If someone tells us that he has profited from property investment, congratulate them. It’s just another investment which gave them good returns. If we believe everyone profits from property investment, that’s untrue. I have come across many friends who told me horror stories about their property investment adventure. One good friend who has a cafe in Penang bought a flat which was never completed. So, he lost a lot of money and time. Another bought a ‘resort’ in Melaka which was never completed and burnt a lot of his savings. He says, ‘no more property investment for him forever. These circumstances do continue to happen today but it’s becoming more uncommon already. So, I think we should feel more fortunate today. Image is MHPI from housingwatch.my
Coming back to property price appreciation. For example, the average property price increase in Malaysia for the past 27 years (1990 – 2016) has been 6.5 percent per annum.(image above) It has however been dropping in recent quarters. As low as 5.5 percent in Q2 2017. The average inflation for the same period of 27 years (1990 – 2016) is 2.76 percent. Do refer to the report in theglobaleconomy.com here. Image on the right. For the recent few quarters, inflation has been higher than the 27 year average. It meant that the average gain for property price minus inflation is around 3.74 percent per annum. Is this high? Not really but of course fortunately, for property, this increase is based on its total price. Inflation is meanwhile based on how much we spend, so it’s definitely lower. If we look at 2017 , it seems that the gain from property price increase minus inflation is only 2 percent per annum. Really does seem small. No wonder even investors are on the sidelines unless some very attractive ones comes along.
When we look at some advanced property markets, it would tell us in numbers that it is not always a ‘profitable investment’ when it comes to property. For example, if we invested in Australian properties 10 years ago, it’s really fortunate if the investments were put into Sydney and Melbourne. However, if the money was invested into Perth or Darwin or Brisbane, then the actual property price after deducting the inflation rate is actually negative. For a full article,do refer to abc.net.au here. If we were to look at the country where the 2008 mortgage crisis happened, the U.S. it is also shown that some cities where the property prices dropped a lot during the housing crash has not yet recovered fully. Here’s that report in globalpropertyguide.com in full. If we were to look into the UK housing market, the same thing is happening. For some cities, after the adjustments for inflation, house prices are actually not up. Here’s that article in BBC UK. I think for London, it’s definitely up but for the rest of the country, it may not.
Three things we should know from all these advanced property markets. Property investment is still a very good hedge versus inflation because the percentage up is based on home prices. So, it may be a low 3 percent but a 3 percent up on RM400,000 property is still RM12,000 up per year. Assuming inflation is up 6 percent but it’s based on our RM100,000 expenditure for the year, it’s still only RM6,000 up. In other words, we gained RM6,000 on paper. Second thing is that property investment MAY NOT be profitable because it really depends on the timing when we bought as well as the timing when we sell. Plus, it is also pretty illiquid too which meant that if we want to sell fast, we may have to lower the asking price significantly. Third, it pays to do a lot of homework because there are clear favourite cities that has risen and the reasons include economic growth and population growth. Just because we like a certain city in some advanced countries do not mean all other cities in that country are great for property investment. Let’s keep learning because Malaysian property market is nowhere near ‘advanced,’ yet. Cheers.
written on 24 Feb 2018
Next suggested article: Highest and with a 360degree view. Selling at less than RM100 million. 🙂