This article was published in Business Today on 13 September 2022
- What is a bubble?
- The five stages of a bubble
- Displacement – A new paradigm
- Profit taking
- Are we in a bubble?
In the past two years, the world has evolved in ways we cannot imagine.
In Malaysia, the government helped citizens with moratoriums and cut back the Overnight Policy Rate (OPR) to cope with the pandemic. In Singapore, property tax increased and new cooling measures were implemented.
With the debut of 2022 came a slew of additional global events, including the Russia-Ukraine war. This led to oil price shocks, escalating global inflation significantly. Followed by an increase in commodity prices leading to higher property prices.
For instance, Singapore experienced commercial property prices increase by multiple folds.
Now, the million-dollar question is, are we in a bubble?
What is a bubble?
A bubble occurs when an asset price escalates so fast that the real intrinsic and fundamental values do not match. In other words, the asset price moves so fast that its rental lags.
Are we in a bubble? To know that, you have to know the five stages of a bubble. So, let’s go through them to see where we stand currently.
The five stages of a bubble
1. Displacement – A new paradigm
Displacement occurs when people find themselves entering a new paradigm. Due to the pandemic, we are in the new normal. Businesses have evolved. Logistics and ecommerce have seen a wider realm of demand. Shops across the street that cater to takeaway and dine-in services have a better rentals than others.
In this stage, prices first rise gradually but then catch momentum as more and more people join the wagon. The speculation of once-in-a-lifetime opportunities creates fear of missing out. This gives rise to an increased number of investors and buyers. And with the addition of inflation, we entered the boom phase before we could even wrap our head around it.
As asset prices skyrocket, there is a feeling of excitement. But when everyone keeps buying, valuation reaches an extreme level. People adjust to the notion that there will always be a market of buyers willing to play. We had seen this stage starkly in Singapore when property prices kept increasing even in the thick of the pandemic. That is when the government implemented cooling measures to deter speculation and harness the bubbling price.
4. Profit taking
After the euphoric buying, people gradually realise that the bubble will burst soon. So, they start selling their assets and parking their profit. At the end of 2021, when we were almost on the verge of recovery from the pandemic, the oil shock from the Russia-Ukraine war pulled oil into a negative price range. All this uncertainty and volatility in a short span of time induced panic selling.
When panic spreads, it infests fast. As such, people want to liquidate their assets before the price reverses and starts dropping. The volatility and fear of inflation have led us to do just that.
Are we in a bubble?
So, the final answer is yes, we are in a bubble. If you are a pessimist, you would be concerned about the rising inflation and the looming recession though we are not there yet. If you are an optimist, you would say that the worst is over.
I am an optimist with a cautionary view. So, I would say watch for the unpredictable environment, and the hiking inflation and interest scenario.
In my personal opinion, the inflation situation is just due to us compensating for the damage done during the pandemic. All production, supply chain and manufacturing operations dropped to almost zero during the pandemic. Now that we are slowly getting back to normal, the supply cannot match the current demand so fast. We are in recovery, so it will take some time to reboot all sectors.
If we can use the right fundamentals for property investment in the current market, it is indeed a great time to invest.
In my next segment, I will talk more about the real estate fundamentals so that you can make the right move with your investment decision in this critical time.