Property Prices Hitting Outrageous Heights – Rationale Behind Investors To Continue Buying

By on January 4, 2013

Despite so many rounds of property cooling measures, property prices continue to hit levels that raise eyebrows. And this is happening consistently. You might think that there must be a point where investors feel that enough is enough and tear up the next property brochure they see. A point where prices per square feet is too high to generate a reasonable rental yield. It does not appear that we are approaching that point any time soon.

Why are investors still writing mega cheques for these transactions?

The decision of investors are purely made from numbers. If the numbers make sense, it becomes logical to buy. And if they don’t make sense, it would be hard to pry open an investors wallet even with a crowbar.

Interest rates on savings in our bank accounts are alarmingly low. Even time deposits are at levels that does not keep up with inflation. Keeping money in the bank is as good as having your coffee served in a leaking cup. If you always loved stocks and had invested in the STI in January 2011, you will also find that you made a loss as the end of 2012 had you held onto it. In the same period, properties are powering ahead like an unstoppable 300kg gorilla.

From another angle, mortgage rates are still very low when you compare them to historical data. Couple that with SIBOR hovering around historical lows, financing property investments look like a very tempting proposition to investors. It might be of interest to you that SOR which is another benchmark rate likened to SIBOR hit negative values in 2011. While mortgage rates can be obtained at less than 1% in 2011, it can still be obtained at just slightly over 1% in 2012. International investors who are used to high mortgage rates will consider this as the closest they can get to free money.

This low costs of funds for investment properties makes it logical for investor to hold onto properties they already own and buy more properties as long as they can find a bank willing to finance it. At the exploding rate property prices are moving, it also makes sense to hold onto properties for as long as possible to fully milk it’s capital appreciation.

From a rental perspective, just a low rental yield of 3% will be able to allow investors to cover their interest expense and make a profit out of it from cash flow. This is yet to take into consideration value appreciation. Even if mortgage rates are at 2%, a 3% yield will give the investor 1% returns. This is 10 times the rate you will get if you are to leave your savings in the bank. This is of course an over-simplified example to bring across the point. If you are to work out the sums yourself, you might find that it can be much more lucrative than this.

The Singapore dollar has also been slowly appreciating against the US dollar for the last 5 years from 2008 to 2012. There is every indication that MAS will continue to let the SGD appreciate in value to combat effects of imported inflation. This makes Singapore a good investment for foreigners. Not only will investors be able to hitch a ride on the Singapore property boom, they will cash in a good profit from exchange rates with a strong appreciating Singapore dollar.

Invest at your own risk

The sun in the property market could set without warning

Although the numbers do add up, there are also a number of market factors and numbers to consider other than just profit numbers. There is a psychological term called “selective perception” that you should read up about. It is used to describe people who are so focused on 1 thing, they fail to see everything else around it. Before putting your money into properties, be sure that you are not suffering from selective perception. You could be so motivated to invest in properties that every signal telling you not to is being filtered out by your brain. For every argument, there will be a counter argument against it. So be sure you get your hands on the most up-to-date and reliable data to aid your investment decisions.



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