Global growth retreats

US Dollar-euro parity in sight

To raise or not to raise: the uS Federal reserve Building in Washington, DC. the probability of a rate-hike in December now exceeds 80% - delivering the first rise in borrowing costs

THERE we go again. Even before the ink is dry, global growth forecasts are downgraded once more.

Paris-based OECD’s (rich nations’ think tank) November Economic Outlook attributes a slump in the growth of world trade (brought about partly by China’s slowdown) as the major factor behind the sluggishness of the global economy.

It was only in October that IMF estimated world GDP will grow 3.1% in 2015 and 3.6% in 2016, in the face of slowing global trade at 2.8% this year (3.9% in 2016).

Now, OECD thinks global growth will ease to 2.9% (3.3% in 2014) and recover modestly to 3.3% in 2016.

Even these, I think, are optimistic. Bear in mind that growth in world trade had slackened in recent years (falling behind global GDP growth which is unusual and not a good sign) and has stagnated since late 2014. It is expected to grow only 2% this year against 3.4% in 2014 and a much faster rate in the early years of the decade: “World trade has been a bellwether for global output, and that global trade growth observed so far this year have in the past been associated with global recession.”

Meanwhile, further GDP slowdown in emerging market economies (EMEs) is weighing heavily on global economic activity. In addition, sluggish trade and subdued investment and low productivity growth are checking the momentum of recovery in the rich nations.

Indeed, there are already signs that many advanced economies are unlikely to reach anywhere near their potential output, despite continuing easy money. Over the medium term, the risks of recession and deflation have become more probable than indicated by the IMF.

Because of recent headwinds, the probability of recession in eurozone and Latin America has risen beyond 30% and 50% respectively, with Japan now in recession.

Simultaneously, the probability of deflation in eurozone and Latin America now exceeds 30%, while Japan is already experiencing significant deflationary tendencies.

This raises the spectre of secular stagnation (what Harvard’s Larry Summers refers to as the inability of an economy to grow to reach its full potential) at a time when policymakers are running out of firepower – fear that the policy tools available to combat deflating forces are becoming increasingly blunt.

The immediate risks

As I see it, many factors are shifting the global economy into a secular slowdown. Immediate risks include:

> Continuing deficient global demand in the face of excess capacity: The rich nations as a whole are in growth recession, with the US pulling-up the others which are struggling to jump start anaemic output. The eurozone is in extended stagnation; growth if any is low (in Germany) and uneven; indeed, the region is flirting with deflation.

Consumer prices have turned increasingly negative in Q3’15. Abenomics is faltering, moving Japan into recession (-0.7% in Q2’15 and -0.8% in Q3’15). IMF predicts the biggest contributors to global growth in 2015-2020 are the faster growing EMEs. Among the top 10, only two are rich nations (US & UK); heading the list are China (accounting for nearly 30%), India (15%) and US (10%); the remainder being (in descending order) Indonesia, Mexico, South Korea, Brazil, Nigeria, UK and Turkey.

> Falling commodity prices: Energy, food and metals prices have fallen significantly over the past year. As a whole, commodity prices are now down 51% from its peak on April 29, 2011. Oil price has fallen 61% since June 14 and is languishing very near US$40 a barrel last weekend. Gold price lost 9% so far in 2015, dropping to a 5-year low at below US$1,065 per troy ounce on Nov 18.

Already, weary investors have begun to sense an end to the raw materials rout, as prices for most dipped below production costs. But few expect a quick rebound. The historical record: after commodity prices tipped over in 1997, it took 21 months to correct the fall. In 2000-01, it was 13 months.

After collapsing in 2008, commodity prices hit bottom in just eight months. This time, the index has been falling for four years and still counting. Nothing preordains a turnaround. Studies of commodity prices dating back to the 19th century found that cycles have been known to last 30-40 years.

So, don’t raise your hopes. Off-setting these “cuts” are currency weaknesses in many commodity-exporting nations since most commodities are priced in US dollar - thus translating to higher revenues in local currency, at least for now.

> China slowing down; so are EMEs and BRICS: Latest data points to an Asia where growth is stabilising in the region of 5%, reflecting very low growth in the more advanced Asian nations as a whole, where growth was at 1.5% annually (with South Korea and Taiwan expanding about twice as fast).

Asian EMEs are decelerating from close to 8% in 2011 to 6.5% or less in 2015. China is down to 6.8% this year but India is doing well at 7.3%. Similarly, the Asean 5 (Indonesia, Malaysia, Philippines, Thailand and Vietnam) is also slowing down, from 6.2% in 2012 to 4.6% expected this year.

Within the region, performance is mixed: Thailand is doing rather badly at 2.5%; while growth in Vietnam will accelerate to 6.5%, with the Philippines not far behind at 6%.

Both Malaysia and Indonesia will each grow at around 4.5% this year and not much more next year. Expectation is that growth in Asean 5 will likely stabilise in 2016 at between 4.5%-5%.

The BRICS (Brazil, Russia, India, China and South Africa) will continue to slacken considerably, growing at less than 2%, dragged down by severe recession in Russia and Brazil and hardly any growth in South Africa. EMEs now face a host of problems constraining their ability to grow.

Plummeting commodity prices, BRICS’s slowdown and investor flight are exposing deep-rooted weaknesses requiring fundamental economic overhauls, but made difficult by domestic politics and corruption. China’s successful transition towards a slower, but a more sustainable growth path will benefit growth all round, despite disruptions generated by rebalancing reforms, notwithstanding China’s sizable buffers available for it to cope.

> Rising US interest rates: The spectre of Fed uncertainty over the rate uplift that has spooked world markets will soon end, hopefully. The probability of a rate-hike in December now exceeds 80% - delivering the first rise in borrowing costs for nearly a decade. Expectation is for a quarter of 1% rise, with gradual but orderly small bites over the coming year. No big deal really, considering that Federal funds rate is already close to zero (below 0.2%) today and the yield on 5-year US Treasuries is only 1.65% per annum.

> Strengthening US dollar: The consensus is for US dollar to continue to strengthen, reflecting its relatively strong economy and prospects of a near term rate-hike in the face of economic weaknesses world-wide. The US dollar index (against six of its peers) has tipped past 99.6 (up 10.3% so far this year) for the first time since April.

Odds are for euro to be at parity with the US dollar; it has already touched 1.05. Tge euro has depreciated 13% so far this year.

The Chinese yuan is stable since this summer’s policy change. It is now likely that the yuan will be included in the SDR basket of elite currencies before year-end – in practice, bestowing on it reserve currency status.

Against a basket of EME currencies, however, the JP Morgan US dollar index is up 13.7% over the year; the Brazilian real is down 30.1% so far this year (until December 10); Malaysian ringgit, -20.2%; Turkish lira, -18.6%; Mexican peso, -12.1%; and Indonesia rupiah, -9.9.

Most certainly, Malaysia’s strong economic fundamentals don’t deserve a near 30% currency downgrade over the past year – it’s over-depreciated by at least 10%-15% after discounting the “bad” politics.

US President Obama (in Malaysia recently) is right to emphasise the critical importance of accountability and transparency, and the need to root out corruption in government.

> Destabilising politics and conflict: G-20 continues to struggle to come up with workable viable steps to reshape an increasingly dour economic outlook. They also face a host of new troubles, from political problems to security crises, raising doubts about preventing the global economy from falling into a long-term funk. Now, the growing refugee crisis in Europe and renewed fears of widespread terrorism after the Paris, Sinai (Egypt) & Bamako (Mali) attacks are proving difficult to fix. Soon enough, these heinous acts will become a pressing economic and business issue, bringing with it far reaching pressures on recovery efforts on the global economy.

What then, are we to do

So it’s not surprising that global economic prospects are repeatedly marked down in recent years. Add to this calls to join-in the war to fight terrorism with its multi-faceted business implications.

What’s worrisome is the rising risk of a world economy persistently mired in sub-par growth – as though hysteresis (impact of past experience on subsequent performance) has taken hold, with the attendant unacceptably wide income disparities, serious security issues, and persistent unemployment.

There is also the need to address the “large-scale displacement of people” with far reaching humanitarian development dimensions. Given that the global economy is still faced with much economic slack and very low inflation (indeed, even deflation), the complex challenges ahead will require continued monetary accommodation and fiscal support, notwithstanding frequent disruptions arising from China’s and EMEs’ reform transition, in the face of financial market volatility emerging from the pending Fed rate lift-off and the prospective strengthening of the US dollar.

Warren Buffett is known to have said: only when the tide has receded can you see who has been swimming naked. Cheap QE money has spoiled EMEs. Traditionally, debt busts in EMEs are centred on their sovereign US dollar denominated bonds.

Today’s “naked” EMEs reside in the corporate sector, mostly exposed to local currency bonds.

Their total private debt now far exceeds 100% of GDP, even higher than it was among the rich nations on the brink of the 2008 financial crisis. In the face of a debt crunch, they can become unduly vulnerable, especially for EMEs with a difficult and uncertain future.

Clearly, tepid and uneven growth raises the risk that can tip an economy into recession. Easy times have come & gone. Much soul searching lies ahead.

By Lin See-Yan What are we to do? 

Former banker, Harvard educated economist and British Chartered Scientist Tan Sri Lin See-Yan is the author of ‘The Global Economy in Turbulent Times’ (Wiley, 2015). Feedback is most welcomed; email: starbiz@thestar.com.my.



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US key interest rate unchanged as global economy worries

U.S. Federal Reserve Chair Janet Yellen attends a press conference in Washington D.C., the United States, Sept. 17, 2015. The Federal Reserve announced on Thursday that the federal funds rate will stay unchanged considering the weak global economy and low inflation. (Xinhua/Yin Bogu)

WASHINGTON, Sept. 17 (Xinhua) -- The U.S. Federal Reserve on Thursday kept its benchmark interest rate unchanged, saying the rising uncertainty abroad and low inflation were the key reasons behind the decision.

After concluding a two-day monetary policy meeting, the Fed said in a statement that the economic activity is expanding at moderate rate with labor market approaching maximum employment but inflation staying muted.

However, in light of the heightened uncertainties abroad and a slightly softer expected path for inflation, the Fed judged it appropriate to wait for more evidence, including some further improvement in the labor market to bolster its confidence that inflation will rise to 2 percent in the medium term, Fed chairwoman Janet Yellen said at the press conference on Thursday.

In regard to foreign developments, the central bank is paying more attention to the developments in China and emerging economies, according to Yellen.

China's economy is growing at a slower pace as it rebalances its economy, which has no surprise, said Yellen, but adding that developments in financial markets in August, in part, reflected concerns that there was down-side risk to Chinese economic performance.

In addition, the substantial downward pressures on oil prices and commodity markets have significant negative impact on resources-exporting emerging markets and advanced economies. Important emerging markets have seen significant outflows of capital, pressures on their exchange rates and concerns about their future performance.

Besides the rising uncertainty in emerging markets, the low inflation is one of the reasons holding the Fed back in raising interest rates.

The core personal consumption expenditure (PCE) price index, an inflation gauge preferred by the Fed, only went up 1.2 percent year on year in July, far below the central bank's 2 percent. The index has been below the Fed's target for over three years.

The recent drop in oil prices and the further appreciation of U.S. dollar have put some downward pressure in the near-term on inflation, which means that it will take a bit more time for these transitory effects to fully dissipate, said Yellen.

According to the Fed officials economic projections released on Thursday, they expected the core PCE price index won't meet the Fed's target until 2018, while the unemployment rate will drop to 4.8 percent, below 4.9 percent, the level the Fed considered as full employment.

Yellen said that as the labor market heals, there will be further upward pressure on inflation. But She said the process is slow and is characterized by lags, and that is why it takes a few years as the inflation to get back to 2 percent, while the unemployment rate falls and even overshoots its longer-run normal level.

The Fed still leaves door open to a rate hike sometime this year. Most Fed officials still expect a first rate increase this year, Yellen said, noting that 13 out of the 17 Federal Reserve Board members and Federal Reserve Bank presidents are looking for a move in 2015.

The Federal Open Market Committee, the monetary policy decision body, will hold two policy meetings this year, in October and December. According to Yellen, every meeting has possibility for a rate increase.

Yellen reiterated that market should pay less attention to the timing of the first interest rate increase and more attention to the expected path of rates.

"The stance of monetary policy will likely remain highly accommodative for quite some time after the initial increase in the federal funds rate," said Yellen.

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South Korea cuts interest rate as MERS contagion as threat

SEOUL: South Korea reported a 10th MERS death as the outbreak of the potentially deadly virus forced the central bank to cut its key interest rate to ward off greater economic damage amid a slump in business.

In what has become the largest outbreak of Middle East Respiratory Syndrome (MERS) outside Saudi Arabia, a 65-year-old man died yesterday after being infected with the virus while receiving treatment for lung cancer at a hospital.

Seoul also reported 14 new cases, including the first infection of a pregnant woman. The new diagnoses brought to 122 the total number of confirmed cases in South Korea, the health ministry said.

Businesses including shopping malls, restaurants and cinemas have reported a sharp drop in sales as people shun public venues with large crowds.

Bank of Korea governor Lee Ju-yeol said slowing exports and threats to business from MERS were central to the decision to cut its benchmark rate by a quarter percentage point, to a record low of 1.5%.

It was the first cut since March, when the central bank made a surprise cut of 25 basis points.

“The full impact of the outbreak still remains uncertain but we thought it was desirable to act pre-emptively to curb its negative impact on the economy,” Lee said.

More than 54,000 foreign travellers have cancelled planned trips to South Korea so far this month, according to the Korea Tourism Board.

Hong Kong has issued a “red” alert warning against non-essential travel to South Korea.

However, Seoul says World Health Organisation guidelines do not warrant such action.

Taiwan raised its travel advisory level for South Korea but stopped short of warning its people against going at all. Other governments in Asia are urging caution but none has gone as far as Hong Kong in warning against non-essential travel.

Residents of Hong Kong are particularly sensitive after an outbreak of Severe Acute Respiratory Syndrome (SARS) killed 299 people in the city in 2003 and sparked global panic.

The MERS virus is considered a deadlier but less infectious cousin of SARS.

On Wednesday, the area around a health clinic inside a metro station in Hong Kong was cordoned off and officials donned protective gear after a woman returning from South Korea showed flu-like symptoms.

Surgical masks reportedly sold out in shops around the station, but Hong Kong officials confirmed yesterday that the woman had tested negative for MERS.

Growing public alarm has forced South Korean President Park Geun-hye to cancel a planned June 14-18 trip to the United States.

Her administration has faced a storm of criticism for perceived slow and insufficient response to the crisis.

Of the 14 new cases, eight were infected at Samsung Medical Centre in Seoul, a major hospital where 55 people have contracted the virus. That is the largest cluster in the outbreak.

A 39-year-old woman in her final trimester of pregnancy was among those confirmed yesterday to have acquired the virus at the hospital.

Another victim contracted the virus at a hospital in Hwaseong City, 40km south of Seoul, and five others are under investigation to discover how they were infected.

More than 3,800 people who came into close contact with those infected are under quarantine, either at their homes or at healthcare facilities.

The first infected patient was diagnosed on May 20 after a trip to Saudi Arabia.

The 68-year-old man visited four medical facilities, infecting other patients and medics, before he was finally diagnosed, sparking criticism that authorities had bungled the initial response. — AFP

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Chance to invest in distressed assets

Distressed property markets where deals are difficult to finance and yield spreads are at all-time highs provide attractive investment opportunities, according to Morgan Stanley’s real estate unit.

In the Asia-Pacific region, Morgan Stanley Real Estate Investing is most focused on China, India, Australia and Japan, said Olivier de Poulpiquet, who helps oversee $36 billion in real estate assets as the global co-head for the unit.

In India and China, demand is driven by strong demographic trends amid a dearth of financing, while in Australia and Japan, low borrowing costs are providing opportunities, he said.

Morgan Stanley, with a team of 280 globally in 11 countries dedicated to the property business, has about 45 percent of its investments in the U.S., 33 percent in Asia and about 22 percent in Europe.

In many developed markets, such as U.S., Japan and Australia, the yield spread between real estate and the risk free rate, typically the interest rate on U.S. Treasury bills, is as much as 400 basis points, de Poulpiquet said.

“Asia and the U.S. will continue to offer opportunities,” de Poulpiquet said in an interview in Singapore yesterday. “Investments in real estate have seen a flight to safety globally and in particular in the U.S. and Europe.”

Interest in property investments by institutional investors is improving as the asset class is viewed as an effective portfolio diversifier and an inflation hedge, de Poulpiquet said. Allocations to real estate by major institutions may climb from an average of 7 percent currently to 10 percent, he said, without providing a time frame for the increase.

India, China

In India and China, Morgan Stanley is finding opportunities by financing developers that are seeking money to complete projects amid a scarcity of capital, de Poulpiquet said.

In its almost three-year effort to tighten the property market, the Chinese government has raised down-payment and mortgage requirements, imposed a property tax for the first time in Shanghai and Chongqing, and enacted home-purchase restrictions in about 40 cities. India’s biggest developers have struggled to rein in record debt as they grapple with high borrowing costs, dwindling sales and banks’ reluctance to lend.

“The major trend in these markets is that this growth is combined with a capital constrained environment for real estate, mostly driven by government interventions and price cooling measures,” de Poulpiquet said.

“In India and China, there is less opportunity to buy existing assets but greater opportunity to pick the right developer and build to either lease or sell.”

Favorable Demographics

India will have 127 million more working age adults by 2020, while in China, the 470 million adults leaving rural areas for cities will reach a rate of 11 million per year, said de Poulpiquet.

Over the next 15 years, the total global urban space growth will reach about 82,000 square kilometers (31,660 square miles), 47 percent of which will be driven by India and China, he said.

In markets such as Shanghai, the supply of class A office spaces is relatively low while demand is forecasted to remain robust, de Poulpiquet said. In India, the trend is similar where the residential sector continues to offer interesting opportunities, he said.

In Australia, distressed assets sold by European banks which are undergoing deleveraging processes to clean up their balance sheets are attractive, said de Poulpiquet.

In Japan, Morgan Stanley is buying class B office assets in Tokyo and greater Tokyo, he said.

“In many markets globally, including Japan and Australia you can buy class B plus assets, at significant yield differential between your cost of borrowing and the real estate yield,” said de Poulpiquet. “It is a relatively safer investment with good quality yield and return profile.”

Europe will also increasingly offer attractive investments in real estate with all the level of distress in the market, he said. Still, Morgan Stanley remains “cautious” and focused on making “defensive investments” in the region as prices still have some room to fall, he said.

“Overall, we will see slower growth, more volatility but in Europe, it’s neither a doomsday scenario nor in a happy recovery and this will last for a while,” he said.- Bloomberg

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Putting things into perspective - investment in Malaysian property

Is this anti-foreign investment sentiment justified? Currently, 98% of residential properties are owned by Malaysians while foreigners own only 2% in Malaysia. 

SHOULD Malaysia follow suit just because of Singapore's recent moves to stabilise its property market by increasing stamp duties and stopping rich foreigners from becoming permanent residents?

Singapore's situation is very different from Malaysia. Firstly, in terms of size Singapore is smaller than Perlis, Malaysia's smallest state but its population is 20 times bigger. This is in contrast to Malaysia which has a low population density but large land size.

Secondly, Singapore has been very successful in attracting talents and expatriates for the last 30 years, a route that Malaysia has only started to embark upon.

Foreign interest: The foreigners who are buying properties in Malaysia are no l onger the British but from countries in the region including Singapore, Indonesia, China and South Korea.

 

Between 1970 and 1980, the size of the non-resident population in Singapore doubled.

The trend has continued and non-residents constituted 26.8% and permanent residents 10.2% of the population in 2011, reflecting the highest proportion of foreign workers in Asia.

This small island has already increased its population from four million to 5.2 million in 2011 in just a decade. While there are plans to raise this to 6.5 million within the next 20 years, this may be stalled.

Singapore has managed to increase its share of knowledge workers from 51% in the 1960s to 59% in 1990s through liberal immigration policies, affordable yet comfortable accommodations and house ownership.

Anti-foreigner sentiment began to build up as one in every three persons living in Singapore is a foreigner.

The Government is now able to pull the brakes on foreign property buyers given their past successes. Prime Minister Lee Hsien Loong expected a slower 1% to 3% growth in the Singapore economy and said that “admitting fewer workers means forgoing business opportunities and slower growth.”

Malaysia, on the other hand, is a long way from achieving the 10 million population it plans to attract to Greater Kuala Lumpur from the present six million by 2020. The country has only started to embark on this high income path two years ago.

Lowest paid

According to the Economic Planning Unit (EPU) statistics, expatriates have been falling at a compound annual growth rate of -9% per annum from 2000 to 2008. Expatriates working in Malaysia are among the lowest paid compared with regional peers, according to a HSBC Bank survey.

Is this anti-foreign investment sentiment justified? Currently, 98% of residential properties are owned by Malaysians while foreigners own only 2% in Malaysia.

Statistics show that there is an overhang of property priced below RM150,000 for the past three years.

The foreigners who are buying properties in Malaysia are no longer the British but from countries in the region including Singapore, Indonesia, China and South Korea.

Similarly, Malaysians are snapping up properties, companies and banks in the region as well as in the United Kingdom.

Bank Negara statistics show that there is more money leaving the country than entering in 2011. Through fostering friendlier ties with Asean and Asean+3, Malaysia wants to enter foreign markets in Asean, China, South Korea and Japan.

Malaysian companies want to be regional players. If that is so, we also have to tread carefully on policies when others are entering Malaysian territory.

Who are the real culprits behind the rise in property prices?

If speculation among locals account for rising property prices, then Bank Negara's move to place restrictions on loans and net income instead of gross income would sufficiently contain the price increase.

Bank Negara has been very effective in curbing volatile rise in property prices as seen in the steady and gradual rise in prices of Malaysian versus Singapore house price index. (See chart)

Why are expatriates good for the country? Ultimately, every Malaysian wants to enjoy a higher income per capita.

High-income nation

As Malaysian wages are no longer competitive to China, India and emerging Asean member countries like Vietnam and Indonesia, the only route for the future of the country is to embark on a path towards a high-income nation.

In order to do this, Malaysia needs sizeable talent pool to attract multi-national companies to relocate their outsourcing industries here.

Malaysia needs to attract both returning diaspora and foreign talents because of our very small number of highly-skilled population in contrast to those available in China and India.

Expatriates can provide skills that our local population may not have. If we want our universities and research to be ranked anywhere within the top 50 globally, we need foreign talents. Foreign businessmen create jobs when they invest here.

The nation has made the right moves in reducing the cost of doing business, liberalising equity requirements for listed stocks as well as property. All these have gradually made an impact on foreign investors. Last year, Malaysia moved into the international investors' radar and the nation's foreign direct investment hit an all-time high of RM33bil.

To backtrack on its more liberal policies now would simply douse the renewed foreign interest in Malaysia.

Historically, every time Malaysia tightens its property policies, it triggers a downturn in property values. “When Malaysia removes restrictions, investments take a spike. When Malaysian reinstates restrictions on foreign investments, the market will over-correct,” said a Singapore analyst.

Look out for Malaysia Property Incorporated's (MPI) solutions to increasing residential property in the price range of RM500,000 to RM1mil in next week's column.

COMMENT By KUMAR THARMALINGAM - Kumar Tharmalingam is the CEO of MPI. MPI is a public-private initiative set up by the EPU to promote and facilitate foreign investment in Malaysian real estate. MPI's raises Malaysia's profile in the international investment radar through constantly updating foreign investors on Malaysia and real estate information.

Penang to raise price cap for foreigners

By HAN KAR KAY hankk@thestar.com.my

GEORGE TOWN: The Penang Government has proposed to raise the cap for foreign purchases on all properties in the state.

Chief Minister Lim Guan Eng said the current limit of RM500,000 would be raised to RM1mil, except for landed properties on the island that would be raised to RM2mil.

He added that the RM500,000 imposed on permanent residents would be retained.

Lim said this is to give locals priority to purchase cheaper properties, and to stop speculation.

“The state hopes to implement the new ruling by June or July. There will be exceptions and avenues for appeal which must be submitted to the state government on a case-by-case basis.

“We are willing to listen to the Federal Government’s objections, and at the same time, get feedback from and opinions from non-governmental organisations, property developers, foreigners and the public,” he told reporters yesterday.

Lim said the state was the first to come up with such a proposal.

Real Estate and Housing Developers’ Association (Penang) chairman Datuk Jerry Chan when contacted said the proposal was a drastic move but good as it would protect local interests.

On April 14, StarBiz reported that the Government was considering raising the minimum floor prices of houses foreigners are allowed to buy to RM1mil.

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Think Twice About Paying Off Your Mortgage, Retirees!

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Retirees: Think Twice About Paying Off Your Mortgage

NEW YORK (CNBC) -- The countdown to retirement is on for millions of baby boomers and, thanks to a lifetime of diligent saving, some have amassed enough wealth to pay off their mortgages and live debt free. 


Conventional wisdom says it's best to pay off your mortgage before retirement, but given the low-interest rate environment, and the need to preserve cash in an unstable economy, that strategy is no longer absolute.

"Paying off your house is one goal, but having a zero-mortgage liability is not the answer for everyone," says Jennie Fierstein, a certified financial planner (CFP) in Westborough, Mass. "If you don't have a stream of resources to replenish it, you might do yourself a disservice by taking money out of the bank to pay off your mortgage."

Retirees themselves, it seems, are equally torn as to the most prudent course of action.

According to the Center for Retirement Research at Boston College, 41% of U.S. households aged 60 to 69 in 2007 maintained a mortgage. Of these, 51% had sufficient assets to repay their loans.

When it pays to borrow
 
While most financial planners agree that owning your home free and clear during retirement is a worthy goal, Elaine Bedel, with Bedel Financial Consulting in Indianapolis, says there are times when it makes more financial sense to keep your money in the market and use the earnings to pay off your loan.

That's particularly true, she says, if you need to invest (however conservatively) for growth.

"There are a few of my clients who feel like if they don't take the risk to get the growth, they're not going to be able to meet their retirement objectives and live the lifestyle they want," says Bedel. "If you take a big chunk out of your nest egg and the income it was generating was being used to meet your mortgage payments, as well as additional living expenses, that may not be the right thing to do."

CFP Fierstein agrees, noting most retirees are advised to withdraw no more than 4% from their nest egg each year to ensure they won't outlive their income.

Thus, if you take $200,000 out of a $500,000 portfolio to pay off your house, your income based on that 4% drawdown rate would drop to $12,000 from $20,000 per year. (The $20,000, of course, would have had to help pay for your mortgage.)

"It's very dangerous to tie up all your money in your house, because your house is not going to generate
income," says Fierstein. "It's nice security, but you lose flexibility and depending on how conservatively you invest your remaining portfolio you may not have enough income to live on."



What's your rate?

When determining whether to pay off or keep your mortgage, you should also consider your interest rate.

If the average after-tax return on your investments is greater than the after-tax cost of your mortgage, it may make sense to keep your money invested, says Fierstein.

Don't forget to factor in the effect of the mortgage-interest tax deduction.

If you're in the 30% tax bracket and you're able to claim the full deduction, a 5% loan is really only costing you roughly 3.5%.

Thus, you'd only have to earn 4% on your investments to make it worth your while. (Given the low interest-rate environment, however it's nearly impossible to achieve that rate of return on more conservative, fixed-income products such as bonds and certificates of deposit.)

"It's hard to find comparable risk-free investments, so you have to be able to stomach a loss if you want to go that route," says Jean Setzfand, AARP's vice president of financial security. "You can't get a plain vanilla CD anymore, because those rates are too low."

Getting close
 
If you're nearing retirement but haven't yet quit, the case for keeping your mortgage and continuing to invest is more clear -- at least until you part ways with the boss.

According to a 2007 study by the Federal Reserve, directing extra money towards your low-interest mortgage loan at the expense of continued contribution to your 401(k) is a costly mistake.

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Some 38% of the U.S. households that are accelerating their mortgage payments instead of saving in a tax-deferred account, such as a 401(k) or traditional IRA, are making the "wrong choice," it concluded.

For those households, reallocating their savings towards a tax-deferred account instead would yield a mean benefit of 11 cents to 17 cents per dollar, depending on the choice of investment assets in the account. In all, the study notes, "those misallocated savings are costing U.S. households as much as $1.5 billion per year."

When to pay it off

Despite the limited scenarios in which keeping a mortgage during retirement might make sense, AARP's Setzfand and financial planners Bedel and Fierstein agree that most retirees would be better off eliminating debt (however low the interest rate) for the peace of mind it affords.

Money, after all, isn't just about the math.

"I think for the general population our guidance is still the old adage of paying off your mortgage before you retire," says Setzfand of AARP. "There isn't anything as safe as being rid of that mortgage and that burden before you hit a period of your life where you're not bringing in a paycheck."

Indeed, mortgages consume 20% to 30% of the typical household's fixed expenses.

While some maintain that using savings to pay off one's mortgage is unwise, as it leaves you less cash on hand for unexpected expenses, such as medical costs and home repairs, Anthony Webb, the research economist who authored the Center for Retirement Research study, believes that argument lacks validity.

Households "need to consider what they would do if the bad event actually happened," he writes. To wit, how they "would maintain their mortgage payments once their financial assets had been spent."

Remember, too, says Bedel, you can always take out a home equity line of credit on your paid off home, which can satisfy the need for cash reserves.

If you can't pay off your mortgage in full without depleting your nest egg, says Fierstein, at least shoot for a more manageable monthly payment.

"I strongly advocate trying to pay down your mortgage, so when you reach retirement you're not faced with a standard of living crisis," she says. "There is some wisdom to paying off a portion of your mortgage so you have minimal payments and some left over in an emergency fund."

A generation ago, retirement planners often started with the premise of a paid off home, using Social Security, company pensions, and other income sources to help their clients cover living expenses.

Today, however, with interest rates at historic lows and many retirees chasing returns to offset losses incurred during the market meltdown, a mortgage-free retirement is not necessarily the long-term goal.

Deciding what makes sense for you depends on your financial profile, interest rate, and your ability to stomach risk.

-- Written by Shelly K. Schwartz, special to CNBC

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