Thursday 14 November 2013

Facing up to the impending property market correction

By Charles Tan Meah Yang, TODAY, 13 Nov 2013

Owning a condominium — or, for the really ambitious, landed property — is many a Singaporean’s dream. But anything that is not an hour’s commute from the city centre can be eye-wateringly expensive and out of reach for most of my generation (those born in the 1980s).

Our predicament is not unique: Many citizens of major Tier 1 cities around the world experience the same challenges, and too many of them have also given up any hope of ever owning a house.

In cities like London, where the average flat is estimated to cost 7.9 times the average household income (according to Demographia), an entire generation of 20-somethings is growing up only to find that, even in their 30s, their savings are still not enough for a down-payment on their first home.

The situation is even more acute in cities like Sydney (8.3 times) and Vancouver (9.5 times) where, like in London, Hong Kong and Singapore, home prices have been bid up by inflows of foreign capital from investors seeking to park their wealth away from the relatively less stable regimes from which it was derived (such as the Middle East, China and Indonesia).

The result is almost always increasing discontent and disenfranchisement among the local population and, in particular, the emerging middle-class of young professionals. This is the group who have not had the time to accumulate any assets to benefit from rising asset prices, and yet must bear the costs associated with this form of inflation.

In Singapore, the problem is exacerbated by the pressures that our imported workforce exert — competition in the labour market depresses wage growth, while that same competition for scarce resources contributes to overall inflation for consumer goods, services and, yes, housing (although according to figures announced yesterday, this seems to have ameliorated — foreign buying in the private housing market fell from 17 per cent in 2011 to 7 per cent in the third quarter this year).

Overall, this leads us to the current situation, where real wage growth is outstripped by the pace of inflation, and thus, people find themselves in prolonged servitude to the owners of capital and other economic rentiers, widening the chasm between the haves and the have-nots.


The question that naturally comes to mind is one of sustainability. How long can an environment of such extreme disparity and disconnect last before capital flows reverse, and prices revert to reflect the fundamentals of domestic incomes and affordability?

The answer, if London and Sydney are anything to go by, is “very long, indeed” — but my suspicion is that Singapore’s market for private residential property is more likely than not to go through a period of significant correction in the next 12 to 18 months, along with much of the emerging markets.

Experts and industry leaders such as Robert Shiller (Nobel-winning economist) and Larry Fink (CEO of BlackRock, the world’s largest fund manager) have expressed concerns about the “bubble-like” state of current global financial markets — bonds, equities and real estate — propped up by the unprecedented monetary expansion of global liquidity by major central banks, particularly the United States Federal Reserve and the Bank of Japan. Both Professor Shiller and Mr Fink have called on the Fed to begin tapering quantitative easing to take some froth out of the markets. Indeed, indications are that this may come as early as the first quarter of next year, thanks to stronger-than-expected US recovery.

While a tightening of monetary policy is overdue (and probably healthy) for the US economy, such action has dire implications for the emerging markets, including city states such as Singapore and Hong Kong, where asset bubbles have built up as an indirect consequence of exceptionally low US interest rates.

The withdrawal symptoms associated with weaning any economy off cheap credit are severe; asset prices could plunge to reflect the reduced willingness/ability for creditors to extend loans and for debtors to service them, and unemployment would likely spike as companies cut costs to preserve their profitability.


As is the case with quitting any addiction, the initial stages are the most painful but also the most crucial, and the global credit binge since the onset of the 2008 financial crisis has created a population of “credit junkies” on an unprecedented scale.

In my opinion, the world needs another severe financial crisis, because we do not seem to have learnt a key lesson from the previous one — you do not solve a debt problem by creating even more debt.

Unfortunately, as figures from a recent report by Dutch bank ING show, total debt (that is, all forms of debt across both private and public sectors) relative to GDP has increased since 2011, having initially fallen from 2009. I guess old habits just die hard.

A handful of friends and family have accused me of being somewhat sadistic, wishing for a purgative recession of sorts. However, I would argue that our artificial sense of prosperity is due to central bank largesse, which masks the true cost of capital, distorts economic incentives and plays havoc with price signals generated by a market-based system.

Given access to artificially cheap money, inefficiencies are tolerated for longer and funds are diverted to unproductive rent-seeking activities, resulting in an economy driven by outsized, fundamentally unprofitable “zombie companies” and dominated by banking and property barons.

If recent data from the Urban Redevelopment Authority are anything to go by, recent measures (like the Additional Buyer’s Stamp Duty, Total Debt Servicing Ratio and others) to cool the housing market may be working: Home prices rose at the slowest pace in six quarters. But unfortunately, prices are still rising.

It is my belief that, even if Singapore’s private property market does not undergo correction, as I expect it to, the Government should engineer one by continuing to tighten credit conditions and industry regulations. It is worth taking a little bit of pain now if it means preventing a far uglier property market collapse in the future and setting us on the path towards a more stable, sustainable economy over the longer term.

Charles Tan Meah Yang is a Singaporean investment analyst.

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