Private Property Market Up 20% in Next 3 Years?

Just came across a new piece reporting that real estate industry analysts publicly suggesting that despite the government's cooling measures, land prices in the private property market could go up by 20% in the next 3 years, with finished products going up between 10-15% in prices.  The crux of the argument is that Singapore's population will continue to increase.  In recent weeks, I have heard this bullish argument repeatedly from various quarters.  How strange, I thought, that people have such short memory about the public outcry against the Population White Paper published earlier this year.  I am not sure if the government can 'pull a fast one' on Singaporeans in this matter, although I would certainly be disappointed in our democracy if we can be so easily hoodwinked.

In any case, when it comes to the state of the real estate market, I don't trust the analysis of those within the industry.  They often appear to me to be no more than advertorial writers 'preaching the party line' with constantly bullish views.

Economically, I see a lot of issues in the next 2-3 years globally. I doubt Singapore can escape unscathed.  In fact, the initial salvos of the next crisis may already be upon us, with the weakening of the ASEAN economies in recent months.

Minister Khaw and the Local Property Market

A reader had asked me for my views on MND Minister Khaw Boon Wan's performance thus far and about the local property market.  In response, I must say that I am severely challenged in the area of property.  Not being a property owner and having no intentions to buy one any time soon, nor having the means to afford one given the sky-high prices (without become a debt slave), I must say that I have paid scant attention to this market.

With those caveats in mind, here are some of my general observations:

1. The mess left behind by Mr. Mah is a big one, and so it will take Mr. Khaw quite a bit of effort to clean up.
2. Mr. Khaw has rightly warned Singaporeans that the property market may suffer severe setbacks.  This is the right thing to do, given that sentiments seem to be similar to those near the 1996 market top.
3. I think Mr. Khaw is putting in genuine effort trying to give the people what they want, which is an important part of democratic politics.  That said, what they people want may not always be what's right or optimal, given perceptual biases and the general lack of rational decision-making processes.
4. Since I believe that the market is due for a correction, and that the global energy situation will have severe negative impact on our economy in the next few years, I have to wonder if building more flats to address the current supply-demand imbalances is the right thing to do.  But I won't blame Mr. Khaw for this - he is just giving the people what they want.
5. When peak oil's effects become apparent, I believe that there will be an outflow of non-citizens and this will create a big overhang in the property market.
6. I also wonder whether more fundamental changes to HDB housing policy is required, given that most young people, upon buying property, will be debt slaves for a long time, not having the means to save for their retirement.  One has to wonder whether that is sustainable.
7. Perhaps citizens should consider whether it is time to relook at the desire to form nuclear families, given our severe land constraints.  While having less foreigners will help improve things in the short-run, we have to look at whether or not as a society, we have massively misallocated resources into the property sector.  Is it time for us to discover the joys of living with an extended family, not only as a means of economising on housing expenditure, but also perhaps as a remedy to the growing litany of social ills?
8. If the government really wants to bring down prices, one way would be to further tighten monetary policy.  As far as the interest rate environment is concerned, Singapore is still in a negative real interest rate situation.  In such a situation, it is natural for speculative bubbles to form, given that saving money is unproductive in terms of protecting one's purchasing power.
9. We have to remember that our ability to cash out of our properties is dependent on future demand.  Since we are not reproducing ourselves, and since we don't want more immigrants, it is irrational to think that the property market's current underlying fundamentals can be sustained in the long run.  I believe I have written about this issue in earlier blog posts.

My apologies for the lack of organisation again.  As I have mentioned before, property is not something that I pay much attention to.

Thoughts on the Property Cooling Measures

Following the announcement of the latest measures to cool the speculative bubble in the real estate market here, much of the debate continues to centre around the role played by speculators, immigration and foreigners. What I have not seen discussed in detail is the role played by the negative real interest rate environment.

From an Austrian School perspective, negative real interest rates tend to foster bubbles through mal-investments. In my view, Singapore's current monetary policy has to some extent been held hostage (due to export competitiveness considerations) by the US Federal Reserve's zero-interest rate policy as well as the People's Bank of China's USD-peg policy. This has resulted in a negative interest rate environment that is 'conducive' for the growth of speculative bubbles.

If the latest measures by the Ministry of National Development are effective in cooling real estate demand, the continued existence of negative real interest rates could well see hot money moving into the local stock market or other asset classes.

My Outlook for 2011

After an eventful 2010, I believe that 2011 will bring even more surprises as we move into the next phase of the global financial crisis. Here are some of my thoughts on what could be important issues for the year:

Sovereign Debt Crisis

With credit spreads of the PIIGS countries near record levels, I believe that the market will start to recognise that the debt problems of the EU countries cannot be resolved without either outright default or being inflated away through debt monetisation. I also believe that the US and China's debt problems will start to appear on the radar screens of more investors, and that there is a small chance of them being blown up to full-scale crises. All these will make investing very 'interesting' in 2011, to put things mildly.

Singapore General Elections

While I am not able to foresee whether there will be significant changes to Parliament following the next GE, I believe that none of the long-term problems facing our country will be tackled irrespective of the GE results. As I have previously mentioned, I don't believe that any of the opposition parties have any clue about the serious external threats that Singaporeans will have to deal with in the next decade. As for the PAP government, since I am not privy to what goes on inside the system, I can only say that the outward signs are that no one there appears to be willing to discuss the same long-term threats as well. As such, as far as I can tell, the next GE will not have any direct bearing on those long-term issues.

Retirement

Singaporeans will continue to ignore the looming retirement crisis by over-spending on real estate and cars, while at the same time complaining about the high cost-of-living in the country. We will raise concerns about foreigners taking away our jobs but at the same time fail to realise that this heightened job insecurity situation is at odds with our willingness to commit to 35-year housing loans in order to have the old stereotypical 'good life' of living in a private apartment. Those under 40 will continue to display an ignorance of the virtues of thrift. Many will seek to maintain their standard of living by spending their parents' wealth, thus endangering the retirement savings of the latter. The harsh reality of diminished future prospects due to greater global competition will continue to be ignored.

Inflation

Short of a wholesale deleveraging like what we saw in 2008, where investors sold every kind of risk assets, there is a good chance that oil and food prices will continue to move higher given the supply and demand fundamentals of these markets. Furthermore, if China continues to refuse to let the RMB appreciate against the USD, MAS could be forced to continue letting our money supply grow at high single-digit rates as the US Federal Reserve continue its money-printing and debt monetisation schemes (a.k.a. 'quantitative easing'). This will contribute to higher inflation rates and perhaps inflation in some local asset markets. Singaporeans will complain about the inflation but will do nothing to deal with the issue, preferring to blame the government and ignoring the power of our own behavioural choices.

Self-reliance

PM Lee's New Year's Day message contained a call to 'strengthen the spirit of self-reliance among Singaporeans'. I believe Singaporeans will continue to bitch and moan against the government whenever we are unhappy with things, and prefer to see ourselves as victims rather than do the adult thing of taking responsibility. And because of this, very few people will be interested in preparedness.

Have a joyous and peaceful 2011!

Jim Rogers Has Been Very Polite

Around January this year, Jim Rogers was reported to have said that the Hong Kong real estate market was in a bubble situation. However, according to property consultants Knight Frank, the Singapore property market rose 37% year-on-year in the 2nd quarter, ahead of both China (36.8%) and Hong Kong (24.9%), as reported by Bloomberg.

So far, Jim has not called the Singapore market a bubble. Rather polite, don't you think?

Immigration, Property Prices and Your Retirement

The Straits Times reported on Friday 22/10/2010 that Singapore was ranked seventh in a survey of how countries ranked in terms of adequacy of income for retired persons. It reported that the CPF Board had expressed reservations regarding the limitations of the survey, in particular its exclusion of the CPF funds that we use to buy property:

“If CPF monies withdrawn for housing are included, savings are substantial, averaging around $200,000 for active members who turned 55 in 2007-2009.”

Implicit in the CPF Board’s statement is that money used to buy our HDB flats could be included in the assessment of our financial preparedness for retirement.

What worked previously

Historically, our HDB flats and other residential properties have been a good store of value for our retirement. Rapid economic growth in the past decades have allowed for the appreciation in the prices of such properties. This has allowed older people who have retired in the past 20 years to cash out of real estate at significant profits for use to fund their retirement.

What this means for those of us who are saving for our retirements is that if we are to rely on the existing model of using real estate as a means of funding, we will also need our economy to continue to grow in order to be able to obtain the price appreciation needed. Furthermore, for most of us, we will need to have continued growth in our incomes in order to pay off the mortgage that invariably comes with the purchase of real estate.

In order for this model to continue working, we will also need to sell our properties to someone else, and this is where the issue of immigration comes into play.

Given the country’s low fertility rate, we will soon be facing the prospect of a declining population if there is no immigration. Specifically with respect to the real estate market, this will mean lower demand for housing in future, which translates to the possibility of the country having a surplus of housing units. This lower demand will mean either lower growth or even outright declines in property price in future.

In addition, given that economic growth is a function of capital, labour and productivity growth, a declining population will also mean that economic growth will slow unless compensated by rapid increases in productivity. Given our mediocre record in raising productivity, this means that economic growth will be problematic in future without immigration.

It can thus be said that we Singaporeans are confused about the immigration issue. On the one hand, we have expressed our unhappiness at the influx of foreigners causing all sorts of stresses on the country’s physical infrastructure. On the other hand, whether we are aware of it or not, we need to keep population either stable or growing in order to maintain real estate prices that we depend on for our retirement. So short of a rapid turnaround in birth rates, which seems to me to be unlikely, we will have to accept the current liberal immigration policy.

Risks

While I feel that the government is not likely to reverse in any significant way the current immigration policy, I would like to highlight the risks to us as individuals of continued reliance on real estate as a store of value to fund our retirement accounts.

A mortgage is a bet on your personal future. It is an expression of confidence that you will be able to grow your income sufficiently to handle the payments, and if stretched over a long period, that the income stream will be stable. In recent years, we have seen more volatility in the Singapore economy due to greater uncertainty in the global economic situation. With the constant need to restructure, jobs have become less secure and retrenchments and unemployment more likely. This means that committing to a long term mortgage (e.g. 15 years and above) may not be a prudent thing to do.

For those who buy additional properties to rent out, besides betting on the government not changing the current immigration policy, you are also betting that the economic prospects of Singapore are bright enough to continue to attract people to move here for work and residence. While we cannot foretell the future, we need to be aware of the significant risks that lie on the horizon. These include peak oil, the currency wars turning into global protectionism and trade wars, and a collapse of the USD resulting in a new currency regime. Although I am unable to guess with any degree of accuracy what the exact impact of these events will be on Singapore, it is possible in my view that they will result in diminished prospects due to the serious external economic dislocations that are likely to happen.

On the whole, I personally am of the view that reliance on real estate as a funding vehicle for retirement will have significant risks in future. Furthermore, as real estate prices here have increased at a pace far outstripping income growth in the past decade, one has to wonder how much further this trend can continue. As such, new entrants to the property game should be aware of the dangers of buying at or near the top of the market.