When I first started this blog, I wanted to focus on financial products. However, it becomes increasingly frustrating to me how poorly people misunderstand property investment.
Many investors I talked to, treat property as “safe, high yield” investment.They borrow to their neck and struggle for the mortgage payment for their second or third properties, while the same group of people treat stock or even bond investments as “highly volatile, losing money” business.
Many failed to understand
- The leverage effect of property investment applies not only upside but also downside
- The interest rate impact to their investments
- The un-leveraged yield of private property investment is poorer than many stocks
- The property investment itself is as volatile as stock investment.
Take a look at the chart below. PPI refers to Private Property Index, where STI refers to Straits Times Index. It is not hard to see that the private property market moves inline with stock market in Singapore. To be more precise, stock market is a leading indicator for property market, which means property price movement is typically a few month lagging the stock market.
I hope this blog entry and recent comment about property market by new minister of Ministry of National Development Khaw Boon Wan serve as a wake up call for many property investors. During financial crisis, many property owners learn the truth in a hard way. But why the misunderstanding of private property investment is still so prevalent, just like those “Gold Bugs”. I will discuss this in greater details in the future.
Ivan, just come across this post. As a property investor, agent and trainer, I totally agree with you.
The tendencies to invest in property instead of shares, and other assets classes are mainly due to lack of knowledge, education and information available. Asset property is an instrument everybody knows, who doesn’t need a roof ?. Only how familiar is that knowledge is anybody guess.
Growing up, they see their parents HDB flats appreciated multifolds. Most would have bought directly from HDB, subsidised and after MOP, they sold in the open market, compounding the gains. In 1981,a 3-room(3NG) cost $18k and 1985 a 4-room HDB cost $60k and in 1990, a EM cost $180k.
Goh Chok Tong’s continual policies of LKY and his asset enhancement of wealth, further boosted the property prices and rent. Immigrants explosion before and after the GFC make many property investors millionaires.
Being a young nation, and as a developing country then, our economic growth is phenomenal, from third world to first world economy. We celebrated SG50, just. Any idiot who bought properties at even at peak cycles would also benefitted as the GDP growth would carry even samphans.
These conditions are passé today. It is a different environment now, carpe diem!
Can other unleveraged asset classes speak of the same?
A friend invested in SingTel shares when it IPOed. He bellowed: Super Blue chip, biggest market cap, Temasek owned, Govt backed, triple AAA ratings, monopoly, can’t go wrong! He bought 10 lots costing him $36,000( $3.60c a share)in 1992. It was big money then.
I rest my case.
Hi, Fred
Thank you very much for your comment. It is very insightful.