A word of caution

If you have been house hunting recently, you may realise that property prices seem to be increasing and good deals seem to be getting rarer by the day.  Looking at the price charts, we have found that some developments are presently selling at price levels near the 2007/2008 peak.  For some projects, prices have even exceeded records set in the previous property boom.  This may prompt some investors to recklessly jump onto the property bandwagon in fear of missing out on the recovery.  In view of this, I feel that it is timely for me to pen a few words of caution.

Firstly, the property market moves in cycles.  This means that the market will not stay depressed or remain buoyant indefinitely.  At some point, property prices will become unsustainable and start to correct.  We have experienced this during the late 1990s during the Asian Financial Crisis and when the government implemented anti-speculation measures, the early 2000s after the dot-com bubble burst and aftermath of the terrorist attacks in New York City and late 2008 after the global financial crisis that was brought about by the United States sub-prime mortgage lending and collateralised debt obligations.  While property prices are expected to increase in the long run (on par with inflation), it is not a smooth ascension but a path filled with peaks and troughs.  In short, what this means is that a property market correction will definitely come again, the only question is when?

This leads me to my second point – there is no way to time the property market.  I have a huge dose of respect for the property market and recognise that the markets often do not always perform as expected.  If you have every tried your hand at investing in stocks, you will realise that the stock market in the short term is highly unpredictable.  The same type of news can cause very different market responses.  On some occasions, the stock market may shrug off negative news and continue to increase in value.  On other occasions, the stock market may continue to fall despite a string of positive news.  As an investor myself, I am acutely aware that there are many black swan events that can derail the property market recovery.  All it takes is another September 11 type terrorist attack, SARS outbreak or government intervention, and property prices will almost definitely drop. 

When Warren Buffett was asked to share his investment philosophy, he succinctly said, “We simply attempt to be fearful when others are greedy and to be greedy only when others are fearful.”  Looking at how the property market is currently performing, I cannot help but to start feeling a bit fearful.