Investing in Disturbing times(3) – Property and Land

Investing in Disturbing times (3) – Property and Land

Most investors enter the picture right at the end of the property development process, when the finished property is bought and sold. The prices of finished properties are subject to market conditions and have their own price cycles.

Raw land is the first stage in the the investment process, and also has the greatest potential for profit as it can be worth dozens of times more when it is converted and subsequently houses finished and usable properties on it. If it is kept as agricultural land, it needs to be worked on to produce returns.

The tough part is identifying land that has potential for development and being able to purchase it, and holding on to the land for zero returns until a developer comes knocking.  Otherwise the natural growth of land value is too slow for it to give any return worth considering. Finished properties in a booming market are easy assets to speculate on, but when the market turns, as we have seen it happening in the US and other countries, they turn into nightmare investments.

REIT’s are another option to consider, but they are also subject to the same price cycles as the underlying property market.

Property prices tend to peak just before a recession, and the next peak in property prices usually takes 18 years. But if what follows the peak is a depression then the next peak in prices could take longer. It took 48 years for prices to peak again in the US after the last depression.

The real estate cycle in the USA http://www.foldvary.net/works/cycle.html
	Peaks in land value		Peaks in construction		Depressions
	interval (years)		interval (years)		interval (years)
	1818	–	–	–	1819	–
	1836	18	1836	–	1837	18
	1854	18	1856	20	1857	20
	1872	18	1871	15	1873	16
	1890	18	1892	21	1893	20
	1907	17	1909	17	1918	25
	1925	18	1925	16	1929	11
	1973	48	1972	47	1973	44
	1979	6	1978	6	1980	7
	1989	10	1986	8	1990	10
	2006	17	2006	20	2008?	18

Dr Fred Foldvary warned of the coming housing crash and depression back in 2007, and of course no one listened.

Singapore is one of the few countries to take action early to stop property speculation from creating a bubble. 120 years ago the economist Henry George discovered that land speculation is the cause of every major business cycle recession. Sadly, those that end up paying for the finished properties rarely have a chance to enjoy the incredible profits that are generated each time land is developed.

When will we see a peak in property prices again? If the legislation is enacted and enforced to repatriate all illegal immigrants, will the resulting sudden surplus of properties precipitate a crash in Klang Valley property prices? What will happen if the 100,000 bumiputera units left unsold nationwide are opened to non-bumi’s?

Judging by the increasing number of foreclosure and bank auctions of properties, we have not seen the full effects from the local housing markets yet.

As far as investments go, properties are great speculative assets in good times, because it has a larger ready market. A person who has zero investment experience will not think twice to flip properties in a rising market, and ‘the greater fool’ theory applies to its fullest extent in housing bubbles.

That being said, an ounce of Gold today is 3684 ringgit. If property prices drop to a level where a hundred ounces, or less, of gold buys a decent middle class home, we will have a good investment opportunity at that point, provided we are willing to hold for what could be up to over 4 decades till the next price peak occurs. As it stands it appears that prices are still between 300 to 500 ounces of gold. At peak prices, it can be over 700 ounces of gold for a middle class home.

Bottom line, property investment is viewed as a ‘safe’ bet, until prices no longer rise, and the mortgage becomes debilitating. It is slow, and as end users we are not able to enjoy the levels of profits enjoyed by certain land owners and developers. The market will have to square away all the oversupply and bad debts accumulated during boom times before property prices will rise strong enough to make it a strong choice as an investment class as opposed to others.

Jeevindra Kumar

Part 4 follows