Recently, there are reports on units in high-end condominium projects being sold at a big loss.
As property buyers, we hear too often from developers and property agents that property prices will always go up in the long run.
Does the property market always manage to recover, with prices going higher than the previous peak? Is it true that any time is a good time to buy?
Below is an abstract from my book No B.S. Guide to Property Investment about one of my real-life property stories and the lessons learned.
In 2003, I bought a unit in a seafront condominium.
When it was under renovation, two neighbors staying at the units above mine dropped by for a chat.
They both bought their place first-hand from the developer.
“Do you mind telling us what price you paid?”
I told them the amount.
“Oh, that was more or less what we paid for last time.”
“Which year did you buy your place?”
“It was 1984. Do you know about their launch at that time?”
“I don’t know. I was still in primary school in 1984.”
I did a search of the old newspapers. I found that the condominium was selling in a depressed market that year. My two neighbors weren’t overpaying at all.
It was amazing that, almost twenty years later, despite inflation and depreciation, and after all the ups and downs in the economy, we were back to the launch price!
Who said prices can’t go back twenty years? They don’t just go back, they can even go back to where they start.
Prices can’t drop lower?
Between 2002 and 2004, my strategy was to buy rental properties at fifteen percent lower than the last transacted price. In that way, I still had a fifteen percent buffer in case prices dropped further. And once the market recovered, I could sell them at any price and still make a profit.
I did make money. But I was wrong.
How could I tell that prices couldn’t drop another fifteen or twenty percent?
Many people who bought in 1995 held on to their overpriced purchase. They struggled through the recession in 2001, SARS in 2003, the downturn in 2004… Every time when they thought that the bad days were finally over, a more severe storm came.
Do you know that the value of properties can drop to zero or even negative? It happens when prices fall below the cost of land and the construction cost.
J. Anthony Boeckh, author of The Great Inflation, told what happened in some US states after the sub-prime crisis:
“In general, prices nationally have dropped back to the level of the cost of building a new dwelling, which includes land acquisition, building costs, and profit for the builder.”
Will exponential growth happen again?
Prices of landed properties in Singapore have increased 75 to 100 times in the last fifty years. But can they rise at the same rate in the next fifty years?
I doubt so.
In the 1960s, Singapore’s infrastructure, economy and social stability were very different from today. The ease of borrowing and the pool of eligible buyers were also very limited.
In the last fifty years, Singapore has evolved from an emerging country to a developed nation. It is with substantial improvement in our economy and living standard, coupled with easy financing, that housing prices can climb to where they are today.
Markets that achieved high growth in the past cannot guarantee continued growth. On the contrary, it may imply that the boom may soon be over. Once the fundamentals are changed, the trend will be reversed.
There are many countries that used to have a strong economy. Then they experienced recession. Some managed to recover and grow again while others have remained weak since then.
Although history often repeats itself, there are also things in history that, once they are gone, they are gone forever.
When, or will it ever, recover?
There is a saying that, in each property cycle, prices always surpass the previous peak to reach an all-time high. This happened several times in the history of the Singapore property market. But the question is: When?
The commodity bull market which started in the early 1930s was surpassed only by the bull market in 1970s. Just look at gold, there was a very long period of depressed prices after its collapse in 1980.
Amid spiraling property prices in 1980s, many Japanese believed they would never be able to afford it if they didn’t buy now. Many borrowed huge housing loans that could only be paid off by their grandchildren. The bubble that burst in the late 1980s started two lost decades in Japan.
This is how Marc Faber described a major market collapse, as compared to a minor correction:
Major manias occur very infrequently. Once they burst, they shake an entire generation’s faith in the object of speculation … while mini manias may take place every few years … a major mania will represent the final stage, or culmination, of a long-term secular up-trend which may have lasted 10 to 25 years.
What are the lessons learned?
Only invest if you have the answers for the following questions:
• Can you see any upside in the fundamentals in the foreseeable future?
• How long do you think you can see profit from your property investment?
• Do you have the holding power to wait till the next bull run?
• Will you see a recovery before your retirement (and at least live to see that happen)?
Next time when you want to ask me when is a good time to buy again, take the hint from investor Jim Rogers.
Bottoms in the investment world don’t end with four-year lows. They end with 10 or 15-year lows. You do not buy unless it is cheap and unless you see positive change coming within next 2 to 3 years.
Can you see positive or negative changes coming on their way?
Hi propertysoul,
It’s heartwarming that you’re advising others to be more prudent in their property investments. However, the land prices are no longer cheap as compared to that of 10 years ago. As we can see, EC land prices in Jurong West are already even fetching $600> per sqft. On top of that, the launch prices are on average $800 per sqft,with it fully being sold.
That brings me to the topic property prices,and one should also take into account that national income is one of the main drivers in property prices,with Singapore GNI per capita is slightly more than $USD 50,000 according to the latest statistics.
Needless to say, this is also catalyzed by the slow increase in Singapore’s population(estimated to increase to 6.5mil in 2030,according to the White Paper) and that brings me to talk about this second driver.to cope with the increasing population, the government has invested in many infrastructures such as the upcoming North South expressway, and a few other MRT lines(EC line,DT line),which will definitely value add to the properties.
Just to prove my point, it can be seen in today’s business times(1/4/2014), it’s stated that Paya Lebar central site was just sold at 942.56 psf/ppr for the 99 year lease hold site that includes the construction of apartments in,with the expected break even cost to be at least $1800 PSF.( I hope this news isn’t part of an April’s Fools Joke though even with the property cooling measures still ongoing)
Thanks for your comments. I just feel that the TDSR that came into the market in June 2013 is very much like the anti-speculation measures introduced in May 1996. And we are experiencing what had happened in 1997 and 1998.
Hi propertysoul,
It’s heartwarming that you’re advising others to be more prudent in their property investments. However, the land prices are no longer cheap as compared to that of 10 years ago. As we can see, EC land prices in Jurong West are already even fetching $600> per sqft. On top of that, the launch prices are on average $800 per sqft,with it fully being sold.
That brings me to the topic property prices,and one should also take into account that national income is one of the main drivers in property prices,with Singapore GNI per capita is slightly more than $USD 50,000 according to the latest statistics.
Needless to say, this is also catalyzed by the slow increase in Singapore’s population(estimated to increase to 6.5mil in 2030,according to the White Paper) and that brings me to talk about this second driver.to cope with the increasing population, the government has invested in many infrastructures such as the upcoming North South expressway, and a few other MRT lines(EC line,DT line),which will definitely value add to the properties.
Just to prove my point, it can be seen in today’s business times(1/4/2014), it’s stated that Paya Lebar central site was just sold at 942.56 psf/ppr for the 99 year lease hold site that includes the construction of apartments in,with the expected break even cost to be at least $1800 PSF.( I hope this news isn’t part of an April’s Fools Joke though even with the property cooling measures still ongoing)
Thanks for your comments. I just feel that the TDSR that came into the market in June 2013 is very much like the anti-speculation measures introduced in May 1996. And we are experiencing what had happened in 1997 and 1998.
Thanks for bringing up the topic of TDSR,which is well intentioned for the citizens to be more prudent with their property investments. However, I’d say the cooling measures are much more heavy now compared to 1996-97,with the implementation of 2 other policies ABST and SSD.
Firstly, the main cause of low property prices in 1996-97 would be the Asian Financial Crisis, with Singapore’s anti speculation measures at that point of time pulling down prices,and that brings me to the question if we’re having any financial crisis now? In fact, Singapore has one of the lowest unemployment rate in the world.In addition, our foreign reserves are standing at Top 10 in the world.
Personally, I’ve a friend who sold his property during the Lehman brother crisis somewhere in 2008-09 ,expecting to buy back when the property prices crash. Currently, he told me he’s still renting a house with the hope of buying back at a much lower which he had sold for in 2008. Little did he know that the capital gains he had made in 2008 is almost wiped off on paying rents.To make things worse, the property price is 50% higher than what he has sold for.
Lastly, my belief in buying property would be buying within our means, as no one can really predict and time the market. Even our minister, admittedly bought one of his houses at a high price. Fortunately, his house has appreciated in value after staying there for many years.
How I wish the Kopi sold in the coffee shop could go back to the same old price in 2005 at $0.60.
So what’re your thoughts?
The fall in property prices in 1996 had started more than two years before the onset of the Asian Financial Crisis. (It is a cycle thing. Anything that goes up will come down one day.) The latter was just a perfect storm that caused further and prolonged slump in prices.
Besides buying within our means we should avoid buying near the top of the market. You are right that no one can predict when the next financial crisis will be coming. That’s why I advocate value investing and I believe in being a contrarian investor (sell when everyone is buying and buy when no one is buying).
It doesn’t make sense to compare prices of everyday groceries with property prices. The cost structure, market speculation, etc. are different. When many US homes became almost worthless in 2009, the Americans are still paying the same price for a can of coke!
Yes US homes almost became worthless due the subprime mortgage crisis where banks were too relaxed with their lending, without looking at the borrower’s income profile. This is stretched out to the extent that even the jobless gets free loan. Will this ever happen in Singapore since 2009? This has therefore created a bubble in the property price that was unsustainable and bursted.
FYI, food prices largely remain cheap in U.S. let even coke are due to the government subsidies. Billions of dollars are going to producers in the business of corn syrup,high fructose corn syrup and corn starch,all used to make junk foods and cokes. With such subsidies, sacrifices has to be made such as high income taxes. Unlike in Singapore, we still enjoy relatively low personal income tax. Most importantly, the land here is scarce compared to other countries with our population density is one of the highest in the world at 7252.43 per sqkm(last measured in 2010). What does this say about our property prices in the near future with increasing population?Being a contrarian investor is no doubt good in theory and has seemingly sound fundamentals, but given the current landscape and context in Singapore with the highest millionaire ratio with increasing population and world class infrastructure(hospital,airport,public transport,housings,financial institutes,education hub,research centers (the list goes on) in the world, it seems unfeasible.
Thanks for bringing up the topic of TDSR,which is well intentioned for the citizens to be more prudent with their property investments. However, I’d say the cooling measures are much more heavy now compared to 1996-97,with the implementation of 2 other policies ABST and SSD.
Firstly, the main cause of low property prices in 1996-97 would be the Asian Financial Crisis, with Singapore’s anti speculation measures at that point of time pulling down prices,and that brings me to the question if we’re having any financial crisis now? In fact, Singapore has one of the lowest unemployment rate in the world.In addition, our foreign reserves are standing at Top 10 in the world.
Personally, I’ve a friend who sold his property during the Lehman brother crisis somewhere in 2008-09 ,expecting to buy back when the property prices crash. Currently, he told me he’s still renting a house with the hope of buying back at a much lower which he had sold for in 2008. Little did he know that the capital gains he had made in 2008 is almost wiped off on paying rents.To make things worse, the property price is 50% higher than what he has sold for.
Lastly, my belief in buying property would be buying within our means, as no one can really predict and time the market. Even our minister, admittedly bought one of his houses at a high price. Fortunately, his house has appreciated in value after staying there for many years.
How I wish the Kopi sold in the coffee shop could go back to the same old price in 2005 at $0.60.
So what’re your thoughts?
The fall in property prices in 1996 had started more than two years before the onset of the Asian Financial Crisis. (It is a cycle thing. Anything that goes up will come down one day.) The latter was just a perfect storm that caused further and prolonged slump in prices.
Besides buying within our means we should avoid buying near the top of the market. You are right that no one can predict when the next financial crisis will be coming. That’s why I advocate value investing and I believe in being a contrarian investor (sell when everyone is buying and buy when no one is buying).
It doesn’t make sense to compare prices of everyday groceries with property prices. The cost structure, market speculation, etc. are different. When many US homes became almost worthless in 2009, the Americans are still paying the same price for a can of coke!
Yes US homes almost became worthless due the subprime mortgage crisis where banks were too relaxed with their lending, without looking at the borrower’s income profile. This is stretched out to the extent that even the jobless gets free loan. Will this ever happen in Singapore since 2009? This has therefore created a bubble in the property price that was unsustainable and bursted.
FYI, food prices largely remain cheap in U.S. let even coke are due to the government subsidies. Billions of dollars are going to producers in the business of corn syrup,high fructose corn syrup and corn starch,all used to make junk foods and cokes. With such subsidies, sacrifices has to be made such as high income taxes. Unlike in Singapore, we still enjoy relatively low personal income tax. Most importantly, the land here is scarce compared to other countries with our population density is one of the highest in the world at 7252.43 per sqkm(last measured in 2010). What does this say about our property prices in the near future with increasing population?Being a contrarian investor is no doubt good in theory and has seemingly sound fundamentals, but given the current landscape and context in Singapore with the highest millionaire ratio with increasing population and world class infrastructure(hospital,airport,public transport,housings,financial institutes,education hub,research centers (the list goes on) in the world, it seems unfeasible.
Your book has been most useful to a future first time home owner like myself.
I’ve got a quick question. I read before on your blog and book that the property value to purchase as a first time home owner should not exceed more than 5 times the combined annual salary.
If you could share a little bit more – why 5 times and not 6 or 7 times?
I understand that anything more than 5 times the combined annual salary could mean that we’re overleveraging.
But my question is more on…why the magic number 5, and not 4 or 6 or 7?
Would love to be further enlightened from you.
Thanks in advance
Thanks for your question. This is like asking MAS why TDSR uses medium-term interest rate of 3.5% as a threshold for new loan repayments of residential properties. Why not 2% or 2.5%? There is a one-word answer to both questions: It’s arbitrary.
Of course, if I say affordability calculation is 8 or 10 times of your annual salary, my readers will be very happy because many of them can immediately afford to buy now. But buying a property, whether for own stay or for investment, is a big quantum and risky purchase. You need a big “safety margin” and good holding power to weather the storms. Remember, being conservative and steady always win in the long-term.
Why 5 times? Frankly, I am not the first one who said this. Someone I know who stands behind this theory is a very successful property investor who has accumulated huge profits for decades during both good or bad times. And I’ve managed to stick to this rule (or even below 5 times) when I bought my 5 properties.
Your book has been most useful to a future first time home owner like myself.
I’ve got a quick question. I read before on your blog and book that the property value to purchase as a first time home owner should not exceed more than 5 times the combined annual salary.
If you could share a little bit more – why 5 times and not 6 or 7 times?
I understand that anything more than 5 times the combined annual salary could mean that we’re overleveraging.
But my question is more on…why the magic number 5, and not 4 or 6 or 7?
Would love to be further enlightened from you.
Thanks in advance
Thanks for your question. This is like asking MAS why TDSR uses medium-term interest rate of 3.5% as a threshold for new loan repayments of residential properties. Why not 2% or 2.5%? There is a one-word answer to both questions: It’s arbitrary.
Of course, if I say affordability calculation is 8 or 10 times of your annual salary, my readers will be very happy because many of them can immediately afford to buy now. But buying a property, whether for own stay or for investment, is a big quantum and risky purchase. You need a big “safety margin” and good holding power to weather the storms. Remember, being conservative and steady always win in the long-term.
Why 5 times? Frankly, I am not the first one who said this. Someone I know who stands behind this theory is a very successful property investor who has accumulated huge profits for decades during both good or bad times. And I’ve managed to stick to this rule (or even below 5 times) when I bought my 5 properties.
Hi propertysoul,
We may have different views on properties but I’m glad that we all love properties. Anyway, I do look forward to your future posts.
Cheers!
Thanks. I look forward to your comments too.
Hi propertysoul,
We may have different views on properties but I’m glad that we all love properties. Anyway, I do look forward to your future posts.
Cheers!
Thanks. I look forward to your comments too.