What you should know about when investing in property during a crisis

In all market conditions, there will always be various perspectives on where the market is heading at that very point in time. Today, in the midst of the Covid-19 pandemic Circuit Breaker measures, there are still property transactions happening in different regions of Singapore. Let us find out what you should know about when investing in property during a crisis.

WHAT MOST PEOPLE ARE FEELING

I’m sure the major consensus today will be very bearish with all major key indicators showing negative or big contractions with news and publications painting gloomy forecasts ahead on a global scale

HISTORY REPEATS ITSELF

In the midst of all the gloomy outlook, there are still enquires and transactions of private residential properties. There are good new developments that are still selling during this period.

LET US LOOK AT THIS FROM A STATISTICS PERSPECTIVE

Without glazing into the crystal ball, we are very certain that at some point in the future the markets will recover once the Covid-19 pandemic is over, like all other previous economic crises or pandemics.

What we cannot fully anticipate is how the recover of the market will look like.

A. THE “V”

The “V” shaped recovery has a very fast reversal point. Some opinions that I have gathered is that today’s crisis is not specific to any nation, region nor industry. This is a crisis on a global scale as if planet Earth pressed the “pause” button. When the measures are lifted and life slowly gets back to normal, businesses will quickly recover with the aid of government stimulus packages.

B. THE “SWOOSH” (PRONOUNCED AS “SW-WASH”)

Swoosh shaped recovery takes on a more conservative perspective that the governments and businesses take a very prolonged cautious approach to the road of recovery.

Recovery is gradual but steady without the risk of sudden formation of a bubble, a rapid increase in asset prices after a contraction. 

4 possible types of market recovery

C. THE “U”

“U” shaped recovery takes on a more negative stand that the Covid-19 situation will drag on for a longer period, or the economic recovery is hampered by other unforeseen circumstances. The only question will be how long will the pandemic last.

One positive note is that ultimately the recovery will come, just a matter of when.

D. THE SQUARE ROOT

This form of recovery shows signs that the market is playing catch up to the pre-crisis status quo. Recover may be rapid or gradual with a plateau forming when markets were at just before the Covid-19 pandemic.

Using a long term perspective, the current crisis can serve as a breather for the escalating property prices for investors with sufficient cash flow to enter the market.

Alternative scenarios for US real GDP (Source: BEA, Federal Reserve, Haver, Noruma)

BE FEARFUL WHEN OTHERS ARE GREEDY

BE GREEDY WHEN OTHERS ARE FEARFUL

– Warren buffett

HOW DID SINGAPORE PROPERTY MARKET FARE OVER PAST CRISES 

Looking at how the Singapore Property Market performed over the previous crises, we can observe some patterns. See Diagram2 below.

We can witness the formation of all 4 recovery patterns happening from 1990 till today.

We can observe a swoosh-like recovery that is gradual and steady during the onset of the 1st Gulf War.

A triple whammy of anti-speculation measures, Asian Financial Crisis, and Dot Com Bust saw the V-shaped recovery in 1998 halted and transformed into a U-shape recovery.

Regardless of the recovery patterns, after joining the trough, or the bottoms of the curves, we can see a gradual uptrend over a long period of time. Every peak and trough is higher than the previous one. Investors who had invested in properties during past crises will still be profitable over time.

URA Property Price Index with crisis indicator

ARE THERE REALLY BOLD BUYERS IN EVERY CRISIS?

Let us have a look at investors’ behaviour in crises to better understand if this is really true. We will look at our very own Singapore’s Straits Times Index (STI), a collection of the top 30 companies listing on the Singapore Stock Exchange. From the charts below, we can see a consistent pattern of bargain hunting and an increase in transaction volume when prices are lower. 

Straits Times Index (STI) price and volume during crisis

There are always bargain hunters looking for good value assets during a crisis. Let us have a look at the most recent and relevant figures below. We witness the very same price and volume relationship. Investors are taking the opportunity to buy in blue-chip stocks that are now cheaper.

Straits Times Index (STI) price and volume in 2020

IS THE SAME BEHAVIOUR APPLICABLE TO THE PROPERTY MARKET?

Our last major crisis is the Global Financial Crisis. We saw some new developments that took off very fast that started the next wave of price recovery.

And these buying activities started approximately 6 months after the collapse of Lehman Brothers on 15 September 2008.

New launches snapped up in the last crisis

DID OWNERS IN OUR LAST CRISIS MAKE ANY PROFITS?

Before we can talk about investing in property today, we need to look at statistics in the diagram below to see how they performed in terms of profitability. Did investors who invested in properties during the last crisis make money?

For statistical accuracy, we use new launch transactions because we are able to get accurate entry prices and exit prices of every new home that was sold.

From 2007 to Q1 2020, there were 15,712 new homes that were bought and resold. The diagram below shows the percentage of transactions that are profitable, average profits as well as losses.

Profitability of new homes bought during the Global Financial Crisis

CCR, the luxury market segment was heavily dragged down by losses caused by non-profitable transactions in Sentosa which was heavily speculated during the peak.

Using data from URA in diagram below, we noticed that new condominiums that were bought in the 2008 crisis had the highest profits. The chart below shows the average profits made for properties bought between Q3 2007 to Q4 2018.

Profits of new homes bought during 2008 had the highest profits

WHAT ABOUT LOSSES?

There will always be winners and losers in every market condition. Remember that CCR, RCR and OCR had 67.5%, 84.5% and 91.5% profitability respectively so there are transactions that didn’t go right. Let us have a look at those figures in the diagram below.

Lower chance of making losses when buying during crisis

There was a lower number of losses for buyers who invested in properties during the 2008 period. Most likely because they had enjoyed a lower entry price.

SHOULD YOU MAKE YOUR MOVE TODAY?

There are also several other factors such as interest ratescosts, how big is your safety net, your CPF usage, your current financial position and your risk appetite to consider.

Everyone is different, the most important thing when comes to investing in property is how comfortable are you to ride through any short term turbulences to reach your end goal.

Speak to us today if you want to understand more in detail on statistics and figures to determine is this the right time for you to invest in property.

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