Buying a property is the biggest purchase most of us will make in our lives.Making a mistake and buying a property at the peak of the market can have disastrous consequences, leading to years of income being wiped out, and even bankruptcy if you are over-leveraged and suddenly find yourself unable to meet the mortgage payments (or a call from the bank to top up equity when you are cash-strapped).
What the Wise Investor Does
"Those who do not learn from history are doomed to repeat it." -George Santayana
The Wise Investor times his (or her) investment based on three things:
1. Understanding the history of the property market cycle
2. Knowing which part of the cycle we are currently in
3. Looking at leading indicators to estimate the turning of the cycle
The Wise Investor bases his understanding and analysis on DATA, and not opinions, guesses, market sentiment or what his drinking buddy or the coffeeshop uncle says is the next "sure thing".
Why Do CyclesOccur?
Cycles, like the seasons (at least outside of the equatorial regions like Singapore) and the waxing and waning of the moon, are continually repeating phenomena. It seems obvious that nature has its cycles, but why do man-made things like the economy and property market have cycles?
I believe that property market cycles occur due to the unchanging nature of human behaviour. Emotions like fear and greed lead us to act as a whole in fairly predictable ways. Our compulsion to acting out of short-term interests and marginal thinking leads us to take actions that make sense via the lens of the next month or year, but which drives the market to extremes.
One example of this is the relentless search for yield in the current low interest rate environment. People who buy properties that are yielding 2%because the current mortgage rates are 1% are doing something that is completely rational in the SHORT TERM ("Hey I'm getting a 1% yield spread!"), but make absolutely no sense in the longer term. But yet we cannot bear doing otherwise because the alternative is leaving your money as a deposit earning close to zero.
The Danger of Marginal Thinking
Marginal thinking leads us to look only at the next step ahead of us, not noticing that we are about to step off a cliff. We know that the action we are about to take is foolhardy (e.g. buying a shoebox unit in Punggol), but we do it anyway because the market has been going up and we believe that it will keep doing so because everyone says it will, and there's no obvious reason to believe that it won't.
My friend, by the time the reasons for a correction are obvious, you'll be tumbling over a cliff into the icy cold sea with the rest of the lemmings.Sometimes we need to take a step back and look at the big picture.
Cycles are Rhymes,Not Copies
"History does not repeat itself, but it does rhyme." - Mark Twain
One common misconception about cycles are that they can be distilled into a mathematically sound formula, e.g. "every bull market lasts five years with a 50% upward move, followed by a two year downward move of 30%". This is simply not true.
Every cycle is different in terms of its details, magnitude and timing. For example, based on the Property Market Cycle Model by Property Market Insights,since 1996 we've had three Early Bull market phases, and they've lasted from 4to 14 quarters, rising from 34% to 52%.
If we can't predict how long each phase of the cycle will last and we don't know exactly how much prices will rise or fall, is there any value to understanding the cycle?
The Value of Understanding Cycles
I believe there absolutely is. While we don't know how long the wait will be or how great the reward, we know (as far as anything is knowable) that cycles will continue to occur. By positioning ourselves to ride the waves of each cycle, we can maximize both the probability of profiting and the size of that gain.
However, if you follow the lemmings you will most likely end up buying at the exact wrong time (i.e. the peak), and in doing so position yourself on the wrong side of the cycle. At best you will experience low returns for a long period of time. You'll have a high probability of losing years, if not decades,of savings. At worst, you could go bankrupt. That's the value of understanding the property cycle.
In the next part of this series we will examine how forecastable the property market actually is and a multi-million dollar mistake an investor made. Till next time!
By Mr. Propwise, aChartered Financial Analyst and resident expert at PropertyMarketInsights.com,a site to help property owners and investors make profitable decisions in uncertain times. Click here to learn more
