Tuesday, June 3, 2008
One of the strongest argument for buying property now, even though property price is obviously high, is that buying a property can help one to hedge against inflation. People who hold dear to this argument would typically quote the success story of their parents who bought landed properties in the 1970s at a few thousand and of course, these properties are worthed millions today. A very convincing argument it seems. I remember how friends who bought properties in the mid 90s' peak put forward the same argument too. But then, we all know, today, more than 10 years later, they are still holding on to a negative asset.
Buying property to hedge against inflation makes sense only if the entry price is right
Property investment as a hedge against inflation does not justify any entry price for property, which is what the advocates of this argument is trying to suggest. "It's ok to buy now even though property price is high," argued the advocates diligently, "because property price will still go up in 30 years time."
Consider: The Higher Your Entry Price, The Bigger Your Mortgage, The Bigger Your Risk
Mortgage brings with it the risk of not being able to service the loans and sufferring a bank foreclosure. You could lose all your life savings and being in debt for the rest of your life. So what's the advice ?", you ask. Well, you can buy a property to hedge against inflation, but first of all, consider the affordability.
Consider: Affordability's The Overriding Consideration
You read about the success stories of property investors. Do you know there are property investments that have gone very wrong, stories with sad endings? I do, I still see friends who lost everything in the property market during the 1998's market crash living with the misery of a bad property investment. They are bankrupts. Their health have failed. They brought misery to themselves and their families. One has gone senile, leaving his family to worry about the bank loans who has to hide what little money they can earn. It's a story of glory to rag.
Consider: With Mortgage Interest & Forgone Deposit Interest taken account, you may actually be paying 200% for your property.
Often people look at the property price as what they've paid at the time of purchase but really it costs much more than that when the mortgage interest and forgone interests from CPF and FD are taken into account. If the total amount you paid ends up to be 200% of the purchase price, then unless your property value (including rental yield) increases by more than 200% in the same period, you're actually still having a negative asset.
Consider: Property Depreciation Over Time
Property value depreciates with age, and especially for 99-leasehold properties. So for those who justify buying property at the current high price, you may also want to consider the property depreciation over time.
Consider: "BUY LOW, SELL HIGH" Strategy
A Smart Buyer wrote, "Property price goes up and down .. clever buyers will aim to buy at the low point of each cycle, even if property price is on the upward trend in the long run, .. now with so many bad news, a down cycle is more likely in the near future .. population growth to 6.5 million is over 50 years lah, no need to be so kan cheong... besides developers asking prices are already 10 years ahead .. "
Happy is the man who buy low, sell high.
Yet another wrote, "Being in the property industry myself, I have got the opportunities to meet people whom I really considered them as investors... these are the people who are capable of earning a gain of over 30% in merely 2 years.... i have met them so i believe its true and possible... *salute their far sightedness*. So what is their winning strategy? It's exactly: buy low & sell high".
The "BUY LOW, SELL HIGH" strategy not only brings higher return on your property asset, it also brings less risk since you buy low, and hence, less worries and more likely, a happier life.
The question therefore is not whether buying property can hedge against inflation, but when are lows and highs of the property cycles.