The Straits Times has an article on a group of mostly Singaporeans and Malaysians who bought properties in New Zealand. Not only did they lose all their deposits (downpayment) amounting to NZ$10m but they were sued for another NZ$36m. (NZ$1 = SGD 0.93). To add salt to the wound, none of these investors got any of the properties they wanted!
Here is a quote from the article: “Another Singaporean who declined to be named said he travelled to Queenstown before sinking about NZ$150,000 in deposit for a two-bedroom apartment at Lakeside View, costing over NZ$1 million. He faces about NZ$700,000 in damages, and says he has already spent $30,000 in legal fees.”
In other words, this Singaporean is going to lose a total of NZ$150k + NZ$700K + NZ$30k = NZ$880k !! The worst is there is no property to takeover!
Actually I have a lot of things to say but decided on a few general comments:
- Depending on the investment type, you may lose more than you can afford to. Sometimes even more than your capital.
- When investing in overseas, invests what the locals are buying.
- Be wary of any promises.
- Be clear on what is your ‘capital’. See comments below.
- All investment carry risks. Nothing is risk-free.
On the last point, although all investment carry risks, not all risk are the same. It is important to quantify the risk and make a calculated decision. If it is not possible to quantify the risk, it is better not to invest. I would say that all of these 109 investors underestimated the risk they were taking.
Person named Alex who underestimated the risk said: "We wanted to own a second property but we could not afford one here. So we looked for one overseas... we thought the worst-case scenario would be to lose our deposits."
Many are like Alex who cannot afford to invest in properties in Singapore. So they decided to invest in overseas properties. But what I find it strange is that there are so many different asset classes in investments. Why must they insist to buy properties? Why can’t they buy stocks, unit trusts and ETFs which have very low entry level? I believe the reason why many insists to buy properties is due to the belief that they can earn big money through properties based on historical performance. It is well known that in the past, property investments have done very well.
Hence, the underlying reason why people is so keen to invest in properties is due to the well known behaviour documented in the school of behaviour finance known as “Representativeness” and “Overconfidence".
Representativeness is behaviour in which the investor based his expectations on past experience and then applying stereotypes. In other words, many property investors assumed that good returns in the past will be repeated into the future. Of course, this is the wrong way to invest for if the past predicts the future, there is no concept of risk anymore.
Overconfidence is when an investor places too much confidence in the ability to predict the future. Studies have shown that overconfidence tends to lead to highly concentrated portfolios. Moreover, those who have actual experience may fall into the trap of overconfidence. For example, if you have experience good returns from properties, you are in the danger of being overconfidence in your next property investment.
On another separate matter, Alex thought that the worst case scenario is the total loss of deposit. Actually the capital of the investment is the entire value of the property. The deposit does not represent the entire capital. For property investment, once you have committed to the purchase, you become legally liable for the entire purchase price.
In Singapore context, when you exercise the purchase option, you are legally obligated to purchase the entire property which can be many times that of the initial deposit.
Like this article? Subscribe to my newsletter below for more.