Tan Kin Lian's Blog: Investing in properties

Monday, December 21, 2009

Investing in properties

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

4 comments:

Anonymous said...: The property market in Singapore will continue to have a strong uptrend as long as we have a liberal immigration policy. If we increase the population by about 5% a year, it is very hard for the property market not to have a sustained bull run.

Recently however, there have been some signs that MOM has been tightening up with regard to the various employment schemes.

At the same time, due to the high prices, there has been a lot of building. Typically, it takes 12 to 18 months for a new project to TOP. Many of the new projects are therefore expected to TOP in 2Q1010 to 3Q2010.

Taken together, we therefore can expect that the property market has peaked. It will probably start to go down in 2Q2010 to 3Q2010.

In the long run however, continued immigration to reach the announced population target of 7 mil will mean that while that might be a short term correction in prices, the long term uptrend will continue.

With regard to buying a property for investment, the real money is not made flipping a property. This is a rather dangerous short term strategy.

The real money is made by studying the en bloc potential of a property. The ideal property to buy is an older property in a good location which is not densely built up. As Singapore's population increases, it is likely that URA will eventually increase the plot ratio to allow for a higher population density. When this happens, the potential return on your investment can be quite large. You however have to be quite patient and wait for quite a long time (10 to 20 years) before you can realise your investment gain.

The new property launches are bad investment properties. The high price psf as well as the densely populated units means that these usually have very low enbloc potential.; December 21, 2009 11:13 AM
Redstar said...: Thanks very much for your take on the property sector. The trap has been laid. The price would be paid in the years ahead. This is the evil side of Capitalism. The borrower is at the mercy of the lender; when he finally pulls the plug.; December 21, 2009 11:52 AM
Anonymous said...: "In the future, it is likely to increase. This will result in a drop in property prices. It could drop by 50%,"

Defending the market from extremity is liken to defending one's country or land( from economic ravages).

If this country has not learn from previous property blood path( social and economic) and reign over the market, then the rulers do not deserve to rule.

That said,I am sure the rich(or with the financial resources) are waiting for your prophecy to come true.; December 21, 2009 12:18 PM
Paul said...: Hi Kin Lian,

I think property prices is a function supply and demand and would be better gauged by looking at future trends in the locality of property. (as what is correctly described by Aurvandil above).

Indeed interest rates will affect demand but i think it is a secondary factor.

Thanks for the post!; December 28, 2009 2:49 PM