June 2, 2010
The banks are cashing in
It’s time to look at your investment portfolio and revise monthly instalments to the bank once again. It’s the second time this year that the interest rates have been adjusted upwards. Since Bank Negara announced the revision of the OPR (overnight policy rate) by 25 basis points or 0.25%, several banks have announced revisions of their BLR (base lending rates) within the range of 6.00% to 6.10%.
Several reasons that might have attributed to the increase of the interest rates are:
• The recovery of the stock market indicates that the economy is well on its way to recovery.
• Strong GDP (Gross Domestic Product) growth and upward revisions by private and Government sources show that most sectors are responding well to the market and picking up speed
• Increase in property transactions in the Klang Valley for the past two quarters (source: www.jpph.gov.my) are strong signs that investors are returning into the property market.
For countries such as Australia, they have increased their interest rates since mid of last year and had one of the most increases in the world within the same time. This is due to the rapid recovery of their property market. As for China, instead of increasing lending rates, they are increasing the restrictions on multiple property purchases and decreased financing of some properties to 50%!
In Malaysia, the gradual increase in the interest rates can only mean that financial institutions are cashing in on the bullish nature of the market. With the announcement of the increase in the OPR from Bank Negara, it could also be Government’s way of cooling down the property market just a bit before it overheats. Some camps have it that the property market is already ballooning and a bubble burst might be on the horizon.
Inflation and cash build-up
The increase in transactions and prices are theoretically justified and bound to happen because of two main factors - inflation and build-up in cash. While inflation figures are about three to seven percent (depending on lifestyle), property prices have been stagnant over the past two years, if not lower than what it was earlier. With properties being the best hedge in inflation, it is now correcting to catch up with the inflation rate. Thus, now we see the sharp increase in prices.
For this same reason, for the past two years, those who were thinking of buying properties or any other investments have been on the sidelines, building up their cash portfolio. After two years, they see the need to make their money work hard for them, before it loses its value further against inflation.
Whatever the reason may be, should the market continue in its upward trends, there might at least be one more upward revision from the banks before the end of the year. That said, current interest rates are actually still lower than it was two years ago, when it was at 6.75%. So even if banks increase the rates by another 25 basis points by the end of this year, our rates are still low.
A quick look at the chronology of events
As early as November 2009, financial institutions have been revising their rates upwards. Here’s a chronology of events.
• November 2009 Major banks revised their promotional rates upwards, from BLR – 2.0% (or more) to BLR –1.8%
• December 2009 Prime Minister announced the return of Real Property Gain Tax (RPGT)
• March 2010 Major banks increased their BLR by 25 basis points, or 0.25%
• May 2010 Bank Negara revised its OPR by 25 basis points, or 0.25%. Major banks followed suit, with an increase in the BLR by an average of 25 basis points, or 0.25%
Michael Tan conducts property investment seminars and workshops throughout the year. For details, call 03-2283 1740 or visit www.freemen.com.my
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