I could try to reassure you that property prices falling is natural, and that “in the long run” it won’t matter. But that’s stupid. Because in the long run, we’ll all be in urns and nothing will matter. In the meantime, the failing property market is causing its fair share of pain – and here are some lessons you better pick up from it:
How Bad is the Property Market?
The property market was already reeling in June. But as of now further declines have brought property prices to their lowest in almost two years. And the rental market seems to be racing it to the ground: rents are now at a 38 month low.
The two are intertwined by the way – as rental rates fall, the value of property follows suit.
Now, property agents like to reassure people that this is all cyclical. And that’s true; as the supply of housing dries up again, prices will rise again, etc.
But it’s weak. Like trying to reassure Ebola sufferers by explaining that, hey, you may croak next month; but in some future century mankind will find a cure.
The “cyclical market” speech does nothing to help someone who bought an expensive house in, say, 2012.
Instead, note these three preventative lessons:
1. Property CAN Turn into a Bad Investment
Some people will insist it can’t. Even if the home value drops, you can still rent collect rental. And it will rise eventually, right?
Yes, but here’s the issue: Let’s say you buy a house for $2 million and the value plummets to $1.5 million. After about five years, another cycle starts up and your house appreciates back to around $2 million.
After 10 years, it finally reaches a value of $2.2 million.
On the surface, it may look okay to you – that’s still $200,000 in gains. But that $200,000 took 15 years to earn. You could have made significantly more money investing in other things, without tying up $2 million in the house.
And this is optimistically assuming there are no margin calls (the bank asking you to fork out cash because the value of your home to your loan has fallen), and that no emergency forces you to sell during your long 15 year wait.
When buying property, don’t be afraid to cut your losses when it becomes a liability. Follow us on Facebook, to find out when it’s best to sell off.
2. Don’t Count on Rental Being Consistent
A lot of landlords adjust to a particular level of rental income. And for the most part, rental in Singapore is consistent – except when it’s not.
Every now and then, a huge supply of housing hits the market. Too many developments are completed, too many resale flats enter the market, etc. On top of that, you can have global factors kicking in as well – even in 2013, when the worries about QE tapering hit, some rental fell (the assumption was that companies would lower expat packages).
Landlords who were too dependent on rental income are now in trouble. That happens when you bank on the fact that rental will cover the cost of the home loan. It can be a dual shock, when rental income falls and the interest rate rises.
If you’re forced to sell under those conditions, you could be selling at a loss – exactly the jam some landlords are in now.
3. Patience is Rewarded When Buying
In general, you can buy faster than you can sell. Although property agents will urge you to buy as soon as you can, that’s not always a hot idea.
The ones who’ve hit the jackpot are the buyers who had the money in 2012, but patiently waited for two years or so. They knew the bubble had to burst at some point, and this is the moment they’ve waited for. With cash already on hand, they can move in quick and buy on the cheap.
So the next time property prices are soaring, keep your cool and don’t rush in just because you’ll “miss out”. Keep following us for news on property, and our experts will give you a heads up when they see prices falling or bottoming out.
How much more do you think property prices will fall? Comment and let us know!
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