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"E-book" by AK

Second "e-book".

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More speculation, bigger the bubble.

Wednesday, June 1, 2016

I had dinner with a friend (and let's call him G) who is the academic sort. He spends a lot of time with plants and I have been picking his brains with regards to caring for my little planter in the sky. 

One of the things we talked about during our after dinner chat was real estate investment. We were really gossiping because a mutual friend bought a condo unit a year or so ago and is now under water (i.e. the developer slashed prices for the remaining units).

I said to G that since this mutual friend of ours bought it because he likes the condo and wants to stay there, then, let us close an eye. It is a consumption item. For many, it is hard to be rational about a highly emotive thing like a home.

G told me that I was mistaken. It was bought as an investment. Alamak, as an investment, it was a bad idea. Price too high. Yield too low and likely to become lower. Throw in capital loss and we have a pretty horrible brew, I said.

Not surprisingly, many people think that property prices will always go up and are willing to pay the price as long as they can afford it. 

We must remember that it should never be about affordability. It should always be about value for money.



I highlighted USA's lost decade and also how property prices in Japan deflated for 20 years which means that the Japanese experienced not one but two lost decades.

Why did Japan become a nation of mostly renters? 

The Japanese people don't want to take the risk of buying a house today only to see its value half 10 years later.

G said, "This is Karma!"


Well, to be fair, G doesn't have any training in Economics and he probably did believe that there were Karmic forces at work.

I said, "Bubble."

I think I was somewhat curt.

Bad AK! Bad AK!

So, I am making up for it with this blog post.


Basically, when people pay high prices expecting that future earnings will justify those prices, there is an element of speculation.

More speculation, bigger the bubble.

So, if we remember the Rule of 15 which really means a property should have a rental yield of at least 6.6% (or a price earnings ratio of about 15x) before we think about buying, buying a property that has a gross yield of only 2% or 3% is highly speculative. (See related post #2 for more on the Rule of 15.)

Well, if we somehow know for sure that renters will be willing to pay two times or three times more than the rent they pay today, then, these low yielders could turn out to be pretty decent investments in future.

A working crystal ball, anybody?

The same goes for investing in stocks and I will let the related posts below do the rest of the talking.

So lazy!

Bad AK! Bad AK!



Related posts:
1. Affordability and value for money.
2. To buy or not to buy? Rule of 15.
3. $1.14 a share cheaper than 93c a share?

8 comments:

Thomas Ooi said...

Is now a good time to buy a condo, AK? :)

temperament said...

Hi AK 6.6% return or Rule No 15 is a very good gauge.
i think it is almost the rule of some 4ks Singaporeans.

But today FD rate can not support this rule leh.
What you think is fair return in today FD rate?

Thank you for the arithematic.
Will remember by hard.

AK71 said...

Hi Thomas,

All investments are good investments at the right price. You might want to read related post #1 at the end of the blog post. ;)

AK71 said...

Hi temperament,

FD rates are relatively low but they are "risk free". So, is it better to get a 2% or 3% gross rental yield or 1.6% per annum from an FD? I would go with the FD but I am sure there are those who have a stronger risk appetite who would disagree.

The environment of very low interest rates make rental yields much lower than 6.6% look attractive now but real estate investments are long term by nature. If we are getting a 2% or 3% gross rental yield which only make sense because we are paying an interest rate of 1% or 1.5% on our loans, then, we better pray that rental demand stays strong and interest rates stay low for the next 20 or 30 years (or however long we took the housing loan for).

I think many newly minted local real estate "investors" ought to be worried.

AK71 said...

Hi Thomas,

You might be interested in this:

When to buy (and sell) a private property?

TG said...

Asians love properties. In the long term all properties will trend up. However properties are all about timing. Dishonest agents will hype things up regardless of their customers' interests. I have a friend who bought two units of condo in Yishun at 1400 psf as the agent convinced him that it is a good buy. Naive or greedy whatever you call it. Many people are unaware that Reits can give them the same exposure to properties at a much lower risk. However Reits are complicated to the common man. Properties are physical objects that they can see and touch. If you take out property tax, income tax, facilities maintenance and other costs which many people do not factor in, this is a really lousy market to be investing in properties.

AK71 said...

Hi TG,

Indeed, no one cares more about our money than we do. We shouldn't be too ready to believe what people say and to part with our money. ;)

AK71 said...

The price decline - the steepest since 2013 - has made it even more uncertain if earlier signs of a bottoming-out in prices can continue amid mounting concerns over the state of the economy and employment.

Christine Li, research director at Cushman & Wakefield, said: "The recent uptick in the take-up rates in the developers' new home sales has given some hope that the prices are bottoming out soon, but the sustainability of the recovery in take-ups and prices is still in question on the back of a poorer economic outlook."

The 12 consecutive quarters of decline culminated in a 10.8 per cent drop in prices and a 10.7 per cent fall in rents since the peak of Q3 2013. Prices and rents had slipped by a more moderate 0.4 per cent and 0.6 per cent respectively in the second quarter.

SLP International executive director Nicholas Mak noted that accelerated price declines in Q3 were across different market segments as well as across different property types.

"Worries over a weaker economy, news of job cuts and fears of a coming recession seem to have adverse impact on the property market."

With foreigners bearing the brunt of job losses, the softening employment market is hurting residential leasing, he said.

URA data shows that the price decline in private homes in Q3 was led by landed properties, which fell 2.7 per cent, after a 1.5 per cent decline in Q2.

Non-landed properties dropped 1.2 per cent in price, after a 0.1 per cent dip in Q2. Those in the prime area or the Core Central Region (CCR) fell the most, 1.9 per cent, after inching up 0.3 per cent in each of the two preceding quarters.

Non-landed property prices in the city fringe or the Rest of Central Region (RCR) slipped by one per cent in Q3, after a 0.2 per cent increase in Q2; non-landed property prices in suburban areas or the Outside Central Region (OCR) also slipped one per cent, after dipping 0.5 per cent in Q2. Rental decline was most pronounced in the OCR at 2.4 per cent over the previous quarter.


Source:
http://www.businesstimes.com.sg/node/128639

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