The property market has cooled down quite a fair bit. Singapore has seen 2 consecutive years of price declines. Malaysia, meanwhile, has seen transaction volumes drop significantly and prices stagnate. Popular overseas investment destinations such as Melbourne, Sydney and London appear to be near their peak, with large incoming supply. The gap between buyers and sellers expectations is still too big and there doesn’t seem to be much good news on the horizon for either party.
On the ground, we are seeing smaller crowds at the show flats and property shows. Property agents are getting fewer enquiries and are seeing lower returns on their marketing dollar. A nett total of 1,492 property agents left the industry in the Council of Estate Agencie’s registration period ended March 2015. The figure is expected to rise in the next renewal exercise, which ends Oct 31.
In these times of despair and low morale, it is important to remember a few rules on property investing so that your decision-making remains solid.
Property Markets work in Cycles
What goes up, must come down. So say the critics of the property market who believe that prices must drop further in order to stimulate buying. But the lows of the current cycle are rarely lower than the lows of the previous cycle. Singapore property prices in the downturn of 2009 were still higher than those in the stagnation years of 2001 to 2006.
Property prices in Singapore WILL drop further, but it looks likely to be a very gradual drop and unlikely to return to 2009 levels. With more than 80% of citizens owning homes in the city state, the government will intervene heavily to prevent a sharp price fall.
On the other hand, if you look at the glass as half full, having a property cycle also means that at some point in the future, prices will have to inch back up. And one reason driving prices back up is inflation.
Inflation is a property investor’s Best Friend
A lot of the recent discussion about the property market is on supply versus demand. Less has been said about the inflation impact on prices. A bowl of noodles today cost $4 versus $1 some 30 years ago. People complain about the cost of living and how it only goes up. Similarly, the same can be said about construction and land costs. At some point, the replacement cost to construct a new property will be as high, or higher than, the price of existing properties. This will push property prices upwards.
Singapore has a historical inflation rate between 2% and 3%; Malaysia’s is in the 3% to 4% range. Property is a hedge against inflation, so the average annual price appreciation of your property over the long term should at least match inflation. The compounded annual growth rate (CAGR) of private property prices in Singapore since year 1993 is about 4% p.a., so it has actually outpaced inflation. In Kuala Lumpur, the CAGR since year 2000 is 6.5% p.a. and in Johor it is 3.2% p.a. (although in 2011 to 2013, Johor grew faster than KL and Singapore). This is how the old adage of “buy properties and wait” came to be.
If you can hold the property for 5 to 10 years, your price appreciation should be substantial even if you bought an average property at an average location. Too many investors get cold feet during the down cycle and exit too early, which brings me to my next point.
Stop micro-managing your investments
If your rents have dropped or you have trouble finding tenants, doing a quick sale to exit the investment is often not the best option.
Transaction costs for real estate is high, the property market is an extremely illiquid market, especially during a down cycle. This means you will take a longer time to find buyers and to transact. If you only held the property for a short time frame, you would not have enjoyed significant capital appreciation and after taking away your transaction and holding costs, you will not make any money. This applies to Malaysian property investments as well. Singapore based investors who buy into overseas markets such as Malaysia tend lose confidence easily as they have poorer visibility compared with locals.
This is the property market, not the share market! Do not get infected by “short-termism” and start dumping your investments during a down cycle. It is better to stay invested throughout the bad times and reap the rewards when the up cycle returns.
If you have to lower your rent further to obtain a tenant, it is still a preferable solution to collecting nothing. An occupied property is better than one that is left empty.
Unless you are financially distressed with no job and no income, I recommend property owners to hold on and grab any qualified tenant they can get. If too many owners panic and sell, you just create a self-reinforcing downward pressure on your property price which won’t end well.
The world environment is fragile. Guess what, bad news is not new.
One of the most important insights for an investor to understand is that no matter how intelligent he is, he won’t be able to predict all the events in the next 5 years.
Today, China is slowing down, Europe is still weak and the US recovery is patchy. There is war in the Middle East and commodity economies like Russia and Brazil are struggling. Singapore has just narrowly avoided a technical recession. Malaysia and Thailand are experiencing political issues and with Indonesia it is always about the haze. It is hard to predict what other disasters or major events that can happen.
Yet life goes on. The civilized world has gone through many tumultuous events, many of which were worse than the ones we are having now. We will survive and society moves forward. We just have to be in the position to reap when the harvest is ready.
Try being Greedy instead of being Fearful
Most investors I speak to today are fearful, and they have many valid concerns. There is a flip side to this situation. In this down market, the deals on offer are getting better. If we predict that this down cycle will stretch another year or two, there is a lot of time for these deals to become fantastic. But you will only be aware of such deals if you are actively seeking them.
Unfortunately, too many people out there are still being influenced by bad news and are sitting out the market at a time when they should be paying it full attention. Try to look at the market greedily, rather than fearfully. A good investor buys low during the down cycle and sells high. A bad investor buys high at an up cycle, and tries to sell higher.
If you can remember the 5 points above, I think you will sleep better at night and perhaps look at the property market tomorrow in a different light. Property investing is fun, exciting and full of opportunities – but only if you choose to make it so.