Is Now The Right Time To Buy Property?
Updated: Jun 11, 2020
Hi everyone! We have entered Phase 1 of the Post-circuit breaker now. I hope that by now most of you are better adjusted to the changes such as working from home and putting on your face masks.
As for me, I've been taking videos of vacant properties to show prospective tenants and buyers. I'm also working from home answering some of the questions which my clients have.
There is a burning question on many people’s minds. Lots of clients and friends have been asking me this same question.
In view of the covid-19 situation, is now the right time to buy a property? Since this is such a popular topic, I’ve decided to address this in my blog post today.
Before I get into the details, I will need to provide some background information for context.
Here are some important events happening in the world that impacts the economy.
As of 21st April 2020, there have been collective global efforts to combat COVID-19.
1. US has pumped in trillions of dollars to support their economy
2. China has billions poured into encouraging consumer spending
3. UK has unleashed a 'war-time' $400B Euro bailout programme for its economy
4. Japan and Europe have contributed hundreds of billions to purchase bonds and help firms
5. Many countries, including Singapore, have plunged their interest rates to all-time lows so that there will be more lending
Singapore's effort in keeping its economy alive
The core of the issue seems to revolve around two things, the first is that people are afraid of a serious economic downturn and hence are cautious about spending.
Secondly, many people are not seeing much business also, so they are not earning as much. This is a vicious cycle that cannot be resolved overnight.
According to Channel News Asia, 3,600 firms closed down in April 2020. If that sounds bad enough, a whopping 8,600 businesses filed for closure in May 2020 as reported by the Business Times. The source claimed that this number will only keep increasing.
In a bid to keep our economy going, the Singapore government has pumped in billions to keep economy alive.
Apart from helping to keep big firms and SMEs alive, they are also going to great lengths to ensure workers continue to be hired by their companies and that consumerism stays active. Remember the $600 payout? Apart from that, there were many other schemes that were implemented such as employment subsidies.
We can infer from government's actions that they are doing all they can to keep as many as possible afloat through this crisis.
The entire world is doing what they can to avoid another Great Depression scenario.
Eventually, recovery will take place and consumer confidence will return
For confidence to return and a recovery to take place, 3 factors must occur.
1. A decline in number of infections
2. A vaccine has to be created
3. A more efficient cure needs to be developed
In the midst of all this uncertainty, it might seem right to not put our money into purchasing a property.
On the contrary, this mindset is wrong. In fact, when crisis strikes is when opportunity shows itself. When old methods do not work any more, it makes way for new ideas to surface.
The recovery of people’s perspectives, spending attitudes and subsequently asset prices is just a matter of when.
Most people form opinions based on what they read from the news. When major media outlets begin announcing that the infections are steadily dropping in numbers, or that vaccines or cures have been discovered, it means that we are already entering the recovery phase.
This will raise another question: By that time, would there still be any good deals left?
There may be, but because of pent-up demand, buyers may come in a fast and furious wave. This is what happened in China, where once restrictions eased, there was a big surge in property transactions and buyers snapped up everything rapidly.
During then, sellers would definitely be a lot less willing to negotiate as compared to now, since they would not be seeing any shortage of buyers.
With all these going on, how can I be sure that now is the right time to buy property?
Essentially, the key lies in a concept known as the Margin of Safety. This Margin of Safety refers to properties that are priced at amounts less than its intrinsic value.
Just like stocks, there is no way to time the bottom of the market as it is always unpredictable. Those who try often suffer wasted efforts and missed chances.
I know it’s tempting to try waiting and capitalising on the right conditions on the account that it happens, but in such situations, waiting for the right conditions to form will result in a lot of wasted time.
What you should be doing however, is creating that opportunity for yourself.
The market is not something that we can control and trying to do so will be futile.
What we can control, however, are the things we can do on our end such as scouting out good value properties, finding out more and setting realistic goals.
We should prime our attitude to focus on actively finding good deals instead. This should be all the more so in present circumstances, where to stay afloat, more groups of people have no choice but to liquidate their investments, and some developers are pricing their projects with good risk premiums factored in.
Hence, there will be properties priced at great value up on the market that is worth exploring.
This Margin of Safety is defined by one’s personal risk tolerance and views of how the property market would pan out.
For example, some people are willing to enter it with a margin of safety of 5% below the valuation. On the other hand for some, anything below 10% is not a sufficient risk premium.
I personally assess this via the rental yield method based on current rents. Factoring in a minimum gross rental yield will help to keep things afloat should the crisis prolongs.