

The Greek government hasn’t balanced a budget in nearly 40 years. Its profligate and irresponsible spending had resulted in its public debt ballooning to a forecast 125% of GDP in 2010. Measures to tackle its public finances problems are expected to cut its 2010 deficit to 9.3% of GDP, an improvement from 2009’s 12.7%.

Years of socialism have also resulted in an oversized government that has systematically crowded out the private sector and driven them underground. In fact, one third of Greeks work for the government where their jobs are guaranteed for life.

But the key cause of Greece’s debt crisis is corruption and impunity, which the Greek Prime Minister himself readily admits. Tax evasion, a way of life in Greece, could be costing the Greek government as much as US$30bil a year. According to Transparency International’s (TI) Corruption Perceptions Index 2009, which measures the perceived levels of public sector corruption in 180 countries and territories, Greece scored 3.8 points out of a possible 10 (with 10 being perceived as having low levels of corruption) and was ranked number 71.

While Japan hasn’t yet run into the kind of solvency problems faced by Greece, some commentators have already started predicting that it could end up being the world’s largest national bankruptcy. That’s because Japan’s public debt mountain is bigger than that of any other industrialised nation.

Japan’s public debt is a legacy of massive half-baked economic stimulus packages during the “lost decade” of the 1990s, as well as during the recession that began in 2008. It is expected to hit 200% of GDP within 2010 as the government tries to spend its way out of the economic doldrums against a backdrop of plummeting tax revenues and soaring welfare costs.

The Japanese government expects its fiscal deficit in 2010 to hit 9.3% of GDP, and public debt to rise to 17 times its annual tax revenues by the end of the year. Japan’s public debt situation seems irrecoverable, and its newly installed prime minister has warned that Japan could face a financial crisis of Greek proportions if it does not tackle its colossal debt.

Prospects of a downgrade

Despite all that, Japan isn’t in the kind of pickle Greece is in right now. In fact, credit rating agency Standard & Poor’s rating on Japan’s sovereign debt remains at AA, one step below its best possible rating, though it did in January raise the prospect of a downgrade on concerns about large fiscal deficits and a sluggish growth outlook.

Why isn’t Japan in the same kind of mess as Greece? And why hasn’t its sovereign credit rating been downgraded to junk status, like that of Greece’s?

It is possible that Japan is perceived as being too big to fail. Japan is the world’s second largest economy after the United States, and even though it may have lost some of its shine, it remains a technological powerhouse with a diligent and highly trained workforce. Its default risk is low, as it has a huge current account surplus as well as the backing of massive domestic private sector savings to continue investing in government bonds.

And unlike Greece, Japan’s credibility remains good, there being no fiddling with statistics to make Japan’s public finances look good. Its institutions are strong, and there is no crowding out of the private sector by the public sector. And corruption is hardly an issue in Japan; according to TI’s Corruption Perceptions Index 2009, Japan scored 7.7 points and was ranked number 17.

Malaysia’s public finances are clearly better off than either Japan’s or Greece’s, and its current debt-to-GDP ratio is nowhere near that of either’s. The CIA’s list (The World Factbook) ranking countries based on public debt as a percentage of GDP (2009 estimates) puts Malaysia at number 50 (at 47.8%); that’s far behind Japan at number 2 (192.1%), Singapore at number 6 (117.6%), and Greece at number 8 (113.4%).

However, according to Datuk Seri Idris Jala, Malaysia could in 2019 end up bankrupt like Greece if it does not cut its subsidies because its debt-to-GDP ratio would by then soar to 100% from the current 54%. Could Malaysia actually end up bankrupt like Greece?

As can be seen from the Greek and Japanese examples, the million-dollar question is actually not whether Malaysia could in 2019 end up bankrupt if its debt-to-GDP ratio soars to 100% but whether investors still find Malaysian government bonds attractive.

But this is an impossible question to answer because besides debt-to-GDP ratio, many other factors like economic strategies and policies, transparency and quality of governance, government efficiency, strength of institutions, etc also figure significantly in investing decisions.

According to the National Economic Advisory Council’s New Economic Model (Part 1) report, aggregate investment levels (in products and services) as a percentage of GDP have been declining ever since the Asian Financial Crisis of 1997-1998. The same report also mentioned that the contraction was driven mostly by a decline in private investment.

Is this an indication that investor interest in Malaysian government bonds could likely go the same way south as investor interest in the real sector in Malaysia?

Suffice to say that if Malaysia has more of the strengths of Japan and less of the weaknesses of Greece, we’ll have fewer worries.

COMMENT
By QUAH BOON HUAT

● The author is a research fellow at the Malaysian Institute of Economic Research (Mier). The views expressed in this article are the author’s and do not represent those of Mier.