Investment Why Knowing The Singapore Property Cycle Can Make You A Better Investor
- February 23, 2020
- 10 min read
I do believe most people are aware that the value of property will grow over time.
It may not grow consistently, or uniformly, but it will trend upwards.
On the flip side, there is such a thing as being on the wrong side of the property cycle.
You’ve probably seen many examples of this on the news.
“Sentosa penthouse sold at a loss of $2m, buyer lost xx amount over 5 years.”
It doesn’t make for good reading, does it?
I had a friend who received a small inheritance all the way back in 2007.
Thankfully, he didn’t squirrel it away frivolously, but instead, chose to put it all in the property market.
Some would say that’s a smart move.
And in most normal circumstances – it would be, just that the not-so-smart move on his part was to not consult anyone for advice.
Because prices were rising up, he assumed that he would have no issues letting it go even if he had to.
Unfortunately, his timing could not be worse.
2007 was the peak of the property cycle back then, and it quickly crashed after thanks to the Global Financial Crisis.
He was hoping to sell it off 2 years later, but by 2009 the prices had dipped – it was too late.
As of today, it’s PSF value is… $2,002. An eye-opening 0.0 percent growth.
It’s been 13 years since that day, and prices have only just about reached that level again.
It has basically taken him 13 years to get to where he started from.
In this scenario, it wasn’t actually that bad because this was additional money that came his way.
While on paper, he hasn’t lost any money, it’s really all about that opportunity cost to him.
But can you imagine for those who had plunged in at that point and over-leveraged on a mortgage?
That’s what you call a truly caught with your pants down scenario.
This is exactly why having knowledge about the property cycle is so important.
Let’s get the boring stuff out of the way first.
From the famous words of Wikipedia,
A property cycle is a sequence of recurrent events reflected in demographic, economic and emotional factors that affect supply and demand for property subsequently influencing the property marketWikipedia
If it sounds terribly tedious and uninteresting, that’s because it is.
Let me attempt to break it down for you.
So, how does a property cycle come about?
The first thing you’d need to know is the law of supply and demand.
In most markets, the forces of supply and demand work to keep prices in check.
Let’s try to apply it to a local context – the coronavirus mask situation.
If I only had 100 masks, and everyone in Singapore wanted one, I would be able to raise my prices sky-high to profit from the desperate (kiasu) ones.
Which is exactly what some “business-minded” individuals tried to do.
But when people start to see the amount of money they could make from this situation, they will naturally start to import masks from overseas to sell.
The additional supply coming into the market would mean that soon everyone has to lower their price to be competitive.
BUT, this does not apply to the property market because the supply of land is fixed.
So when the economy is doing well, this will lead to demand for newer, better homes.
Population will always be growing which will constantly prop up that demand.
Since land is limited, and there isn’t a way to buy more land or import land from overseas, prices will have to increase.
And because of this high demand, it is natural human behaviour to start speculating, or flipping houses if you will.
(Which was exactly why the SSD came about – to prevent speculation)
Once that happens, prices will increase beyond the affordability of most people.
Demand starts to fall, banks start to tighten their credit, interest rates go up.
This results in a crash of prices, low sentiment in the market – it’s really a buyers market from here on.
Gradually, the market will improve and the whole property cycle starts all over again.
If there’s anything you have to take away from the entire article it’s this:
Each property cycle will start from a higher bottom from the previous one, which means the long term trend is always upwards.
You could just take my word for it when I say that the property market is cyclical – but you won’t be convinced enough to take action based on it until you’ve fully grasped the logic for yourself.
So read on to fully understand how the phases of the property cycle play out.
4 Phases of the 18-Year Property Cycle
The first person to discover that a property cycle happens in almost perfect 18-year cycles was actually Homer Hoyt, an American economist.
But it only got “mainstream” through economist Fred Harrison, who was also renowned for his predictions on housing prices.
There are basically 4 phases to every property cycle – recovery phase, mid-cycle dip, explosive phase, and recession phase.
The recovery phase is the one that will succeed the recession phase – this would usually go on for about 7 years. At this point, prices will have dropped enough to tempt smart investors back into the market. These savvy (or brave) investors are the ones that have identified the opportunity to get in at attractive prices as it is very much a buyer’s market. If you have the available cash you easily have the upper hand in any negotiation, with almost no competition to speak of.
Of course, even at this point, no one knows exactly when is rock bottom – which is basically impossible to predict. Even the best investors have absolutely no way of knowing, they just know that their potential upside outweighs the risk that they are taking.
Even though this period is actually the best time to enter the market, you’ll find that the majority of buyers will be staying away.
Everyone is still afraid the market might bottom out further and constant pessimism from the media plays a part in ensuring that the same thing happens every property cycle. Humans are very strangely wired creatures when no one is buying, everyone is afraid and no one dares to make a move. When transactions start picking up, everyone starts to hop on for fear that prices will rise too high beyond them. In short, this is a phenomenon that can also be described as a herd mentality.
This is when transactions start picking up and more people begin to enter the market. More confidence is slowly being restored. A mid-cycle dip usually happens here as some early investors cash out. Some may predict another recession is about to happen, but this usually picks up into the explosive phase.
The explosive phase is an exuberant one, where banks are opening up and providing more competitive rates for home loans to gain market share. Confidence is at a high, and the younger market entering the market now may not have even experienced the last crash. Because sentiment is high, developers also start bidding for more projects. This leads to buying frenzies, balloting, and massive crowds at new launches. You’ll see newspapers and media churning out headlines after headlines of price jumps and profits.
Again, because of the herd mentality, prices are further pushed up as everyone is afraid of missing the boat. Potential investors who cannot really afford overextend themselves. The higher prices go, the more everyone thinks prices will go, and thus the mania continues.
The final two years of the explosive phase is dubbed as the “winner’s curse”. Like the example set out at the beginning of the article – you have picked the most unfortunate time of the property cycle to make your move. Similarly to the lowest point of the market, no one can predict when the absolute peak of the market would be. Those who have bought during this period would be suffering losses in the next few phases if they have no holding power.
Naturally, the recession phase is the most unwelcome of all the phases in the property cycle. Just as easily as prices rose up, prices can just as easily fall. The sentiment in the market will be clearly felt, and those who have over-leveraged will face the consequences as bank auctions and fire sales start to become more frequent.
This is also the point where holding power becomes really apparent. Those who are inexperienced investors might look to sell off their properties as they are afraid of more losses.
So where are we at in the Property Cycle?
If we were to apply the property cycle in the context of Singapore, you can quite clearly see a pattern emerge.
Looking from the beginning of 1998 was the start of the recovery from the Asian Financial Crisis. This was followed by a long mid-cycle dip before a short explosive phase culminating till its peak in 2007/2008. The recession phase was up next, with the recovery only kicking in from 2009 onwards.
You might have noticed that from 1998 till 2009 doesn’t follow the 18-year property cycle, but the more important thing to note here is that there is a cyclical pattern. Unlike most other property markets, Singapore’s one is unique because of Government intervention – eg. cooling measures.
If you continue to chart out the pattern, we could be looking at the start of an explosive phase from here on.
So what can we learn from the property cycle?
- Don’t over-leverage
It’s been shown time and time again throughout history of amateur investors getting burnt because of over-leveraging. To a certain extent, the cooling measures of LTV and TDSR have prevented that, but it is still a worthwhile reminder to not bite off more than you can chew.
What you have to remember is every property cycle moves up at a higher point than the last, so as long as you have holding power you will not be affected by the fluctuations. This means that you can pick and choose the best time to sell.
- Don’t panic during the downturn
Now that you have some idea how a property cycle works, you know that the market will never bottom out completely. So you don’t have to be fearful even when prices are falling. As long as you haven’t over-leveraged to begin with, you should be confident that prices will go back to an even higher point during the next property cycle. Don’t ever let yourself be in a position where you are forced into a sale because you were not prepared.
- Don’t get greedy
During the explosive phase, it will seem extremely tempting to jump in and buy for fear of missing out. You might think that you are a savvy investor if you’ve made money from your first real estate deal, but FOMO is a real thing.
At the end of the day, most people buy because of hype, sell because of fear, and end up losing money. Having knowledge of the property market allows you to act rationally, and not panic just because the market fluctuates.
However, it also important to remember that the property cycle is just one part of the equation when it comes to investing in a property. Singapore does have something that is very different from all other countries – the Government has a big role to play in many aspects, the supply of land, the population growth of foreigners, and the all-important cooling measures.
Again if you have to take away just one thing from this article, remember this:
The property market is cyclical and the long term direction is up!