There was a recent article in the paper with the headline “Time to review property cooling measures” (Straits Times, July 4).
The argument is that, if private home prices have been down; HDB flat prices have dropped; oversupply has worsened; rents have weakened; interest rates have risen; the real estate industry has shed jobs, it may be time for the government to review the cooling measures.
Many people fail to see that the government can only do so much to cool or stimulate the property market. Afterall, it is an open market and there are many other factors that can lead to the continual boom or downturn of the market, such as supply and demand, economic outlook, market confidence, etc.
I am re-reading James Rickards’s book The Death of Money: The Coming Collapse of the International Monetary System. Below are some new inspirations from this interesting read.
1. Regime Uncertainty
When the Singapore government finally decides to withdraw the cooling measures, it may do little help to restore the fallen prices.
Remember those government measures taken to stimulate the property market back in year 2005? Loan-to-value limit was raised to 90%. But not many buyers were interested.
The “regime uncertainty” theory from Charles Kindleberger explains the reason behind the lack of investment during the Great Depression.
“… even when market prices have declined sufficiently to attract investors back into the economy, investors may still refrain because unsteady public policy makes it impossible to calculate returns with any degree of accuracy … the added uncertainty caused by activist government policy ostensibly designed to improve conditions that typically makes matters worse.”
From mid-June, stocks in China tumbled 30 percent from their seven-year high. Then the Chinese government and Chinese brokerages suddenly announced drastic measures to revive the stock market. The intervention might have saved the market from the brink of collapse and demonstrated how powerful and cash-rich the government is (and compared with China’s $3 trillion reserves the money spent is just peanut). However, the whole incident exposes the vulnerability of the fundamentals and further undermines the market confidence of the investors.
Afterall, who needs government to step in if a market is healthy enough to recover on its own?
2. Market Oversupply
With 24,800 vacant private homes, an additional 22,000 to be completed this year and another 21,000 to be ready next year, what kind of population growth do we need in Singapore to absorb the surplus?
Like what Rickards says: “In the end, if you build it, they may not come, and a hard landing will follow.”
3. Wealth Effect
Rickards points out the fact that two asset classes – stocks and housing – represent the wealth of most people (which is certainly the case in Singapore). When prices of stocks and properties go up, people “feel richer and more prosperous and are willing to save less and spend more”.
It is a chicken-and-egg situation: Low borrowing rate and easy money make properties look affordable, attracting Singaporeans to put more money in properties, thus driving property prices to new highs.
4. Wealth Inequality
The wealth effect only benefits the “haves”, not the “don’t haves”.
Wealth becomes heavily concentrated on the privileged who own properties, or businesses who own a stake in the industry (property developers, real estate agencies, banks, brokers, etc.).
When prices are rising faster than wages, housing becomes unaffordable for the common people who are the end consumers of all the housing products. The average people do not get anything from inflated housing prices, except the adverse effect of inflation.
5. Asset Bubble
Cheap money widens the disparity between the rising costs of housing and the unchanged affordability of home buyers, all disguised under the continual growth of debt.
But many people fail to see that this wealth effect is superficial in the sense that it doesn’t come from real economic growth of the country. In other words, the booming property market is not created out of increase in productivity, trade surplus or foreign direct investment.
When the real estate market softens, the net worth of people who are asset rich in properties diminishes with the deflated asset bubble.
6. Asymmetric Information
Many buyers are looking for great bargains in this market. They assume that sellers would hang on to their properties if they are not so desperate to sell. This belief causes buyers to lower the prices they are willing to pay.
However, not all sellers letting go of their properties now are desperate sellers. They refuse to sell at unreasonably-low prices and withdraw their properties from the market. The see-saw situation results in less properties for sale and lower transaction volumes every quarter.
7. Self-fulfilling Expectation
Buyers are sitting on the fence and holding back home purchase. Investors are losing appetite for property investment and looking for a safe haven to park their wealth. The drop in transaction volumes and prices eventually becomes a self-fulfilling expectation.
A persistent depressed market, coupled with adverse factors like supply glut, interest rate hike, soft rental market, etc., requires strong holding power to tide through the storm. And holding power means healthy level of cash reserve and high liquidity of other assets. Unfortunately, the near-zero-interest rate discourages savings which has depleted bank savings and fixed deposits in the past few years.
The market can be more vulnerable than what it appears to be. The loss of market confidence can trigger a ripple effect which causes frenzy dumping to cover losses.
It doesn’t matter what the industry stakeholders are saying. It is still early to say that the Singapore property market is recovering.
To be prudent investors, take the hint from James Rickards.
“The key to wealth preservation is to understand the complex processes and to seek shelter from the cascade.”
Join us at the Making A Smart Move For Your Mortgage Information and Networking Luncheon on 1st August to learn how to cushion the impact of interest rate hike and to take precautions against other market uncertainties.
Excellent ‘translation’ of Jim Rickards’ book into the scenario of Singapore.
The book is definitely worth everybody’s time who believes that the current trends (debt accumulation, up stock markets) will continue undisturbed. They will not.
“There are no easy exits from the policy mistakes that have been committed. All that remain are hard choices.” – Jim Rickards
Thanks! It really means something to me to finally have this blog post out.
Read the book on 1st January this year and wanted to blog my thoughts immediately. But I held them back, thinking they might be too profound and subjective for my readers. Anyway, I am glad that this is finally out of my system.
Thanks! It really means something to me to finally have this blog post out.
Read the book on 1st January this year and wanted to blog my thoughts immediately. But I held them back, thinking they might be too profound and subjective for my readers. Anyway, I am glad that this is finally out of my system.
Good write-up, thanks.
What’s your view on some recent projects where the developers still raise price & freehold projects still being snapped up by the locals?
I don’t think developers are raising prices. They are just using different ways to price the units. People who are still buying are mostly 1st time buyers of mass market condominium, especially new launch projects.
I don’t think developers are raising prices. They are just using different ways to price the units. People who are still buying are mostly 1st time buyers of mass market condominium, especially new launch projects.
Great Insights. A bit worrisome though. What are your thoughts on the recent sell out in Highpark Residences as well as Northpark? Will their prices hold in the event of a downward spiral?
You will still see first time buyers or upgraders going into the market when prices are falling. There are a total of 67,800 units (vacant, launching and to be launched) to be absorbed by the market by end of next year. No need to rush in now.
I would assume not all of them are first-time buyers or upgraders. No offense, I could be wrong (maybe you have got the data that’s not shown here) but I think it’s a bit overgeneralized. I do agree there are lots more units coming but if one is looking for a specific location with probably a desirable unit (e.g. high floor, xx direction facing) then this wait-and-see strategy might not work.
Also some agents are saying there are areas where the price would hold steady due to high demand and low/fewer new condos. I don’t buy it 100% but they do have a point too.
I think it is a personal choice when and at what one wants to enter the market. The definition of a good unit also differs for individuals.
A desirable unit can be found during good or bad times. As a value investor, I have to ensure that I buy the unit with the best layout in the best block with the best value. And this was achievable when I bought during 2002 and 2007.
Prices of all property types and projects fell during the last down cycle. The question is how much the value of the project dropped compared with others. One can tell which are the resilient ones after many years of experience investing in properties. But I don’t have to buy these good projects when their prices are high.
Agents have to make a living during good or bad times. But as an investor I don’t have to be fully invested at all times.
You will still see first time buyers or upgraders going into the market when prices are falling. There are a total of 67,800 units (vacant, launching and to be launched) to be absorbed by the market by end of next year. No need to rush in now.
I would assume not all of them are first-time buyers or upgraders. No offense, I could be wrong (maybe you have got the data that’s not shown here) but I think it’s a bit overgeneralized. I do agree there are lots more units coming but if one is looking for a specific location with probably a desirable unit (e.g. high floor, xx direction facing) then this wait-and-see strategy might not work.
Also some agents are saying there are areas where the price would hold steady due to high demand and low/fewer new condos. I don’t buy it 100% but they do have a point too.
I think it is a personal choice when and at what one wants to enter the market. The definition of a good unit also differs for individuals.
A desirable unit can be found during good or bad times. As a value investor, I have to ensure that I buy the unit with the best layout in the best block with the best value. And this was achievable when I bought during 2002 and 2007.
Prices of all property types and projects fell during the last down cycle. The question is how much the value of the project dropped compared with others. One can tell which are the resilient ones after many years of experience investing in properties. But I don’t have to buy these good projects when their prices are high.
Agents have to make a living during good or bad times. But as an investor I don’t have to be fully invested at all times.
I came across this site only recently and I appreciate your work and wisdom. I have invested in properties in the past but more into equities and indices in recent years. In many ways the market behaviours are similar, the desire to invest increases as market moves higher along with the risks, and the late bull stage or market peaks will see the bulk of retail players joining the frenzies. This has happened.
Both the stocks and property markets are at the tip over stage where buyers who missed the chance will play catchup following some initial drop in prices(wave 2 as per Elliot Wave theory). However, with fundamentals acting against the markets such as rising interests and supplies, and lower earnings(capital gain/rental yields for properties and earnings for stocks) the next wave 3 down will be the big one. Unfortunately, this is how market cycle behave and I respect that fact that this has to play out before the market could regain confidence in a sustained way.
Government intervention may cushion against extreme moves but the cycle will still play out, much in the same manner as it had during the up cycle when a string of cooling measures have little initial effects. The current world economy and currency wars will impact the markets too.
I have no doubt that you are spot on in your comments and we just need to keep tap on how the usual cyclical behaviour plays out.
Best wishes and looking forward to your future postings.
Thank you for sharing your insights of the property market. Actually, I am the one who have learned a lot from savvy investors like you.
Thank you for sharing your insights of the property market. Actually, I am the one who have learned a lot from savvy investors like you.