Recently, there were reports on units in high-end condominium projects being sold at a big loss. As property buyers, we often hear 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.
Bought a unit in a seafront condominium
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 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 started from.
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 know 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 the bad days were finally over, a more severe storm came.
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 could 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.
Although history often repeats itself, there are also things in history that, once they are gone, 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 the 1970s. Just look at gold, there was a very long period of depressed prices after its collapse in 1980.
Amid spiraling property prices in the 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 wait to 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)?
The next time you want to ask when a good time to buy is, 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 the next 2 to 3 years.