According the Wikipedia, “Market timing is the strategy of making buying or selling decisions of financial assets by attempting to predict future market price movements.”
Many that are looking to buy their first home say “it is not the right time”, because they are hoping to buy after a market crash. Unfortunately, this belief has caused a lot of people to miss out on years of opportunity to own their own home. If you also think you can buy after a market crash, here are some things to think about
1. It is difficult to time the market. Most people get it wrong – in part due to human psychology, and in part because these are factors outside of your control. If you look at the Singapore Property Price Index chart above, the market bottoms were all characterized by macro events such as the Asian Financial Crisis (1998), Dot-com Bubble (2001), SARS (2003) and the Global Financial Crisis (2009). Even the world’s best investors like Howard Marks admit how difficult it is to time the market. If you’re looking for a funny example of this at play – check out this blog.
2. Even if you can time the market, there are very few transactions that happen at market troughs. The market bounces back quickly after these troughs, so unless you have funds ready and are willing to buy any distressed asset is on sale, it will be almost impossible for you to buy your dream home at the bottom of the market. If you want to profit from timing the market, it’s much easier to do it through the stock market (where there is more liquidity) rather than real estate market. You can see from the chart at the top of this post that most of the transactions (orange bars) happen at times of rising markets, rather than then depressed times.
Singapore homeowners also have very strong balance sheets so there are no panic sellers from speculative activity – since the Seller Stamp Duty (“SSD”) was introduced in 2010, properties sold within the first three years has reduced fro 40% to 2.2% (2018).
3. The prize for getting market timing right is small. This article from Charles Schwab explores the returns of market timing from 1993 to 2012. Over the course of 19 years, the difference in ending wealth for a person with perfect timing is only 6.5% higher (or 0.33% p.a.) than one who invests immediately. Another interesting finding is that the person who tries to time the market and gets it wrong, actually performs 41% better (1.84% p.a.) than the person who remained in cash investments – the cost of sitting out is much higher than the gains of timing your purchase perfectly.
4. The property you want to live in is probably not the best investment property. If you try to marry both requirements, you end up with too many variables to solve, and a sub-optimal solution.
5. Everyone starts out “short the market” on property. I felt that investment jargon was the most elegant way to express this so I need to explain – Investopedia defines “A short, or a short position, is created when a trader sells a security first with the intention of repurchasing it or covering it later at a lower price.” We all need a roof over our heads, and if we do not own the house we live it (or at least own a property if you practice rentvesting), then we are “short the market on property”. We will need to pay rent everyday until we manage to “cover our short” by buying the home we need back from a property investor.
So should I wait for a market crash before buying?
While it is helpful to understand where the property market cycle is (see my views on that [here]), it is more important to consider whether you are underweight or overweight on property. Market timing is less important if are already under-allocated as it is more important to mitigate the risk of being priced out due to inflation. Even if the market crashes after you take your first step on the property ladder, you can look at the bright side – it would be cheaper for you to upgrade to your dream home.
If you found this article helpful to begin your journey up the property ladder, I would appreciate if you could leave a comment below to spur others in your position. There are many opportunities and also pitfalls to optimize in the Singapore Property Market, so it makes sense to engage a market insider like myself to walk you through this. Reach out to me for a free consultation and you will see why you can trust me to value-add to you in this journey.
Good article – I have a lot of friends who have been waiting forever for the right time, only to see their dream home getting out of their reach. Almost all of them regret not buying when they were able to
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