Be prepared for post-Covid recession

During the May Day Rally, Prime Minister Lee Hsien Loong warned Singaporeans to be prepared for more economic challenges in the year ahead. Because there may be a recession within the next two years.

As a small island country, the fate of Singapore is intertwined with and affected by the destinies of many countries. We import most of our supplies overseas and export manufactured products to countries around the world. It is inevitable that we are at the mercy of the Russia-Ukraine war, China’s zero-case policy, high energy prices and interest rate hikes. For some time, we are going to suffer from high inflation and weak global demand.

Mr Lee added, “Singapore is tightly integrated into the global economy (and) given our small size, we will always be a price taker in world markets, so we cannot avoid these global headwinds.”

Early this month, CNBC conducted a survey on 30 economists, fund managers and strategists. The majority (57 percent) believe that the Federal Reserve’s tightening campaign will end in a recession. August 2023 is the average starting month among those who think a recession is coming.

Joel Naroff of Naroff Economics writes: “The likelihood is that things will be worse and last longer than in most models, meaning that the Fed’s ability to fashion a soft landing is highly unlikely. If it happens, it will be through sheer luck only.

– “The Fed’s aggressive hiking campaign will lead to a recession, according to CNBC survey”, CNBC, 3 May 2022

Why governments cannot save us from recession this time

Is recession a big deal? Every few years, there are talks about recession. Likewise, every now and then the media will say recovery or rebound is on track.

I don’t want to sound pessimistic. But every time when those “analysts” talked about recovery, I couldn’t really feel it. However, I do remember how we suffered during the past recessions or downturns – Asian Financial Crisis, dot.com bust, 2001 recession, SARS outbreak, global financial crisis and Covid-19.

Such is life for us ordinary people.

The recent talks of recession were in October 2019 and again in April 2020. Governments all over the world did what they could to avoid their country falling into recession – by offering generous relief packages to stimulate the sinking economy.

No government expected Covid-19 to last for two years and still counting. They gave away cheap money and generous measures to save the economy. It was also a no-brainer strategy for countries having elections.

But it is different this time. To beat inflation, quantitative easing and low interest rates are replaced by monetary tightening and interest rate hikes.

Last Wednesday, Fed announced a raise of 50 basis points, the first in 22 years. There will be another round next month.

The latest US 30-year mortgage rate has shot up to 5.54 percent (May 9). The highest in history was 18 percent 41 years ago in 1981, after inflation hit 14.6 percent the previous year. Fed’s aggressive rate hike led to the 1980-1982 recession. Similarly, US inflation is now at 8.5 percent – its highest in 40 years. So expect both inflation and mortgage rate to continue rising.

In Singapore, mortgage rates have doubled over the last six months. Average two-year fixed rates have risen to 2.25 percent. Floating interest rates will follow suit soon.

Nothing left to support prices of overvalued assets

Fed’s expected rate hike is not the biggest threat to the US economy (and gradually the world economy). What will really kill is Fed’s decision to cut $2.7 trillion off its nearly $9 trillion balance sheet. It plans to reduce bond holdings by $95 billion a month, down from at least $120 billion a month during the pandemic.

Fed has been buying bonds like nobody’s business to stimulate the economy. This led to increased monetary supply. Instead of leaving money in the bank to earn low interests, individuals and companies put their cash in the stock market, real estate and cryptocurrencies.

With Fed’s tapering, there is nothing left to support these red-hot asset markets and the current high valuation of assets.

All this while, many chose to ignore the facts: Escalating home prices is the result of too much liquidity, low interest rates, ease of borrowing or refinancing from the banks. The big crowd of homebuyers is the result of buyer incentives and tax rebates from governments in some countries.

Instead, they chose to believe the industry stakeholders and media reports: Under the pandemic, people are all looking for a better home. There is shortage of home supply. We will see revenge home purchase with easing of Covid-19 measures.

Whether there is revenge or not we don’t know. All we know is high interest rates and the threat of recession are now getting back at the impulsive homebuyers.

“Other warning signs include sharp asset price corrections, accompanied by rapid loss of business and consumer confidence, Ms Ling said. Sharp asset price corrections could dampen consumer spending, for instance.

The impact of a recession on Singapore is the possibility of job losses or greater job uncertainties.

Mr Aw said: “This recession, if it materializes, will likely be accompanied by higher inflation, which erodes the purchasing power of consumers and imposes economic hardship on the population.”

As for Ms Ling, she said: “A recession would hurt the average Singaporean by potentially causing job losses, cutbacks in wages, tightening of belts, delays in capital expenditure (money spent on productive assets such as machinery or computers) and weigh on confidence levels.”

– “Explainer: What will likely cause a recession by 2024 that PM Lee cautioned about?”, TODAY, 5 May 2022

Homebuyers more cautious than analysts

Meanwhile, property agencies are still trying to convince us that there is a supply crunch in the home market. Inventories are running low due to construction delay. Inflation and higher GST next year could mean higher prices …

Nonetheless, it is a slap on their face with the disappointing sales results of North Gaia. The new Yishun EC only moved 164 units (26.6 percent of 616 units) during the launch weekend. With 3,700 turned up for the preview, only 164 or 4 percent were real buyers. It was another nightmare for developers after Tiong Seng’s Cairnhill 16 has no sales after months of first launch.

Indeed, North Gaia is a record-low sales for an EC that has government subsidies. Furthermore, first-time homebuyers are not affected by higher ABSD. In contrast, even when there were 6,000 daily cases last September, Sengkang EC Parc Greenwich still managed to sell 322 units over the launch weekend.

Before the launch, PropNex said “we knew this was going to be the hottest-selling project of 2022”. There would be “strong buying interest” and “”revenge property buying”. Property agencies told us “home sales have already rebounded”, “dwellers looking to upgrade from public to private units” and “investors to park their money in residential property”,

Despite all these encouraging headlines and remarks in media articles, the developers are more practical. They are holding back new launches for a better time to launch. March new private home sales (excluding ECs) declined by 49.5 per cent from the 1,296 units sold in March last year. Only 654 units were sold. April’s new home sales would be near the same level.

Obviously, the consumers are more cautious than the suppliers. High inflation and rising interest rates mean lower purchasing power. Economic downturn implies price correction. These negative factors are eroding consumer confidence and dampening buying mood.

Why post-Covid recovery becomes post-Covid recession

Since late last year, contrary to the media’s talk of post-Covid recovery, I have been talking among friends about the possibility of a post-Covid recession.

Surprisingly, the easing of Covid-19 measures may not result in economic recovery, but an earlier than expected downturn. Below are some possible reasons:

1. Sudden rise in number of job seekers

Think post-war recession. Post-war high unemployment rate is the result of large numbers of returning war veterans re-entering the workforce.

Manpower Minister Tan See Leng said yesterday (May 9) that, as of this April, there were 6,400 workers in short-term Covid-19 roles by the public sector, government-funded institutions or private sector medical service providers. Around 1,200 of these workers will be redeployed into longer-term roles. The other 5,200 will be looking for new jobs. With further easing of pandemic measures, all safe distancing and safe entry officers will also lose their jobs. With the re-opening of border between Singapore and Malaysia, there will be more supply of workers from Malaysia.

Are there enough new job openings in F&B and other industries to cater to all these new job seekers?

2. Rapid drop in demand for products

It starts with the government stepping the brake on relief measures. This is followed by companies and individuals buying less. When we no longer need to deploy so much resources to fight the Covid-19 war, companies will see a rapid drop in orders and revenues. For instance, there is oversupply of pandemic resources such as masks and gloves.

On the other hand, we are having less home-based learning. In the first quarter of 2022, worldwide PC shipments fall 6.8 percent year-on-year. Gartner said a sharp drop in Chromebook sales has contributed to the overall market decline.

Above all, companies were all able to show their impressive performance last year. Thanks to the poor results in 2020 that provided a low base for comparison. But this year, there is no more financial trick to hype performance. Recently, the banks, including DBS, UOB and HSBC, reported lower quarterly profits. They could no longer show magical profit growth with adjustment of exaggerated “allowance for credit losses” they put in their financial statement in 2020.

3. Perceived logistic risk that never materialized

Last October, there was widespread coverage in the media about a Christmas supply-chain crisis. Consumers would face empty store shelves, supply-chain hassles and delivery delays. Retailers stocked up early and buyers shopped well in advance. As a result, the Christmas crisis never materialized.

The whole of 2021 we talked about logistic problems under a prolonged pandemic. Purchasers in companies overreacted by over-ordering and over-stocking from suppliers. This helped to boost short-term sales performance of suppliers. However, sudden surge in orders is often followed by dive in sales in the following quarters.

Still remember Y2K? There is a saying that the Y2K scare may be the cause of the 2001 recession. In 1999, under the belief that computers would stop working on 1 January 2000, companies and individuals all bought new computers with Y2K complaint software. The short-lived IT boom was followed by declining sales, tumbling stock prices, bankrupt dot-com companies and subsequently recession in 2001.

It is not the recession, but the recovery after the recession

We hope this perceived risk of post-Covid recession will never materialize. Because once consumer confidence is lost, it can take very long for the economy to recover. The same is true for buyers’ mood for properties.

Even if there is a recession, we still have the chance to quickly recover from it – provided that there is no Black Swan waiting at the corner. A recession was started by the US in March 2001. Unfortunately, the economy was hit by the Black Swan of 9/11 attack. As a result, the recession lasted for eight months and ended only in November that year. The negative sentiments lingered for over a year. Then we had SARS in Singapore in 2003.

Before SARS broke out, the Singapore economy had already been weathered by the dotcom bubble, the US recession and the Iraq War. The private residential property price index fell 37 percent from the peak of 129.7 in the 2nd quarter of 1996 to 81.6 in the 1st quarter of 2003.

I bought one property in the 4th quarter of 2002 and another in the 2nd quarter of 2003. By then, market sentiment had deteriorated, and transaction volume had dropped lower.

– Vina Ip, Behind The Scenes of The Property Market

How to prepare for recession

We always hope for the best but prepare for the worst. Just like inflation and stagflation, there is nothing much we can do with a recession except to be prepared for it.

“A financial crisis impacts every single one of us indiscriminately. However, every economic downturn or recession tends to punish much more heavily those who are financially weak or ill-prepared for the unexpected.

– “Coronavirus crisis will prove survival of the fittest”, Propertysoul.com

Allow me to end this blog post by quoting from my book Behind The Scenes of The Property Market the property strategies to protect oneself during bad times.

To safeguard your own interest, take note of the following when buying a private home at this moment:

1) Buy only for your own stay, not for investment. Make sure it is your first private home purchase, so you are exempt from ABSD.

2) Buy only if the seller gives a discount big enough to buffer against the future fall in value. Bargain hard and only buy when it is really cheap.

3) Look only in the resale market (versus the new sales market), where property prices are much more negotiable.

4) Pay the majority of the selling price in cash in case the value of your property falls below your outstanding loan, so you won’t end up holding negative equity in the future.

Even if you buy during a time when things cannot be any worse, don’t be surprised by a prolonged plummet in home prices that show no sign of abating. Be prepared to wait out the storm. It may take a year or two. But In the worst case, bad days may linger for years. SARS was a whirlwind lasting three months from March to June 2003. But the private home market continued to be weak and did not pick up until the second half of 2006.

It is critical to have holding power. Make sure the rent from your investment property can well cover the mortgage and other expenses. If you happen to buy the wrong property, it is difficult to dispose of in the market. Because buying a new home is the last thing on people’s minds in a recession.

– Vina Ip, Behind The Scenes of The Property Market

If you need advice on property matters or residential properties in Singapore, you can check out my personal consultation service.

My new book Behind The Scenes of The Property Market is now available for preview and order online. You can also check out my online courses.