Today, as the global markets keep sinking, led by China, I am also wondering what else and where things are set up for a potential financial ruin if regulators don’t step in. Of course, my heart goes to my homeland—the one and only amazing Rwanda.
So, what is happening there today besides CHAN2016? Well, I am going to tell you what I think of a $200,000 home somewhere in Kicukiro or a $1,000,000 apartment rental property nearby Kisementi. How about that 12-18% interest rate though?
In my humble opinion, prices at which Kigali’s real estate units are being sold—and bank loans interest rate at which these mortgages are underwritten—deserve one’s attention.
Numbers don’t lie; let’s do it.
For a $200,000 home loan at, let’s say, 15% interest rate, it will take someone who pays $3,227/month, 10 years before they are settled with the bank. And the cumulative total payments after those 10 years, assuming there are no penalties, will be $387,204!
For a 1 million dollar loans, for those rental property developers, it will take you again 10 years, making payments of $16,133/month at 15% interest rate. And before you settle with the bank, you’ll have paid the cumulative total of $1,936,019; assuming no penalties occurred. That’s a lot of payments.
Please note that the sooner you want to pay off your mortgage, let’s say in 5 years, the more your monthly payment will have to be; since interest rate tend to be located in for the life of the loan agreements. Now who is actually driving up these prices? I believe buyers are the one’s speculating the future value of real-estate. Hence, they are willing to pay every penny regardless of today’s value. Home owners are dying to realize that overrated home ownership dream, which not always make financial sense. At least not at these prices. Let me tell you, you could be better off renting for now.
I would rather rent today and invest in stocks, bonds
Let me assume some of you can comfortably afford these payments today. You could be well better off holding the fire, time the market and buy later when the pricing is efficient. I am very confident it’s going to reach the peak someday—if not collapse—and the timing of it will be worthwhile.
Instead of paying $3,227 every month for that mortgage, find a nice family-size rental home somewhere in Kigali or so for $1,500 per month. Then invest the remaining $1,700 in a 5 or 10 years treasury bond which pays well over 10% interest. If you can do every month over the period of 10 years, you will have kept a nice roof over the top of your head, and at the end of 10 years, you will collect well over $200,000. Instead of you paying such a hefty interest rate to the bank, the government will pay you a relatively handsome interest through a portfolio of treasury bonds holdings. Don’t buy stocks if your intention is preservation of capital. I’ll explain why later on.
Even if you don’t invest the money in the market, and you just put it in a safe saving account at the bank that earns you a very small interest, you will still do much better than taking that 15% interest loan mortgage. Let me run the numbers for you. There is 120 months in ten years. That means 120 payments. If you deposit $1,700 in a saving account at the bank every month for 10 years, you will have deposited a total of $204,000 (1700×120). That is before any interest is added. Then you can buy your home cash.
The bottom line is, there plenty of better savvy alternatives.
Is real estate market collapse possible?
Who did not hear our dear highly-leveraged hotel owners calling for regulators rescue? Could this default wind spread to the residential and other commercial housing area? The answer is yes; very possibly. This is simple, if one’s loan obligation is growing by 15% every year; not to mention inflation rate for other expenses. Your earnings will need to growth by well more than 15% annually for you to afford this. At least, 20% annual growth. If not, the debt obligation will outweigh the payment power; hence people will start to default and get kicked out of these homes i.e. Cyamunara ngo mutahe. I am very confident that only very few of Rwandans’ income grow by this rate annually. So why are we, bankers, even approving these loans? Setting them up for failures? That, I don’t have an answer.
Simply, I would suggest that housing and financing regulators should think about revisiting this seemingly housing bubble—step in while it’s still doable and save the day.
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