Thursday, July 29, 2010

When will housing prices return to 'normal'?

I think few ordinary Singaporeans would think that housing in Singapore is affordable or reasonably priced.

Yet, while I share this view, I have been hesitant to label the Singapore housing situation a bubble, unlike many other bloggers or news sites. This is because there are several fundamental drivers for property prices in Singapore. Also, indicators for property valuations are mixed. For example, price-income ratios appear to be on high side, but price-rent ratios are more moderate. 

Note, however, that this post does NOT constitute an exhortation to "buy now before it becomes even more expensive" or that property represents an excellent investment proposition in Singapore.

This post is on thinking about why housing prices have risen, what could cause prices to reverse, and how likely it is that prices will return to a more moderate, 'normal' level.

I have identified 5 drivers for the recent rise in property prices in the past 7 years or so:

1. Strong GDP growth and a relatively stable employment. Wage growth, however, is a separate issue. But clearly, at least some people, notably higher income groups (both local and expatriate) benefit from GDP growth.

2. High rates of immigration.

3. Liberalization in property-related policies. For example:

  • reduction in downpayment from 20% to 10% for HDB flats bought with bank loans, enacted in 2005.
  • permitting singles to buy any type of HDB flat, when previously they were restricted to 3-room flats.
  • permitting entire HDB flats to be rented out.
  • reducing the number of years flatowners must stay in their flats before they can be sold on the resale market.

Notably, HDB has backpedalled on some policies since property prices started sky-rocketing. I do not have an exhaustive list of all the policy changes that the government has enacted in the last 7 years or so (and there are many). Frankly, the housing policy system in Singapore, just like the CPF policies, are byzantine. But the overwhelming impression I get is that policies today are far more liberal than they were 7 years ago. Enlightened readers can correct me here if I am wrong.

4. Inelastic supply of property, in particular HDB flats. HDB's BTO scheme is largely responsible for the latter situation.

5. Ample liquidity, and low interest rates. This is a function of governments around the world flooding the markets with liquidity, particularly Bernanke's quantitative easing policy. There is a direct inverse relationship between property prices and interest rates.

Given these positive fundamental drivers, high property prices in Singapore may stay high for a very long time. 'Normal' could be a long time coming, which might be a good thing or a bad thing depending on your personal financial situation. Again, I have to reiterate here that I am NOT recommending investing or buying property now. I'm not in the market for Singapore property, or any property for that matter, now and in the foreseeable future, so I'm not talking my book.

How might the fundamental drivers listed above be affected such that property prices start to fall and moderate?

Clearly, government policy has a lot to do with policy liberalization, immigration and housing supply. Given how wedded our government is to immigration and just-in-time construction policy, I'm not holding my breath for change here. The government has shown a willingness to tweak housing policy, but it is evident that their effects are not as potent as increasing supply or restricting immigration. Barring a massive loss by the PAP at the next general election, which needless to say is a black swan event, we can safely conclude that policies conducive to high property prices will continue to persist.

As for economic growth, liquidity and low interest rates, these will largely depend on external factors. In particular, if the wheels come off the global economy due to fiscal stimulus wearing off, or if the China overcapacity, commodity-buying and property bubbles burst, or if the US dollar suffers a crisis of confidence, or if the sovereign bond market revolts and stages a massive puke-up...well, a lot of very bad things could happen in a very short time.

Singapore's economy would clearly suffer in such a situation, with knock-on effects on foreign direct investment, capital flows and property prices (and perhaps even immigration).

On balance, it's difficult to say when property prices in Singapore will revert to 'normal'. If you believe that high growth will continue, you might hold the view that housing prices have reached a permanent new plateau, never to descend again.

If on the other hand, you see unsustainable policies, interest rates, levels of debt both sovereign and household, and money-printing everywhere you look, you might have far less sanguine views. 

Myself? Let me reiterate for the third time that this post does not constitute a recommendation or a forecast. Whatever I write could well be very wrong.

I think that property prices will continue to grind higher (keyword: grind, meaning protracted and choppy but with a directional bias) for the short to medium term, meaning 6-18 months or so. Perhaps longer. If an economic reversal occurs however, then property prices will probably plunge sharply and quickly. In other words, my view is that property price movements will be assymmetric in direction and magnitude. Less potential upside relative to potential downside.

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