By guest contributor Gerald Tay
I’m a cautiously optimistic investor, who would rather see ‘money on the table’ today, than have an over-realistic expectation or try to make ‘godly’ predictions of an unknown future. As an investor, I avoid trying to be a future trend predictor, a ‘fortune-telling’ guru or think I possess psychic powers. Trying to be either will simply make me lose sleep every night. Worrying or thinking about what’s going to happen tomorrow with so many changes happening will put unnecessary pressure on my limited brain capacity.
Recently within a short span of time, there were many new policies announced by the government, from the seventh round of property cooling measures, the population growth projections, future GDP growth, enhanced used of land for businesses and residential, new MRT networks, population ageing, and productivity growth.
How will these policies affect property prices in future? Well, for starters, I’ll bet my last dollar that in the coming years ahead, there will be many sales predators using these new policies as ‘killing’ tools to hunt down unwitting prey in our rich property savannah.
The difficulty of making forecasts based on policies
Firstly, it’s very hard or near impossible to pinpoint any specific or even range of policies that may cause property prices to fall or rise per se. Due to our extremely volatile property market (besides Hong Kong) and being an open economy since 1965, there are many highly complex variables that work concurrently and we can never determine what will affect our property market specifically.
Previously in my articles, I remarked that ‘experts and ‘gurus’ in the media who often try to predict the unknown future (and with so much unrealistic positivity) are no more intelligent than you and me. There are huge differences between someone becoming a visionary like Li Ka Shing and Donald trump, an amateur who tries to be or thinks he can be one, and someone selling snake oil to unwitting buyers who think it is a life elixir.
The many complex variables involved in the rise or fall of property prices are simply too many, i.e. interest rates, open economy, currency exchange rates, government policies, population growth, world economy, regional stability, liquidity, money supply, investment inflows and outflows, local bank lending policies, foreign bank to bank lending policies, MAS policies, land supply, market psychology, equity and commodity markets, etc.
The “irrational” behaviour of property prices
In the past, especially in Singapore and Hong Kong, when the land supply goes up, property prices go up rather than come down as opposed to the simple economics theory of demand and supply. Governments, Property Developers and Banks cash in on this opportunity.
And are you aware that this property price rise is not a fundamental growth phenomenon but rather a pure inflationary growth phenomenon caused primarily by hot money inflows which may very well disappear once an unexpected financial crisis erupts? The Asian financial crisis, 2008 crisis, and Spain/USA/Greece/Dubai/Iceland housing crashes are some good examples.
Are you also aware that it does not take a high interest rate of 4% and above to see a fall in property prices? A mere 2-3% is more than sufficient based on historical data. In short, the property prices we are paying today may go up in value on paper, but to say if there is a real buyer in future who is willing to fork out a higher price is still a question that needs to be asked by any savvy investors.
Are you paying up today for tomorrow’s capital gains?
It will depend on those many unknown variables like future supply of dollars/money in the market which we won’t know in advance. What we are paying today may already be the inflated price of tomorrow with little or zero capital gains. A clear example is the many properties that were bought by unwitting buyers at a high during 1996, which cannot even break even after 17 years today!
In my personal opinion, to boost economic growth and GDP numbers to compensate for the tremendous economic loss (and taxes) between 2000 to 2005, during the 2008 financial crisis and for the future anaemic GDP growth of only 1% to 3% from now to 2030 as compared to a previous 8% a year on average, the government has taken advantage of a huge GDP growth on the back of foreign migrants to collect vast amount of taxes through rising property prices between 2009 and 2012.
This uneven growth has benefited some, but has also created high inflation that affects many ordinary Singaporeans from home prices to daily expenses. Home prices shot up and many could not afford a new home. Those who sold their homes to profit from the capital appreciation were forced to rent for an unknown period, hoping that prices would fall to saner levels before buying again. But prices kept going up, up and up.
Where will prices head?
Many readers have asked, where will prices head to? Up or down in the next few years? My honest answer: I don’t know or rather, I can only predict with no more ‘accuracy’ than those experts in the media. In other words, I can be wrong and they can be wrong; I can be right and they can be wrong; they can be right, I can be wrong; vice versa. Nobody can give a bull’s eye answer or even come close to the outcome of the future.
Secondly, 2030 is 17 years from today. What are we expecting? Will prices to continue to go up from now because of all the recent policy announcements like more MRT networks? Will prices always go up in future and not fall? Will buyers who buy today be able sell at a profit in year 2030 and use the proceeds to fund their retirement? Are buyers expecting the same kind of tremendous capital appreciation of the booming 1970s to 1990s period of a growing Singapore economy with average GDP growth of 8%, while in the next 17 years, an anaemic GDP growth of 1% to 3% is expected? Are investors expecting the World/Asian economy to continue to be like 2009 to 2012 in the years ahead? Are buyers hoping to retire comfortably with their homes by 2030 expecting a still booming economy by then, or will we become another Japan, Spain, USA, Greece and many other countries where many retirees cannot retire because they were too highly dependent on their increasing home values to provide for their retirement and it turn out completely otherwise?
The precarious position Singapore is in
Our position is very precarious because as long as the world economy is healthy we are in business. What will happen to a small economy like Singapore if there is a world-wide recession and worse, a prolonged one?
That’s why I always emphasise on buying any property for immediate rental today (as opposed to new launches, or to buy, hold and pray for prices to go up), as I believe that apart from the fact that real returns are higher, rental rates will also go up faster than property prices in the future, especially due to the urgent need for many lower-skilled foreign workers (for jobs which many highly educated Singaporeans are not willing to do in future) in the services/manufacturing industries which are the core economic drivers.
The most favourable investment ‘tip of the day’ for many unwitting investors is with limited land and a growing population, property prices can only go up in future. As you can see by now, before concluding unwisely that the rise or fall in property values are primarily due to these two variables, we cannot simply pin it to a demand/supply of limited land and population growth alone.
The Singapore Government is facing a dilemma balancing between ‘growth versus inflation, and growth versus social stability’. Not surprising, since housing was one of the most hotly debated issues at the last elections. Whether or not you should play the waiting game, depends entirely on whether you have the time and money to wait, or not wait.
Things to think about when buying a home
Your home, for example, is a personal consumer choice, rather than an investment. Use affordability and personal lifestyle choices to make that buying decision. However, when buying as an investment, it’s an entirely different ballgame and you need to separate that as two different issues.
Some readers want to hear only favourable answers, and not a view that is opposite to what they think. Some are not realistic and not willing to accept the truth. My article is not meant to offend anyone, but rather, I hope to convey the realistic truth, that being cautiously optimistic is a lot smarter than being totally unrealistic on future expectation of property prices.
Over the last 50 years, especially after the 2008 financial crisis, the world has changed rapidly and is still constantly changing. Investment strategies that have been applied successfully in the last 20 to 30 years may no longer be applicable in the more volatile economic years ahead. We must change to suit the times, failing which it may lead to dire financial consequences.
Here’s my Rule of Thumb: Buy to make money today, not by selling tomorrow. Take care of the bad times, and let the good times take care of themselves.
By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.