The spread between private and public housing

“Spread” is finance jargon. It means difference in price or level. For example, the bid/ask spread in a stock is the difference between the highest price potential buyers are willing to pay and the lowest price potential sellers are willing to accept.

The spread between private and public housing I am referring to in the title of my post is, of course, the difference in price between a HDB flat and a comparable (in location and square footage, among other things) private apartment.

Private apartments obviously cost more than HDB flats and are also more “desirable” or “better” for a number of reasons, which I will not elaborate on here. Ample information is available elsewhere, given how property is a national obsession.

Unless you’ve been living in a cave somewhere, you should know that we’re headed for a global recession. Singapore is already in a technical recession and private property prices here are starting to crash. Hard. 

We could go on and on about the imminent new supply of private apartments coming on stream and the delayed redevelopment and subsequent letting out of enbloc-purchased units by developers. These are all warning signs that private property prices are poised to go “cliff-diving” (ah, how that catchphrase just rolls off the tongue).

But we won’t. As mentioned before, my blog focuses only on fresh perspectives or perspectives with less exposure. And right now, I want to focus on credit.

Credit as in debt financing for property. Mortgages in other words.  

Today’s ongoing global financial and economic crisis was in many ways brought about by too-easily available credit. Enough ink has been spilt over why this is the case. Suffice it to say that banks are now yanking back easy credit, and even though Asia is not the epicentre of the crisis, even here in Singapore, we see that credit availability has been tightened, for both companies as well as individuals.

How does this affect residential property prices?

Well, property being such a big-ticket purchase, it is almost always purchased on credit (for normal people that is). 

The thing is, for families that buy HDB flats, credit is exceedingly cheap (by global standards) at 2.6% p.a. from the HDB. Contrast that with the expense associated with a bank loan to purchase private property in Singapore, even if interest rates have been driven to multi-year lows by central banks around the world.

And that’s if you can get a bank loan. Word is getting out that even if servicing debt has not become more onerous, getting credit in the first place is harder than before.

So the spread between private and public housing is set to narrow in Singapore. This is mostly due to private property prices crashing hard after attaining bubble-like characteristics. But what I am pointing out here also is that the spread is contracting because of the unavailability of easy credit. Unavailability of credit, by the way, is also one of the culprits behind shrinking trade, which is unequivocally bad news for trade-dependent Singapore.

Private property prices are falling because bank loans to purchase them are harder to come by. Asset deflation, as economic pundits would put it. Anything that needs credit to purchase (including cars) is going to see its price fall unless that credit is still available.

Further to this is the liquidity issue. Something that needs credit to purchase when that credit is not forthcoming is unlikely to be a highly liquid asset. And illiquid (relatively speaking) assets are subject to a liquidity discount.

To put it another way, HDB flats in the near and foreseeable future are likely to be priced at only a modest discount to private property. Not because they are almost as desirable as private apartments (which is debatable), but because they are far easier and cheaper to obtain financing for, and are easier to move in a property market that is in recession.

In some ways, these factors have always applied, but they are more pertinent today than before because the era of easy credit has come to an end.

So what does this mean for property buyers and sellers?

I am not in the habit of giving advice on this blog, much less advice that has import on actions of such magnitude as property transactions. So don’t misconstrue anything here as advice, you have been warned.

Now that the disclaimer has been done with, my take is this:

HDB prices are likely to reverse course after a short-term rise, and start to slide as Singapore endures a serious recession. But their slide will be cushioned by many reasons, including the ones I have cited above. 

As for private property prices taking a tumble, does this mean that they are a good, cheap, value-for-money buy? 

It depends on your view as to whether reflation will occur, whether easy credit will make a comeback, and whether the economy will swing back to the same dizzying heights it experienced in 2006 through mid-2007. 

This is entirely reasonable to expect as Asia in general and Singapore in particular suffered much less of the speculative excesses of the real estate markets in developed countries.

On the other hand, economists and “analysts”, never mind their dismal track record for forecasting, have been busy prognosticating that recovery will take place in the [insert number] quarter of 20[insert number], after credit and economic conditions “stabilize” and return to “normal”.

“Normal”, as I am fond of reminding people, is a matter of historical perspective and frame of reference.