Small Change

Leveraging your way to wealth

It takes money to make money but never underestimate the risks involved

There is an old saying that it takes money to make money, an adage that is no better illustrated than the purchase of my condo unit 25 years ago. As a young reporter at the time, I wouldn't have been able to fork out the cash needed to make the full payment but I had enough saved for the 10 per cent down payment.

Like most home owners, I took out a bank loan to complete the purchase.

In hindsight, that has turned out to be one of my best investments ever, as the price of the condo has more than tripled over the years.

People now think nothing of borrowing $1 million or more to finance a home purchase, but at the time when I borrowed $500,000 to buy my condo, it gave me sleepless nights as I wondered how I was ever going to pay it back. It was serious money, considering that a five-room Housing Board flat cost only about $200,000 then.

However, financial experts would label my loan as a good debt because it makes use of other people's money - the bank's in this case - to grow my wealth as the loan gets paid down and the house appreciates in value.

Better still, it gave me some passive income as I rented out the condo for a few years.

I was elated to strike gold on my first home purchase. There were others, just as lucky, who then went on to try to reap more profit with other property investments using the same formula.


An investor watching share prices in Hong Kong in 1998, during the period of the Asian financial crisis. People must factor in the possibility of such crises happening because the time span for their home mortgage can stretch 20 to 30 years, when many things can happen. PHOTO: REUTERS

At that time, the total debt servicing ratio (TDSR), which restricts the sum a property buyer can borrow as a percentage of gross income, was still very much into the future.

So one much-used tactic was to take the "equity" out of the original property once its value had risen and then refinance to get a higher loan. The excess cash from the fresh loan was then used to make the down payment on the next property.

Using so-called "good debt" to grow your net worth by borrowing to the tilt to, say, finance a property can be a double-edged sword... Instead, I strongly believe that besides looking at good debt and bad debt, a person should also consider good risk and bad risk. It is a concept even the rich can become confused over.

It seems like a no-brainer way to make money, but the flaw is that people tend to get carried away and end up holding two or three properties while failing to price in the big risk they are taking.

Perhaps it was because I had spent much of my working life as a markets reporter, and I had often seen sentiment swing from exuberance in one moment to despair in the next, that I was cynical enough to refrain from following the crowd in chasing after such money-spinning adventures.

A few years after buying my condo, the 1997-1998 Asian financial crisis struck and the interest rate on my home loan shot up from 5 per cent to 7.25 per cent. Overnight, I found my monthly mortgage payment going up by 25 per cent.

Few people remember now but in those days, interest rates for home loans were much higher. As such, even though I now pay 2.6 per cent interest on my mortgage, I sometimes wonder if interest rates will one day climb back to those astronomical levels in 1998.

It is probably a factor most people do not take into consideration when they buy a property, even though the time span for their mortgage can stretch 20 to 30 years, when anything can happen.

In 1998, my condo had received its temporary occupation permit (TOP) just as interest rates suddenly accelerated with the Asian financial crisis.

This triggered a spate of fire sales as some owners were hard-pressed to meet the increased mortgage payments, monthly maintenance fees and property tax hitting them all at the same time.

Even after the crisis subsided, there was no revival in prices, as the residential market was hit by other calamities - the burst of the dot.com bubble in 2000 and then the Sars crisis three years later.

It was just as the great British economist John Maynard Keynes had once noted - the market can stay irrational longer than you can stay solvent.

As such, whenever I listen to financial experts preach about the importance of differentiating between good debt and bad debt, I feel that they may be simplifying the issue a tad too much.

Sure, using borrowed cash to incur liabilities on big-ticket items such as an expensive European car is a downright bad idea, enslaving those who buy them to debt as these things lose their value over time.

However, using so-called "good debt" to grow your net worth by borrowing to the tilt to, say, finance a property can be a double-edged sword as well.

Instead, I strongly believe that besides looking at good debt and bad debt, a person should also consider good risk and bad risk. It is a concept even the rich can become confused over.

I once had a friend, now deceased, who used to have discussions with me about his business projects. He might have done so because he believed that since I was a reporter, I might be able to offer him the unbiased feedback that he was unable to get from his bankers and financial advisers.

There was one particular investment where I felt he had taken too much risk. He was the major shareholder of a listed firm and he had pledged the shares from this company to finance a new venture in China. This was on top of the personal guarantee he gave for the loan.

Nothing wrong with that, but as the new venture required lots of capital, more and more of his shares were getting tied up as collateral - and there was a very real danger that he could lose control of his listed company if something was to go amiss.

As a self-made businessman, he probably thought that he had covered all the risks and the reward was worth it. But I felt that he should have safeguarded his finances by getting the listed firm to shoulder the risks of funding the new venture. If there was ever a case of extreme bad risk, this was it.

I advised him to try to get refinancing on better terms but before he could do that, the Asian financial crisis erupted and the bank pulled his loan.

It was painful watching him take the steps that he did in order to avoid bankruptcy.

Years later, just before the onset of the 2008 global financial crisis, when I read a column by Banyan Tree executive chairman Ho Kwon Ping in which he described how businessmen were blinded by the distractions of an economic boom into taking reckless risks, I couldn't help recalling my friend's plight.

Indeed, as Mr Ho wrote, many of them can be imbibed with the notion that they are somehow above the business cycle, above unexpected risks and that because they have been successful once, they can always repeat that success.

As the market marks the 10th anniversary of the global financial crisis and 20th anniversary of the Asian financial crisis, widely watched indexes, such as the Dow Jones Industrial Average and S&P 500, are hitting record highs again.

I feel uneasy when I read about investors pouring money into so-called initial coin offerings launched by start-ups that only give vague promises of a share of the profit if their projects take off.

If there are nascent signs of irrational exuberance that could roil the market, this is one of them. Sure, it takes money to make money but never underestimate the risks involved.

A version of this article appeared in the print edition of The Sunday Times on July 30, 2017, with the headline 'Leveraging your way to wealth'. Print Edition | Subscribe