Prospects for Property

By TAN Kee Wee
(MediaCorp 938LIVE’s Money Talks, Thursday, 30 July 2009, 7.50 am and 7.20 pm)

The Singapore property market is hot. If you are one of those who have scratched your head and wondered why, you are not alone. That’s because with the local economy in a recession, the property market ought to be quiet.

There are a few reasons why it’s not. One is lower prices. If you need a home, you think you are getting a good deal. Another reason is the optimism that the economy will bounce back soon.

But this is a gamble when the global economic fundamentals are still negative. Even if the economic outlook is positive, history tells us not to hurry.

This is because property prices normally pick up only after the economy has picked up. And that is usually after a time lag.

Yet another reason why people are buying property now is because their situation is compelling them to take a gamble on property. This behaviour is best explained by referring to Prospect Theory. This theory was coined by two psychologists Daniel Kahneman and Amos Tversky in 1979.

Backed by experiments, Prospect Theory uses mathematics to describe how people make choices in situations where they have to decide between alternatives that involve risk.

Put simply, the theory tells us that we have an irrational tendency not to take risks, or gamble, when we are running a profit. But we will take risks, or gamble, when we are running a loss.

Let’s use stock investment to illustrate this. If we bought a stock for $1.00 and it went up to $1.20, most of us would sell and lock in our profits. But if the stock went down to $0.80, most of us would not cut our losses. Prospect Theory says that we would take a gamble and hope for the price to rise.

On this basis, Singapore property buyers fall into the second situation. With interest rates so low, and the cost of living up significantly, property buyers must feel like they are in a situation of loss, since their life savings have shrunk. So they are willing to gamble their life savings by buying property.

To these property buyers, there are really no safe alternatives. Two years ago, structured products like minibonds, looked like safe alternatives. Not anymore. Stocks are also out. They have rallied too much recently. That leaves property, which is still selling at a discount from recent peaks.

While Singapore property buyers appear to be acting rationally, Prospect Theory tells us that they may not be acting in their own best interest. Statistically speaking, they may end up with large paper losses. The right action may be to accept the low bank interest rates and wait.

What about the argument that property is a hedge against inflation? This sounds good in theory. But in practice, after inflation arrives, property prices usually fall as interest rates go up to control inflation.

And what about the argument that since the 1970s, Asian properties have always been on the uptrend? Property was indeed a great investment during those years. Financing was easy and global recessions were mild and not synchronized. But that world has disappeared. Of course, it will return one day.

Until then, it’s good to be skeptical about the long-held belief of ever rising property prices. Just as it is good now to be skeptical about the long-held belief that all religious leaders lead lives of obedience, chastity and poverty.