Saturday, November 26, 2011

Some thoughts on expert opinions on economy and property

It looks like the property investment party in Singapore is coming to an end, at least forecasts are becoming more pessimistic week on week. Back in September 2011, UOB Kay Kian has been the first party breaker by announcing that it forecasts a 8 - 10 % fall in Singapore residential property prices in 2012. A month later, Daiwa Research has revealed that it forecasts the property prices could fall 22 - 23% in the next 3 years. And recently, Standard Chartered announced a bigger forecasted fall: 30 % fall in both residential rents and mass market private residential prices in the next 3 years.

Today, in The Straits Times, Esther Teo has written article on this issue: Will Singapore property market soften? I would like to comment on many belief driven assumptions she has mentioned as "expert thought":
  • "The local property market is also known to be resilient, experiencing just a short blip during the global financial crisis before a sharp rebound at the end of 2009, Mr. Seah noted. - Comparing 2008 to the next crisis and predicting the same scenario after the crisis is not logical. First, 2009 rebound was not a rebound, it was just cheap, printed money flowing from West to East. The West does not have the same fire power now, although overrated FED head will probably print money for a 3rd time to open up a safe exit for his buddies in Wall Street and create a short term asset bubble inflation. Second in 2009, there was a very bad residential property supply crunch in Singapore due to under construction in public housing sector. Just look at the graph here, you will understand what I mean. Just 10,000+ flats were completed in 2009. Double that amount is expected to be completed in 2011 and more in the next 3 years.
  • "On the other hand, while another global crisis might also dampen sentiment, Mr. Tan noted it might lead to more money being pumped into the market as governments act to salvage their economies." - This is actually true, but since first 2 rounds of money printing in US did not work and Western governments do not have so much buffer to accept more debt, I suspect this would be something to rely upon. Sure, there is room for governments to fuel the global asset bubble a few years more but then it will only mean to push prices higher to crash from a higher level. These people relying on printing money misses the fact that if printing money was a working solution all third world would be wealthy now.
  • The article says "these high levels of liquidity flooding the market might find their way to Asia and continue to support property prices" - First, printed money supported prices are doomed to crash since they need constant supply of printed money to just keep their level. So they do not "support" prices, they "inflate" prices. Second, as we have mentioned, with this high levels of sovereign debt it will be politically very difficult fore governments to print money and transfer debt to state from bankers to save them.
  • "However, some experts note, any decision by the US Fed to raise rates will mean that its economy is finally on the mend and that could signal that the global economy is out of doldrums, which is good news for investors - The most laughable experts are of these kind, simply be very very careful about them :) For them, some institutions have god like powers and nothing can happen to them. You know what they said before: "Yes we know if Lehman Brothers bankrupted these investments would be junk, but we have never imagined that Lehman could default". These people put so much faith on FED and they can easily be classified as bigots, not experts. For them, USA and Europe can continue to spend more than they earn indefinitely, FED and its ultra overrated bureaucrats can print money as much as they want without creating inflation, FED has ultimate power to define interest rates so there is no such scenario that USA will be forced to increase interest rates due to its inability to sell new debt like Italy, Spain, France and even Germany are forced to borrow with higher interest rates. So in short, USA may well be forced to increase interest rates before its economy is out of doldrums. When making investment decisions, avoid these bigots at all cost. They will eventually say "nobody thought this can happen" and leave, but you may well be burned. Everything can happen. USA and Europe does not have any god given status to protect them from results of overspending, over borrowing and under-investing. And FED does not have magical powers to play with interest rates against market forces as it wishes. Remember that just 5 years ago in 2006, they had to gradually increase interest rates which they have kept ultra low after 2001. And everyone who bought flats in USA with the belief that the party will last forever was burnt in 2008.
  • "The population growth is expected to be halved to 1.5 percent" says Standard Chartered. But AmFraser Securities equity analyst Lau Wei Chong noted that although the intake of foreigners slowed, the government maintains its open door policy for talent, which will see population continue growing". - The worst case scenario of these experts, population growth slow, is not the worst case scenario. No foreign talent can come here, rent a place and join the population without a job, even he is guaranteed to have a visa to work. In other words, ease or difficulty of immigration is not very important if there is no decent paying job for an immigrant, this is especially true for an expensive place to live like Singapore. Experts tend to skip two scenarios (1) Population of Singapore can actually shrink if foreign talents lose their job. They can probably better hold on in their relatively cheaper countries than holding on here without a job. Please not that, the unemployment rate of Singapore will not significantly go up if foreign talent loses job because they will probably not join unemployed people here at all but leave. (2) Wages, especially the packages and bonuses supporting private property prices can shrink. We all know that expat packages are shrinking since 2008. Banking and finance job bonuses, which are usually 100% of basic annual salary(!) are too exaggerated for an industry which does not create that much value to support the earnings. So they will have to come down, of course after several rounds of bank (bonus) rescue packages paid by everybody else, but they will come down. These packages and bonuses are main supporters of 6K+ condo rents. Job / bonus loses this time can reach high levels for Asia and Singapore, especially if Europe and USA decides the do what they should do long ago, spend less than they earn to pay out their debt instead of borrowing more. All Asian growth in the last 2 decades, including Singapore's, have a large portion which solely is supported by European and American debt driven demand. When debt driven demand goes, that portion will also go.
  • "However, Dr. Chua Yang Liang, head of research at Jones Lang LaSalle South East Asia, noted that the population has expanded 2.8 per cent a year over the past 10 years while number of completed homes has increased by 2.1 per cent a year. Given the way the growing population has outpaced the housing stock, this has led to a backlog of demand for houses. If the economic crisis is not too severe, this will help to mitigate the sharpness of any price correction - I agree with him about the back log. There must be a lot of people out there dreaming a property of their own. But do not forget, sharp increases like 18 % in 2010 alone, priced them out I do not think mild price corrections will just enable them to buy! Think about it, 1 million SGD, a norm for a mass market condominium now, is 5.5 times the annual gross income for a family making 15,000  per month. In other words, an average  private property is in severely unaffordable region even for a very high income of 15,000 SGD.
See alsoe Can foreign professional demand take up Singapore private property oversupply?

This blog article is to provide general information only and should not be treated as an invitation to buy or sell any property or as sales material.  Users of this report should consider this report as a one of the many factors in making their investment decision. Users should make reference to other sources of information and specific investment advice to obtain a more objective view of the property market. Asia Singapore shall not be responsible for losses suffered.

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