Wednesday, July 9, 2008

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Is property investment good hedge against inflation ?

The following debate on whether if property investment is a good hedge against inflation is extracted from the Singapore Property Forum. It has been orgainised to help readers focus on the topic.

"Property is still the best investment to hedge for inflation for now. Inflation is 7%, FD is 0.9%, you are losing 6% of value. Property in long term is still the best investment based on historical data in Spore. Barclay banks said 40% of Spore household will be US$ millionaire in 2017, 9 yrs from now, then property price will be at least 250% higher from today."

"Not for your sake am I pointing this out, 'cos it won't register with you. But to other smart buyers, I'd point out (again) that in the next 5 years, property is NOT a good hedge against inflation. 1. IF property RISES 7% /year, THEN its a hedge against inflation. 2. If property STAYS FLAT, then its eroded JUST AS BAD AS CASH. 3. If property DECLINES (as is the case now), then its WORSE than cash! Situation 3 is the likely scenario for the next 2-5 years. Better to keep cash. Don't forget to add the cost of mortgage to the cost of the property. So it really has to appreciate even more than inflation rate just to break even. "

"Barclay said 40% of Spore household are US$ millionaire by 2017, 9 yrs from now, property price will be 200-300% higher than now, very good hedge against inflation in next 9 years. "

"We are discussing the OPTIMAL (or at least near optimal) timing to take the plunge. And the consensus is that certainly 2008 is the WRONG time to go in. During this period of flat and even weakening prices, property will make you considerably poorer than the effects of inflation on cash. Besides, I wonder how many people honestly believe that prices can still double or triple in 9 years, even under optimal conditions! "

"current price, how to drop? HDB DBSS at $500-600 psf, mass condo at $650-1000 psf. Land price at $300 paf, building material at $400-500 psf, do your own calculation. If need to lose money by putting in so much effort, developer will hold on till better time to launch like Livia, CityDev bought the land 10 yrs ago. you think squeezed local developers & construction to bankrupt is good to fulfill your dream to own at dirt cheap? "

"Can't make money? That's not the buyer's problem. If market is weak, price will fall. Just as it has all round the world at multiple periods throughout history everytime there is a price correction. Yes, companies can lose money, individual investors can lose money. Its a fact of life. Sure, some developers will have sufficient fat to tide over the lean years, but others (including many individuals) will not, and prices will fall on account of them."

"keep cash in FD, you lose 6% in 1 year. Invest in property, you make >6% in 1 year. Total will be a gain of >12% in 1 year. "

"If inflation & material cost increased do not transfer to end user, then there will be no supply of porperty, that is even better. "

"very true. Half year gone, >6% of lost, waiting for property to come down. If you waited since last year, >20% of the value of your cash already down the drain. That is the difference between the rich & the poor. "

"Fact: Higher risk, higher potential gain but also higher potential loss.

Invest in property, you face the risk of losing huge amount of money if you've to sell eventually at a loss during an economic downturn. It could be 40% or even 60%. Money in Singapore FD poses no risk and the liquidity allows to you to buy into shares, properties .. in a recession. Rental yield maybe 5-6% if bought years back but if you buy property at today price, you'll get 2% and subtracting your mortgage, you'll left with negative returns. The discussion is about whether it makes sense to buy property today, not 2-3 yrs ago, so don't keep saying you're getting 5-6% rental yield.

Fact: Rental yield and interest rate can change. My guess is rental yield will drop with increase vacancy rate with increase supply. Interest rate will have to rise eventually to manage inflation. If this happens, those who invest in property will face higher mortgage and lower rental yield. "

May also want to read:
History of Singapore Property 1960 to 2008
Buy or Not Buy: How to decide amid mixed market signals
When to Buy, When Not to by
Property Price Index Graph Plotter & Online Property Valuation
Your Property Investment Determines Your Financial Success in Your Life
HDB Resales: West Sees Highest Price Increase


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The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.

Smart Buyer :)