The times have been good for property investors in the past couple of years. Prices in certain areas, particularly in selected areas of Kuala Lumpur and Petaling Jaya have risen significantly, some as high as 50 percent. And as a result of this rise, practically all property investors had made money. In fact, some people have seen their net worth jump up by 30 or 40 percent because of the price rise. For example, a young colleague who purchased their house two years ago saw the value of their house increase from RM950,000 to RM1.3 million today. Of course, the owner was all smiles when they told me the story.
I am happy for them. As an avid property investor, I have benefitted from the rise myself, so I am certainly not complaining. At the same time, I must admit that I have some reservation about the whole scenario. The price rise has distorted reality to many investors, including my colleague. Because the price climbed up as soon as he bought the property, and remained at a high level even today, his view on property investment is seriously distorted. He thinks that:
1. Prices will go up as soon you buy a property.
2. The gains will be in double digits per annum.
3. This is normal.
4. Prices always go up.
5. It is easy to make money in properties.
6. He is a super genius when it comes to property investment!
Long-term property investors will quickly point out that none of the above are true. That’s right – none! For starters, I can tell you the current situation is exceptional. It wasn’t like this five years ago, and certainly not ten years ago. I can also tell you that times are not going to remain this good forever. Prices do not rise to the sky, and interest rates do not stay low forever. In fact, interest rates has already climbed (or to use the toned down term of ‘normalised’) by 75 basis points already this year.
Why am I so sure of this? Simple; I have seen similar euphoria before (the first in the mid-1980s and then in year 1997 during the Asian Currency Crisis), and the story did not end well on both occasions. Like most bubbles, prices edged up slowly initially. The initial buyers made money and this attracted others to invest into properties as well. And as prices climbed higher and higher, the euphoria got to the levels that some people were rushing to buy because they were scared that the prices will spiral out of their reach if they do not act then. But when the market crashed, as all bubbles eventually do, a lot of people were seriously hit, a lot of money was lost, and that included seeing their properties being auctioned off by the banks.
I see the same story being repeated today. On top of the ever present dangers, there will be massive challenges in this new decade. There will be much turbulence in the coming days, and some of them will be unlike what you and I have seen or experienced before. This may include double-digit interest rates, multiple bank failures, currency crashes and explosion of the derivatives market.
As a result of the new challenges, the investors using the current success formula of buying five properties at one go (by paying the minimum down payment and borrowing to the hilt) will be seriously hammered. They will experience much pain, to put it mildly. Some people will lose their properties, some will lose more than money and yes, some will become ex-millionaires.
But of course, where there is danger, there are also opportunities. This will include a huge number of properties being auctioned and also getting huge discounts from distressed sellers.
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