In 2009, Singapore experienced the effect of the subprime mortgage crisis and property prices fell 25% across the board. Fast forward 10 years late, we experienced an artificial dip of 12% caused by the government’s cooling measures. Property prices seem to have bottom out in 2017 and recovered only to be met with another cooling measure in July 2018 which stopped price recovery.
Singapore Property Price Index
We are now faced with a huge supply wall of more than 50,000 units that are unsold or launching soon. There are also 25,000 vacant homes currently. This is no a small amount, on average these units will take more than 5 years to soak up.
Knowing the current situation, what then should we do? Especially when interest rate is on an uptrend over the next few years. The global economy still has steam, but as what many market experts mentioned, we are at the tail end of the economic cycle. If that is the case, how should we prepare and weather the next property downturn?
In this blog article, I will discuss my opinion on what property investors and owners should consider doing.
1) Hold on to properties that can hold their value better
If your property price crashes by 50% during a crisis, that can have a negative impact on your emotions. Property owners should try to avoid this at all cost by looking for a property that can outperform the overall property market during a crisis.
Property owners should prepare for the downturn by checking if their properties are likely to hold their value better in down cycles, if you have the ability to switch, you can consider to do so.
Such properties should have consistently high demand at all times, meaning there will always be buyers looking to buy in a particular property, if prices do drop, these buyers will pounce on the opportunity. These properties are what I call Investment-Grade property.
2) Cash out properties that experience yield compression (Lower Rental yields)
If you own investment properties, this will be important for you. Rental yields have been decreasing in most areas. Today, Gross Rental Yield hovers around 2-3% while if we deduct expenses like maintenance fees and interest cost, this figure drops to 1% or even lower. Even fix deposit rates are almost 2% today, making rental yields not attractive.
As an investor, holding a property with Low rental yield does not make a lot of sense especially when price appreciation is limited and pretty much stagnant.
Instead of holding on to a property with Low yield, consider cashing out and patiently look for a property that can provide better rental yields or returns. If you can’t find a property with better yields and returns, be patient and avoid rushing into any decision. At times, keeping cash on hand is a better choice.
3) Doing nothing is also a strategy
Many investors think that money needs to always be invested. This is not always the case. If there are no deals available, it is prudent to wait.
A seasoned property investor mentioned to me years ago that it is sometimes better to hold on to cash and wait for the deal. This was true in 2018 where if any investor did nothing and held cash, cash did better than most investments. Therefore, doing nothing is also a strategy.
Chart of returns of different investments over the years
When cash is on hand, you can now take time to look for a suitable property to buy. Buying a property at the peak, can set you back years, while buying a good property even at the peak of the market cycle could make you money. Property selection is even more important in 2019 than years ago.
4) Don’t buy a property just because it is below current market value
Over the past 9 months, there has been many ads on below current market value (below valuation) properties. This sounds like a very good deal, but this depends on where we are in the property market cycle.
Buying a below current market value property at the wrong part of the cycle could mean, buying a property at $950K (valued at $1mil), only to see your property price drop to $900K 3 months later after collecting your keys to the unit. Cheap can always get cheaper.
This is why buying a property that is resilient in a down market, and outperforms in a up market is essential for a successful property investor.
5) Grow your bank account
Yes, this is easier said than done. For those who have the ability to do so, now is the time to do whatever it takes to accumulate cash so that when the right time arrives, you have more “firepower” to pick up good deals.
Getting ready for the downturn
These are some of the steps you can take to get ready for the next property downturn. We will never know when the downturn will happen. By being ready, you are already a step ahead.
Every crisis presents both opportunities and dangers, which side you are on is ultimately your choice. However, crisis comes on average once every 8-12 years. Missing out the next crisis will mean you will likely have to wait another 8 or more years.
If you found this article useful, please share it with your family and friends so that everyone can benefit and get ready for the next property downturn. If you like to discuss further, I am just an email or call away.