Many people made huge gains by investing in properties in the past. This was achieved at a time when property prices were relatively low, compared to today. At today's prices, it will be difficult to expect further appreciation along the scale as was achieved in the past.
The trend of interest rate is also going against property investments. During the past twenty years, there was a decline in interest rate globally. This decline contributed to appreciation in property prices. For example, if interest rate dropped from 6% to 3%, the prices of properties will double.
Interest rate is very low now. At the short end, it is near zero. For longer terms, it is around 3%. In the future, it is likely to increase. This will result in a drop in property prices. It could drop by 50%, if the long term interest rate were to double from today's level.
Interest rate is expected to remain low, due to deflation, but may increase from the highly depressed level of today, so you can expect some correction in property prices in the year's ahead.
To learn about what can happen when the property market corrects, we have to look at what has happened in America and Europe. They have allowed the property prices to increase too much due to low interest rate, subprime mortgages and financial instruments. When these markets correct, the damage to the economy has been severe.
In all, it is a bad time to invest in properties as a long term investment. People still have to buy a property to live in, although they should consider the option to rent a property. Apart from interest rate, property prices will also depend on supply and demand and the economic situation. But interest rate does play a big part.
Be careful about investing in properties (other than for own occupation).
Tan Kin Lian
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