SO YOU THINK ALL PROPERTY PRICES WILL INCREASE PERPETUALLY?
“Buy property for sure it will increase in price over time..”
Unfortunately, this statement cannot hold for all properties.
Real case study on a decrease trend (transaction chart from Sept 2019 to May 2023)
Facts of property A: A small sized unit bought in a sub sale market in a developed, prime area of Kuala Lumpur.
2016 Signed SPA RM 360,000
2023 Market price RM 270,000
That is a 25% decrease in value on paper. In addition, there is a deficit from a negative cashflow (net of mortgage and maintenance fee) of around RM 5,000 per annum.
As it was a subsale the total upfront of 10% deposit, legal fees and disbursements work out to about RM50,000 paid out of pocket in 2016 and RM 5,000 per annum for the maintenance and mortgage top up.
If I were to dump that money into an EPF/ASB assuming 5% per annum, RM 50,000 upfront and RM 5,000 annual savings plan, the value of RM 50,000 in 2016 would be valued to the tune of over RM 111,000 today.
Another flipside is this same property if were to be liquidated today, would not just be at a loss, but it would not be able to cover the balance of the mortgage that is outstanding resulting in negative equity.
What’s worse is that if your strategy in owning a property is to seek capital gains, unfortunately there are pockets of locations and developments that go the other way, ie the value remains stagnant over time.
Is this opportunity cost of not investing in a mutual liquid fund an equity risk you can afford to take?
Of course, not all is gloom and doom – there are cases whereby the property price may increase over time that is an asset WORTH your time holding on to , may it be for investment or for legacy.
Real case study on an increased trend (transaction chart from July 2021 to May 2023)
Facts of property B: A medium sized unit bought in a sub sale market in a developed, prime area of Kuala Lumpur.
2007 Signed SPA RM 430,000
2023 Market price RM 930,000
Doubled in value over 16 years.
Even then, there are many “hidden costs” that come into the mental calculation that tends to be overlooked for property ownership includes maintenance, renovation cost, vacancy rates and also dealing with potential headaches of troublesome tenants or the lack of maintenance and security in the development.
Merely looking at the price on the SPA before and after you dispose is certainly not enough to determine whether the annualised RoI (or internal rate of return aka IRR) on the property investment is worth your time, or at least comparable to say a mutual fund, EPF or ASB.
If you want to read about the mental calculation of property ownership, read my past Smart Investor article here https://tinyurl.com/4u6tut7
As property investing is generally illiquid in comparison to mutual funds whereby you can still leave it and let it bounce back in time (provided your strategy on the said fund is suitable for your risk profile)
Also there is an opportunity cost of having capital tied up in sometimes illiquid asset that some individuals are not able to stomach :
1. Exposure to risk of variable cost- increasing mortgage rates throughout the tenure
2. If a tenant doesn’t pay or its vacant – the owner will STILL have to pay out of your own pocket to make up for the mortgage costs – holding power is a need.
It is common, especially within Asian households to treat property ownership like it’s this secrets path to gaining wealth, but it’s no different than any other investment strategy.
Owning a property is not passive and some may treat it like a part time job. Another perspective on building wealth is that you could do a part time gig, invest those earnings in a index/mutual fund/ASB and “build equity” all at the same time.
7 years of holding on (with the opportunity cost of doubling money in EPF/ASB), how much longer can you wait holding property A, with no guarantee that the value will go up AND find a willing buyer to realise your financial goal?
#opportunitycost
#propertyownership