Not Another Piece On The Property Market
I was reading an article reporting on DBS’s outlook on Singapore property and their expectations for prices to fall and for volumes to contract written a fortnight ago when Zico called and told me about his meeting with some old friends from the private banking business.
His friends are adamant that property prices will not correct because they have a load of clients with cash sitting on the side to swoop down on bargains. Zico scoffs at this because his opinion is that if they are holding back now, they will not be buying when it corrects 10-20% or even 30%.
All of us need a roof over our heads. That is 1 roof. Extra roofs are sensibly welcomed as investments as long as it covers the opportunity costs.
Most people I speak to see real estate as a form of forced savings. Leveraged as well. You cannot borrow a million dollars to buy stocks but you can definitely borrow a million to buy a house. So the gains are exponentially higher when prices rise.
Over the years, we have grown complacent to the belief that prices will only rise and real estate research has proliferated as investors grow in sophistication. Anything you have bought 10-20 years ago will definitely be higher today. Even corrections are not to be taken seriously because, ultimately, prices go up. This is the law especially with the global population nearly doubling to over 7 billion in the past 30 years.
The Singapore government is worried these days as affordability issues mount and public dissent protests loudly. It makes sense even as our GDP per capita has grown 80% in the past decade, the URA Residential Index has rose 115%. Remember this is borrowed money which means that people are borrowing >100% more than they used to even as they earn more.
The bigger worry is that maxing out leverage leaves the borrower little room for failure. And few people can remember the days of loan margin calls which have left some people homeless in the process. For me, I remember 2003 when I knew of some who had to top up their loans and their extreme difficulties then.
But we are not going to talk about the dreary topic of debt today. I am more interested in the psychology behind the majority’s mindset on property investments that have led to this explosive boom we have witnessed and the latest balloting for that new condo in Bishan that has a few of my friends on tenterhooks on their chances.
It is human nature to believe what we see, hear or read and even better, we experience success. That leads to a belief. Beliefs play out and it becomes a norm. That is our market today. Not a single day goes by without the mention of real estate in the media or in conversations. The reasons are solid – rising wages, rising population, land scarcity etc.
Zico is right, by the way. The human psyche behind those cash hoards on the side and not buying real estate at this moment will be same as psyche that remains on the side when prices fall.
We have not seen a crash and prolonged downturn in a long time for the 2008 crash only lasted less than a year before a whirlwind rebound. A proper crash like the 1995-1998 one is scant in our memories. What do you think the headlines and conversations were like then ?
Bloomberg 1 Oct 1998
Number of Singapore Public Housing Owners in Arrears Soars
Asiaone 21 Sep 1998
Singapore Developers Delay Launch of 5,000 Residential Units
“Singapore, Sept. 21 (Bloomberg) — Singapore property developers are delaying the construction of about 5,000 residential housing units and renting out or canceling
development of another 1,000 units amid a glut in the island state’s property market, the Singapore Straits Times reported.”
Bloomberg 8 Sep 1998
Returns on Singapore Prime Offices Among Lowest in Asia
We can see that times were not as rosy then with property prices down an average of 45% in 3 years.
45% is a lot of loan to top up if you ask me.
A good friend of mine who has bought in London asked me this week if I would invest in Iskandar ? My answer was no. I thought of Zico and my personal psyche. My main problem is that I bought my place too cheaply in 2004, much lower than what the former owner paid for it in 1992. Since then, I have been plagued by a grave reluctance to invest.
I have had portensions of a market correction for some months now. That is a short span of time if we consider that it took an average of 4-6 months to sell an apartment and over a year to sell a landed property in the old days and not the mere weeks that it takes these days.
News out of Hong Kong also points to a slowing of sales despite prices holding up. In Singapore, 3Q property sales rise to a record according to DTZ data, mostly due to investors from China, Japan and Southeast Asia. The new MAS TDSR (total debt servicing ratio) does not apply to foreign buyers, I suppose.
Singaporeans, on the other hand, are choosing to buy offshore to escape the TDSR limits because taking loans outside the country spares them from the new ruling.
My advice is to wait a couple of months for the market psyche to turn. The slow down story has just taken root and needs time to set in even as Li Ka Shing is picking up his heels. We shall see soon enough.
Calling Bluff On Real Estate (tradehaven.net) 07/09/13
Singapore Real Estate Menopause (tradehaven.net) 13/07/13
Singapore Real Estate Suicide ? Buy 99 Year Leasehold (tradehaven.net) 12/08/13
WEALTH – The Fallacy of Singapore Property. Written for my friends (tradehaven.net) 16/01/13
Sellers’ Largesse Continues With Li Ka Shing (tradehaven.net) 04/10/13
“His friends are adamant that property prices will not correct because they have a load of clients with cash sitting on the side to ”
I have noticed over the years that bears tend to be smarter than bulls, but bulls are often richer than bears. Its all about herds, not logic. The best is just to allocate cash sensibly…bulls get slaughtered like pigs when markets stop rising. Bears are mostly just miserable but never homeless. Can you imagine a bear with a bubbly personality…doesn’t happen, they are normally miserable types and thats how they like it.
The justification by bulls that there is “money on the sidelines” is one of the most persistently moronic arguments used by bulls I have known. It makes no sense, but it never dies. Money on the sidelines? What the **** does this really mean? If I have money in my bank account then that counts as money on the sudelines, right? When I spend it is there then less money on the sidelines? Well, it just moves from one account to another, so there is just less money on my sideline and more on someone elses. Money just moves, the amount on the sidelines remains essentially unchanged, i.e., it is always there, it just depends whose it is.
What matters is creation of credit, velocity and preference to spend. Credit can temporarily create new money, preference decides what that new money is spent on. Or, if no credit is created, then preference just determines where money goes, whose account it leaves and whose account it enters. Velocity can also help push asset prices up, but that doesn’t automatically mean it has to be residential property.
Now, I have equities in various countries, I am short equities in others, I am long real estate in a few markets, but none is residential. I see no reason to buy residential property in Singapore, the yields are pathetically low and the supply pipeline makes the chances of major inflation low (yes yes, I know if you had bought a condo in 2010 etc it would have doubled etc….most REITS would have quadrupled though, etc….and anyway I am not talking about the rear view mirror).
My landlord is seemingly incapapable of doing simple maths and believes what the agent told him about his rental yield…(rent*12)/price…even then just 2.5% or so….with real costs, voids and expenses over a decade holding period, say, it goes negative. I would rather he earn negative yield than me, especially when I can buy high yielding assets with excellent correlation with Singapore property. By the way, if I want to buy on margin I can, with 5:1 leverage and margin rates, in USD, of about 1.25%…so even the mortgage argument makes no sense apart from that fact that most people don’t have margin accounts or know how to use them. (Now, before you say it, I know all about Viktor Niederhoffer, but his mistake was he used too much of the leverage available to him, I would not advocate actually using 5:1 leverage on anything.)
So really this is about preference. I admit preference isn’t always logical, but it will take a huge amount of illogic to convince smart “money on the sidelines” (as opposed to just “money on the sidelines”) that Singapore residential property is currently the optimal and preferred choice to spend that cash on. I will buy on a dip, but it will have to be a big one…blood on the streets etc.
You are right in your rejection of the “money on the sides” argument. I dislike that argument immensely and always feel that it is the last line of defense for the sales person/banker that we deal with.
It would be useful to have a “money on the sides” housing index for comfort and I challenge the banks to produce one for customers if they want to shoot their mouths off.
Residential properties happen to be the only means many a layperson can access the market on excessive leverage. Your landlord, like many others, is from the old school and the simple maxim that in the end, he will still have a brick and mortar asset as compared to a paper asset. That has not failed the many generations before him.
LOOK OUT FOR THE RISE OF THE UNDER-GROUND CLASS.
I see a market in selling sunlight.