By now, you’ve probably seen several articles about the GameStop saga, or at least heard about it from friends. Like many things in 2020 and 2021, this has been an unprecedented situation; in this case, it is one that could affect the financial markets and trading practices for decades to come. But even if you don’t trade stocks, there are valuable lessons we can learn from the GameStop saga – some of which can apply to your property purchases. Here’s what you can take away:
GameStop is a retailer of video games, and video-game related accessories, in the United States. While it used to be one of the largest retailers of video games in the US (and possibly the world), GameStop’s business has not been doing well over the past few years. This is because most people today download their video games; they no longer need to go to a physical store to buy them.
In January 2021, word got out on a subreddit called WallStreetBets, that GameStop shares were predicted to fall, and some hedge funds were shorting the stock.
A quick explainer for those who don’t trade:
When you short a stock, you borrow the shares to sell them, with the promise that you’ll replace them later. For example, you might borrow some shares to sell them for $1,000 today, with the promise to return the shares next week.
If by next week the shares only cost $800, you would make a profit of $200 per share. Conversely, if the share prices cost $1,200 next week, you would end up making a loss of $200 per share when you replace them.
In effect, shorting the stock means betting against the company. You will win if the company’s share value falls, and you will lose if its share value rises.
Now back to GameStop:
Starting from WallStreetBets, a movement started to buy GameStop shares, and caused its price to rise.
The buyers knew that, if they all pitched in, they could inflate the GameStop share price (and the hedge funds would have to buy it from them at the higher price, as they’re obliged to replace the shares they sold).
This is called a short squeeze. However, no one predicted how many people would jump on the bandwagon. In just two days, the GameStop share price rose over 1,500 per cent. The hedge funds had sold GameStop stock at just around US$19.94 per share; but at the new price, they would have to replace it at US$325 per share.
Locally, an NUS student managed to chalk up around S$100,000 in gains by owning GameStop shares. For the short-sellers, they are now looking at a collective estimated loss of US$19 billion. Some brokerages, such as RobinHood (which was used by many of the traders on WallStreetBets) blocked the buying of further GameStop shares, which has prompted lawsuits further down the road.
But just as quickly as the price rose, it has crashed back down – at the time I’m writing this, GameStop shares have fallen below US$100.
While this involved shorting equities, there are some useful lessons to be learned; and they apply even to building a property portfolio.
Despite GameStop’s share prices soaring over 1,500 per cent and then crashing down, nothing has changed about the company. It’s still a struggling retail business. It did not generate more sales when its share price went up; nor did it start doing worse when the prices began crashing again.
Rather, the share price movement was entirely due to the sentiments of buyers and sellers; without regard for the actual underlying business.
Sometimes, the same thing can happen with property. For example, Cash Over Valuation (COV) for resale flats has been on the rise the past month. This is when resale flats are transacted at above their real valuation.
Does it make sense to pay COV? Sometimes, such as if you really don’t care about investment returns, and the flat is purely a roof over your head. However, you should understand that COV may simply reflect the emotional response of the seller, rather than the actual worth of the flat.
The inverse is also true. A property that’s unusually cheap may not have anything inherently wrong with it. For example, sellers who are in a painful divorce may be selling cheaply because they want to move on, and the old marital home is a painful reminder. The low price tag may not be a “hiding” anything.
For these reasons, we should be careful not to let the current price affect our analysis of the property. Don’t let a high price (or a rush to buy) create the assumption that there’s something special about the property; nor should you assume a low price indicates a problem. Focus on the fundamentals of location, upkeep, and affordability.
A short squeeze requires knowledge of what the short-sellers are doing. If no one had found out how much GameStop was being shorted, the whole saga wouldn’t have happened. Likewise, if the short-sellers could draw a bead on the buyers’ intentions, they could have responded differently.
Some of the participants in the short-squeeze care very little about making money, and have thrown away hundreds of thousands of dollars holding on. Their intent is to hurt hedge funds, which they see as malicious, or stand up for a company they grew up with. If the short-sellers had understood the potential for this sort of reaction, they may have reconsidered their initial moves.
Likewise, knowledge of the buyers’ or seller’s situations are key in property transactions. One example of this is when a buyer is aware the ethnic quota has been reached, for a particular resale flat – this can sometimes cause the buyers to lowball the seller, as they know the pool of prospective buyers is more limited.
Another example is when the buyer knows the seller has a tight timeline – such as when buyers of a new launch condo know the developer is close to its five-year ABSD deadline (failure to complete and sell all units within five years will lead to a tax of 30 per cent of the land price).
The buyer or seller’s situation can cause them to alter their offer or asking price, in a way that’s unrelated to the inherent value of the property.
RobinHood, the brokerage firm that blocked buying of GameStop shares, ostensibly did so due to high deposits required (without going into too much detail, I’ll just say that brokerage firms need to put up a deposit at a clearing house to fulfill orders; and the deposit goes up based on the stock’s volatility). Despite borrowing billions, RobinHood was unable to secure the funds needed.
Likewise, many of the short-sellers made dangerous assumptions that they could get the money when it was needed; just because of the large amounts they were already known to borrow. This forced some of them into closing, when lenders got nervous and became unavailable.
Some property buyers like to make the same mistake. A high degree of leverage is possible for buying property; the minimum cash down is only five per cent of the property price. This sometimes leads to presumptuous gestures – such as buyers who put down the booking fee before they’ve even secured a bank loan.
Later, if problems arise, they could end up forfeiting a large part of the deposit.
Other timing issues could also arise; such as when the sellers in an en-bloc sale assume they can get a bridging loan, while waiting for the sale proceeds. Do know that, if the time to receive the sale proceeds are too far away (it can sometimes even exceed a year), a bridging loan may not be available.
Start settling financing issues before you need the loan, not in the days or week when you actually need it. If you need help with any of these issues, drop me a message and I’ll walk you through it.
The potential loss to shorting a stock is, in theory, unlimited. Once you’ve sold it, you’re obliged to replace it at the later price – which may be twice as high, 10 times as high, 10,000 times as high, etc. This is a downside that you may not be able to walk away from.
The same concerns apply to making a property purchase. If you buy a 45-year-old industrial property with a 60-year lease, and it turns out there are no tenants, there is no “undo” option It’s highly improbable that you can resell such a property without a steep loss (if you can even sell it at all).
The downside risk may not just be selling without profit – it may be you can’t even sell at all. Likewise, if you take on a co-owner who later can’t afford the mortgage, losses from a foreclosure may be unavoidable.
You need to ensure that, if everything goes wrong, you can survive the fallout. Don’t be a pure optimist or pessimist – make sure you calculate the potential gains and the potential losses. Ideally, of course, the potential gains should outweigh the losses.
Why are so many Wall Street experts shocked by the GameStop saga? To me, it’s underestimation of how much the Internet has changed investing. A site like Reddit can mobilise hundreds of thousands of users to share information and jump in, all in a matter of hours. This is unlike the Wall Street glory days in the 1980’s, when it still took a lot of time and effort to co-ordinate such big movements.
What the Internet has done to equities, it has also done to property. As a simple case in point, consider how difficult it is to price your property above valuation these days. Sure, it can still happen – but all it takes is for the buyer to browse a few property portals, and they can instantly know that you’re pricing above the norm.
If you want to, you can check out the latest URA transactions right now, and work out if the home you’re eyeing is over or underpriced.
Besides pricing, every aspect of a property – from its location to the small flaws in its swimming pool tiles – can be broadcast to hundreds of thousands of users in a matter of hours, if not minutes.
This impacts both property buyers and sellers alike. The good news is this buyers can use this to their advantage – do scan forums and chats, to pick out key information. You should always verify these with trustworthy sources later; but they provide a good general inkling of what to look for.
While property prices do move up and down, you’re far less likely to experience such a roller-coaster of emotions and changing prices (at least within the realm of residential properties). While property assets are less liquid, they can also form a less volatile complement to your portfolio. Do reach out if you want to know what sorts of property asset might be best for you.
In the meantime, you can follow me on RonChongProperty.sg to find out more about the ongoing trends in Singapore real estate.