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When prices rise double the income for 5 years?

Posted in Starting Property Investing

Briefly, the property bubble will burst when the market could no longer provide support to the property price. The support we are talking about here refers to people’s income. If we earn way too little versus way too high property prices, of course we are not able to support the prices. To explain very briefly why prices actually go up, there are many popular areas and buyers usually love to buy into those areas. The issue with these areas would usually be the supply; it is no longer increasing in big numbers every year. However, buyers who have the money and would like to buy into these limited supply neighbourhoods are always increasing. Earlier article here. 

Who are some of these buyers? Some just got promoted into senior management, for example. Some just changed job and had a 30 percent increment for example. Last but not least some got a windfall bonus of 8 months (this is not uncommon in some industries yeah) and suddenly have enough downpayment. These situations continue to happen but the supply of properties in that particular hotspot? Well, nearly stagnant unless we are talking about areas nearby the hotspot instead. Thus when demand is more than the supply, the price would move up. However, prices CANNOT keep moving up if it’s moving much faster than the income. Image shows the average salary increment in Southeast Asia for 2018.

Assuming property price went up by 10 percent in one particular year and the typical increment for that year was 5 percent. The market will still be okay because it’s tougher but buyers could still afford it. Second year the same thing happened and buyers got upset but in the end still decided to buy. Third year the same thing happened and now the potential buyer is really stretching his monthly mortgage to the limit if he is still buying that property which has gone up by over 30 percent while his salary barely touched half of the property price increase. If this continue for just 2 more years, I think it’s clear that majority of the buyers could no longer afford the increase. In other words, every time property prices rise way faster than income, the bubble continues building up. When the price could no longer be supported by the income, this is when the property market crashes. There is no need for any predictions, just get to know what was the property price increase and what was the increment. Happy working and buying.

written on 5 Nov 2018

Next suggested article:  Property bubble bursting after 2019. 2 reasons say expert. 



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