Saturday, August 9, 2008

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Investing Advice: Downside Risk of Property Market will first be observed as Sharp Decrease in Transaction Volume

In a market like the property market where you trade non-securitized assets like property you are unlikely to observe increased downside risk as higher volatility (i.e. price fluctuations like in the stock market) but what you do observe is a sharp decrease in traded volume.

This is one way how liquidity risk can manifest itself.

This is something a property owner that are looking to liquidate his assets should be VERY worried about.

Iliquidity caused the whole sub-prime crisis. The banks were trying to sell their credit products but since there where no volume for them, they had to mark them down to some 10 to 20 percents on the dollar.

Now all said and done, property is no credit derivative BUT property as an assets class is very prone to drop in volume because there exists no market makers that are obligated to quote BID and ask prices. This can put an investor in a situation that he cannot find any bid for a property for a long time and hence all he can do is watch the price of his asset go through the floor.

Ask property investors from Las Vegas, Nevada some developments have dropped from a peak price of 600 000 USD to 60 000 USD for the same foreclosed property . I am not saying that this kind of drop is going to occur here in Singapore. But to reason that the drastic drop in volume is nothing to care about is just to put your head in the sand.

Posted by guest at the Singapore Property Forum.

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 :)