Property Bubble

The Straits Times on Saturday published a 7-page special report discussing the recent property boom in Singapore. The property correspondent for ST deliberated on this phenomenon and discussed if the rebound in prices was indeed sustainable or that a property bubble was developing in Singapore. Many expert opinions were sought in the report but it seems to me that the opinions offered were often vague and unconvincing guesses about the trend of the property market that did not hold much water. I think the possibility of a bubble is much higher than that of real fundamental demand for property. Let me explain.

With the exception of Singapore and probably China, nowhere else in the world can one find such irrational exuberance. According to reports from the US Federal Reserve, European Union Central Bank and almost all governments around the world, the greatest economic recession since the Great Depression of the 1920s has only stopped getting more severe. Recovery is beginning and the economic wounds caused by the ravages of the financial tsunami are starting to heal. But that's the point. The economy is starting to heal, it is not fit and healthy, ready to go out there to jump in the air and perform somersaults. Singaporeans and Chinese do not seem to differentiate between "an economy that stopped getting worse" and a "booming economy". In China, most retail investors are not sophisticated ones. Speculation is rife and most retail investors in the markets punt their money on assets that they hardly understand. There is a saying in China, " 新股不败 ", which means that you cannot lose money by chasing after IPOs in China, even if the company is selling fresh air. Farmers sold their cattle and lands to punt in the stock market. Factory workers sold their bicycles to buy stocks of companies they had never heard of. For every rags-to-riches story the markets in China made, there are 3 or more tragedies that nobody heard. Since the stock market peak 1 month ago, the Shanghai Composite Index tanked more than 20%. For the Singaporeans that bought property which is easily 15-20 times the average annual income of a typical Singaporean, is what they are doing so different from the Chinese farmers and factory workers? I think not. The main difference is that Singaporeans are gambling with they think they will have but the farmer gambled with what he has got.

The economic backdrop to this property boom is significant. While there is general consensus that the economy will only get better from henceforth, the property market in Singapore had already priced in an economic future resembling the boom times of 2006-2007 or even the property bubble period of 1996-1997. This is a ludicrous assumption as the world economy had been fundamentally reshaped by this global financial crisis. Business costs and profitability, job security and remuneration are all going to be different in the new world economic order. Any property bought between 1996 & 1997 is still underwater, even after the ramp up in property prices over the last few months. Therefore to speculate in property that is priced on the assumption of a mean-reverting global economy is both naïve and dangerous. With the property boom that is hopelessly out of sync with the economic reality, there exists a real risk that property investors in Singapore may end up paying for overpriced white elephants for the rest of the lives.

The government should also be very concerned about this phenomenon as the investor base swarming into the current property boom are not high-end property investors but rather mass market participants that have lost their heads in the mad rush for "bargains". While the rich are more able to withstand valuation losses (thus margin calls on their property loans), ordinary folks may not be able to do so. If my predictions of a correction in the property market realizes, such investors may end up force-selling their expensive purchases at significant losses which would certainly derail the financial ambitions of these ordinary Singaporeans. Government subsidies for new babies and benefits like extended maternity leave seems laughable when newly-married couples are forced to delay their plans for a family due to financial ruin resulted from the purchase of their new properties. With sky-rocketing mortgage payments consuming a majority of the monthly salary, support for parents will become a greater issue and the whole "father suing son for neglect" problem comes into focus. The spillover effects from the private property market to the public one (ie. HDB) is becoming increasingly disruptive. Since there is currently no effective mechanism to segregate the public property market from the private one, the ramp-up in condo prices forces couples buying their first HDB to pay over the odds for a place to start building their family. Even a university graduate would struggle to pay for a 4-room HDB flat in today's prices without depleting their CPF holdings and monthly salary. Coupled with the government's move to import more and more foreign workers, in part feeding the rental market in Singapore (thereby further incentivizing the purchase of property to rent rather than to stay), the growing discontent by the burgeoning middle class can be easily understood. The various issues that plague the government today are all inter-connection ones. The root of one problem is often the consequence of another. The government needs to realize that there is a real multi-faceted social consequence to this mad rush for private property in Singapore's suburbs.

One of Singapore's property honcho told the ST that he does not think a bubble is developing. His arguments include 1) pent-up demand for private property from 2007/8 due to lack of supply by developers, 2) relatively cheaper property when compared to 1996, 3) low interest rates due to market conditions. I think none of these reasons make sense and cannot justify the current property boom. A bubble can be rightly defined as a spike in prices from pure expectations of future prices which is not dependant on any fundamental principles. As explained above, the fundamental economic reasons for purchasing property at such high prices is clearly non-existent. Investors are willing to pay such exorbitant prices simply because they are expecting others to follow suit. Stories of property agents snapping up 3 or 4 condominiums before the official launch only to flip them over to retails buyers are resurfacing. These people are not interested in investing in the properties. They do not care about factors like location or rent yield. All they care about is reselling the condos for a quick buck. As long as they can cover the loan interests for that short time between the flip and some cash to spare, who cares if they are helping to create the illusion of robust demand and hiking up the prices artificially?

Buyers were not buying in 2007-8 because they could not afford to, not because there were no private properties to buy. Job insecurity and asset depreciation were rife for the last 2 years and people were reluctant to commit to big financial outlays. The property developments were rescinded by the developers due to the lack of demand then. The developers were hoping to make a bigger profit when they re-release the developments into the market when demand came back. The supply was always there, just not the demand. To suggest otherwise would be hypocritical and inaccurate. Also, to compare the price levels now to that of 1996 is simply ridiculous. It was a bubble then. In fact, it was the biggest property bubble to date in Singapore. People were paying up till 25-times their annual salary to own a condominium. Just because it is not bigger than that of the 1996 bubble does not mean we are not in one now. The current boom is a bubble and it is fast becoming bigger than that in 1996.

Thirdly, the low prevailing interest rates was cited as a reason for the spending binge in the property market. There is some truth in this reasoning but that truth is not of the logical variety. Rather the reasoning is a rather frivolous, nevertheless accurate, one. You see, many Singaporean investors have short memories and consider things only in the immediate vicinity or timeframe. Although the short term interest rates for SIBOR are rather low for now, housing mortgages are tied to the floating SIBOR for the next 20-30 years. With the US Treasury's policy of quantitative easing, the huge stimulus will inevitably cause US interest rates to rocket to calm inflationary worries. With Singapore's financial markets open and accessible to investors worldwide and MAS's policy of pegging SGD to USD, the SIBOR will correspondingly rise in line with the US. Therefore if not for the shortsightedness of the average Singaporean property investor, the low interest rates they are paying now cannot and should not be a justification for putting money n an investment vehicle which will take 20-30 years to repay.

One of the cornerstones of the Singapore dream is to own a property of your own. The purpose of the government to institute the HDB was also to facilitate the building of quality, affordable housing to the people of Singapore. I was brought up to believe that everything in Singapore is possible as long as I am merit it. I do not think that anymore. Wealth is becoming the greatest social divide, one that cannot be bridged by industry or intelligence. If one is not rich enough in the beginning, it will be doubly hard for him to participate in the tremendous wealth of our nation. I grew up thinking that Singapore, despite its occasional inadequacies, was an ideal place to buy a home and set up a family. Instead, this dream of property ownership and family building increasingly feels more like a chain that traps one here on this tiny island, forcing one to serve out a mammoth financial obligation for the rest of his life with no respite. A property should first be a home before an investment. Unlike stocks, there is often a real human story behind a house or a piece of land. It means much more than just money and I hope people can see that earlier before the house of cards start falling down, bursting the bubble encapsulating it.