Tuesday, April 16, 2013

From boom, to blowing bubbles

Singapore’s property market has been framed as a success story. Prices have moved inexorably up since 2005 despite several rounds of cooling measures.

15 April 2013


Devadas Krisnadas

Singapore’s property market has been framed as a success story. Prices have moved inexorably up since 2005 despite several rounds of cooling measures.

The intervention of cooling measures is indicative that the Government has concerns that the market may be overheating, but also reflects political considerations from Singaporeans who feel they are being priced out of the “Singapore Dream”.

Property forms the largest asset within each household balance sheet. Judging by news reports of packed showrooms, it would seem that most Singaporeans feel positive about the future of the property market. Is the optimism justified or are they headed for a fall?


Following the 1997 Asian Dollar Crisis, the domestic property market went into decline and remained subdued by the effects of successive economic shocks until 2005. From that point, with the exception of a dip due to the 2009 global financial crisis, the property market as marked to price moved ever higher.

There are several drivers which explain this pick-up. First, there was under-supply in the public housing market after years of slow building due to cautious government policy, following the surplus scare in the wake of the 1997 Asian Dollar Crisis.

Second, there was pent up domestic demand, after almost a decade of neglect as an asset class due to a combination of market wariness and lagging supply.

Third, the population has grown at a fast clip through population augmentation. The majority of new citizens and permanent residents are adults with purchasing power. A comparison of graphs 1 and 2 show obvious parallels. Population growth has also meant good rental demand which translates into mortgage cover for investors.

Fourth, segments of the Singapore property market have become internationalised. Local property is being marketed in far-flung destinations to attract High Net-worth Individuals (HNI) to invest here. While this is mostly concentrated on the high end it has a positive psychology effect on the entire market, creating a buzz which property developers and real estate agents can be expected to opportunistically exploit.

Fifth, there has been a sustained and significant fall in interest rates over the past decade, but especially since 2005. This has lowered the cost of debt and disincentivised savings. Singaporeans seeking yield have moved savings into equity and property.

Sixth, in property cycles, after a certain point in the upswing, the herd effect makes itself known. The longer the good run lasts, the more it is sustained just a bit longer by new market entrants who want to get in on the action.

Seventh, Singapore experienced a sharp but very short recession as a consequence of the global financial crisis. Our economic numbers have been positive, though just shaving past experiencing a technical recession each year. This positive momentum and a tight labour market have to date translated into an absence of natural economic checks on buying behaviour.


Now let us look at the current and anticipated state of these demand drivers.

First, accelerated and intensified building by the Housing and Development Board (HDB) will remedy the demand and supply mismatch in the public housing market by 2016. The URA has released many land parcels over the past three years which will continue to translate into new housing units in the private market, especially in the mass market condominium segment. In all, nearly 200,000 new units are due to be completed by 2016.

Second, the pent-up demand from the first half of the last decade has been soaked up by now.

Third, notwithstanding the adoption of the White Paper on population, Prime Minister Lee Hsien Loong has pledged to moderate the rate of population growth and look at a total population ceiling of 6 million, rather than 6.9 million, by 2030.

This addition of less than a million means the annualised pace of growth would be less than half that we have experienced over the past five years. Hence, demand from population augmentation should be far less over time.

Further, the higher the price index goes, the higher rentals must be to provide mortgage cover for investors. At a certain point rental levels cannot be supported by wage levels, which will then catch out investors reliant on a certain level of rent to meet their payments.

Fourth, expect the high-end segment of the market to continue attracting foreign investment. However the buyer in the mass market – public resale or private – should screen out high end price behaviour when determining what is fair value. This is because the foreign (or local) HNI is not influenced by domestic factors nor by the same practical considerations, such as the need for income security or rental cover, as faces the layman investor or buyer.


Fifth, interest rates cannot be expected to say so low for ever. As the macro economy slowly recovers, we should expect that quantitative easing by major economies will wind down and that eventually, interest rates will creep back up.

There is something pernicious about a low interest rate environment which is worth noting. A 100 basis (1 percentage point) move upwards when the initial interest is 5 per cent – the rate circa 2000 – would represent a 20 per cent higher weight of capital, which is a hit most will likely be able to afford.

However a similar-sized move when the initial interest rate is 2 per cent – the rate circa 2012 – would represent a 50 per cent higher weight of capital. Hence those who have borrowed to the limit of their debt serviceability would be extremely vulnerable to future rate shifts, which can only be upwards given how low they have been in recent years.

Sixth, so the only strong driver we can count on for the foreseeable future is the herd effect. The problem with the herd effect is that it does not reflect real fundamental demand, since a significant proportion would be speculative. It also may not reflect real effective demand, given that some caught in the herd effect may be over-exposing themselves.

Seventh, while we have done comparatively well economically over the past four years we should not expect unrealistically for this to continue without some eventual interruption. Singapore’s economic health is contingent on what happens in the larger global economy. Shocks should be expected – the only questions are when, with how much warning and how seriously.


Contrary to the rosy inference that higher property prices suggest a healthy economy, I would argue that we are now facing systemic risks in the medium and long-term, as well as at the household and financial system levels.

A large number of Singaporeans have exposure to the property market which may make them financially vulnerable when there is another economic shock. Most households have been able to weather previous crises due to a strong cash reserve in the form of savings. However, the larger down payment and stamp duty requirements introduced in successive cooling measures imply an erosion of that cash reserve. This increases the depth of their vulnerability.

At the financial system level, our local banks have a significant loan book exposure to the property sector of 30 per cent. While this still meets the conditions of Section 35 of the Banking Act, it represents a non-trivial risk factor. There is a systemic risk to the financial system if we experience a significant economic shock that inverts the property market, as happened in 1997-98.

Finally, for Singaporean households to lock up so much liquidity in the illiquid property market represents two distinct risks. The first, that in future years there may be unintentionally coordinated disinvestment through sales, as retirement or other life adjustment effects make themselves felt. This would create supply-and-demand distortions which can be difficult to contain.

Second, taking on large debt in the property sector reduces the incentive to take risks in other areas – this can have a suppressant effect on the entrepreneurial impulse of young people by limiting them to ‘safe’ salaried employment.


In the event that we have an inversion of the property market – due to economic shock or supply overrun/ demand undershoot – we would do well to avoid a moral hazard situation where the Government comes to the rescue of households or the financial system.

It is important that the lessons of risk management be learnt, and that those who were avaricious or imprudent do not get to have their cake and eat it too with the aid of tax dollars. But if an inversion occurs in the period approaching 2016, it is not unnatural to expect considerable political temptation for the Government to intervene.

The nature of “bubble calling” is that bubbles are easy enough to see in hindsight, but just about everyone will find them invisible to fathom with foresight – either out of self-interest or because of the ‘’noisiness’ of all the varied indicators. However, the systemic risks are such that if “this time is different”, as people like to assume, it is only so in the most negative of ways.

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