By guest contributor Gerald Tay
Singapore’s private residential property index continued to climb to 211.9 in Q4 2012 from 208.2 in Q3. This is a hike of 1.8 percent compared to the 0.6 percent increase in the previous quarter. HDB re-sale prices have hit an all-time high and Executive Condominiums (ECs) have reached a record-selling price of S$2million dollars. The statistics are already well-known to you so I’m not going to further bore you with it in this article.
“STOP telling ‘fairy tales’ to property buyers!”
While writing this article, my frustration with the current situation has made me bang the table and scream, “STOP telling ‘fairy tales’ to property buyers!”
Listening to the ‘property experts’, you’d never guess it was the twenty-first century. They all seem to be teaching the same old strategies for property investing and telling unwitting buyers that beautiful ‘fairy tale’ endings are a reality, financial crises only belong to pre-historic times, and property downturns are just myths and legends!
Too many investment myths have gone unchallenged lately. And we love to believe that tomorrow will be like today. So the best thing to do is relax, drink ‘Teh-Tarik’, and talk about how easy it is to make money buying properties now.
With our property landscape changing all of the time, largely as a result of the influence of global economic forces, savvy investors/buyers have to keep up and realise that everything is changing rapidly.
Here are three investment myths circulating right now from ‘property experts’ that annoy me. Let’s look at these myths, which are perpetuated by so-called investment experts, whose interests lie in selling ‘dreams’.
I believe these investment myths have kept many ordinary people from creating wealth, or even a comfortable retirement.
“The great enemy of the truth is very often not the lie – deliberate, contrived, and dishonest – but the myth – persistent, persuasive, and unrealistic.”
– John F. Kennedy
Myth 1: ‘Expert’ Investment Opinions/Comments in the Media Are Always Right
It’s puzzling why journalists often get buying and investment advice from the very people who have a vested interest in the market – property developers, agencies, salesman, investment companies etc.
The press tends to sensationalize developments for the sake of creating news in today’s noisy media circus.
Lately, I’ve heard some interesting media comments from ‘property experts’:
“By 2014, projected prices would not differ substantially; however, rent on investment may provide a healthy gross yield, caveated between four to six percent per year for astute investors.” (‘Expert’ with a large well-known local property agency, marketing a recently new launched condo)
On another recent new launch property:
“The strong demand for ‘XXX’ is reflective of its premium location…., which demonstrates the value and potential price appreciation of this locale and its surroundings.” (Property Developer who sells the project).
“It is expected that the trend will continue in 2013 with OCR prices likely to surpass 2012’s increment attaining close to 10 percent price increment.” (CEO of a large well-known local property agency)
And again, the same CEO should be awarded the year’s ‘Oscar-award’ for ‘Best Acting Fortune Teller’… (He made similar euphoric comments back in late 2007):
“It’s almost a given that if you buy an EC today and wait 10 years, you could make a quarter of a million dollars in profit.”
These ‘experts’ made similar euphoric comments in the media before the panic of 2008’s Global Financial Crisis, right before property prices plunged:
“We expect the office sector to remain resilient. Investment sentiment to remain positive in 2008, given continued economic growth.”
“Prices unlikely to fall yet…”
“Private residential property sector for 2008 will continue to perform well.”
“The price index for 2008 is predicted to grow in the region of 15 to 18 per cent.”
If you look back to the previous years, hardly any (in fact none!) of these “experts” predicted any financial crisis and property downturns. Their predictions were always up and positive!
Don’t believe the “fortune-telling” media hype. A delusion of rising property prices is that prices will keep going up forever…and they never do!
Myth 2: The Long-Term Capital Gains on Your Investment Property Will Compensate for the Fact You Bought at a High Price and Its Cash Flow is Negative, Marginal or Even Non-Existent
I believe it is getting harder to justify the “dream” of strong capital growth as during the previous years, particularly with properties bought in the higher price brackets. My view is that in the coming years, with an already mature and peaking Singapore economy, property investors and home buyers who buy at a high price today, could be disappointed by the capital growth of their properties in the years ahead.
If you buy a property that has positive cash-flow from day one, it doesn’t matter whether there’s any capital gain. Why? Because rents will rise over time and you can then use those rents to pay down the principal on your loan, and eventually you will own all or a large percentage of the property outright. You could still get some capital gains, and you’ll be miles ahead of the investor/buyer who is betting solely on capital gains.
Over the years, property has gone up in value everywhere. However, buying property at a super inflated price is not a good idea. It will take a long time for you to make money out of that investment, if you ever do, and in the meantime you will be in a risky situation if the market goes down.
Myth 3: Property Speculators are Investors
Do you buy lottery tickets as an investment? The people who gamble in real estate lose money all the time. The people who invest in real estate rarely do, if ever. Even if they do lose money, most of the time it’s just a temporary paper loss. In all the years I’ve owned property, I’ve never lost money. I may not have made all that I should have (I’ve had tenants not pay rent, damaged property, etc.) but by making the right purchases up front, they’ve always produced a profit for me, not to mention capital gains. The difference, I invest in properties, meaning I pick a property with good cash-flow.
Don’t confuse success with investing either. There was a time, not long ago, where you could buy a property and resell it for a profit a month or year later. Just because you made money in a crazy economy, doesn’t mean you can make a sustainable profit later. People who bought Facebook, Enron, WorldCom, and waste lands from Profitable Plots were not investors…investors were the ones who did their research and avoided them. You can make money sometimes buying stupid things, but that doesn’t make you an investor.
Are You Wearing the Emperor’s New Clothes?
I hope not.
The Emperor had no clothes on but everyone told him how fantastic he looked in all his robes and crowns, only to realize the truth later. Just because someone says so and everyone is doing it doesn’t make it true.
Unfortunately, the truth is usually unpleasant and most people prefer to pay thousands to listen to half-truths and untruths which make them feel good.
For savvy investors, you should raise the question: “which other myths do I believe in that keep me from achieving my financial goals?”
Be sure you KNOW what you believe in to be true.
By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor.
