By Gerald Tay (guest contributor)
Financial markets have been on a highly jittery state since the US Federal Reserve announced that they are starting to unwind its mega-monetary easing (known as Quantitative Easing, or QE) soon. The day of reckoning may not yet be at hand, but given the increased frequency of alerts, it may be nearer than most people think.
What are the possible impacts this could have on the Singapore property market? Let’s examine what could trigger a potential downturn or crash in property prices from both global-macro and country-micro warning signs.
The four-letter-word: ‘exit’
Is Mr. Bernanke just testing the impact his words would have on financial markets, or is he seriously considering cutting back on the Fed’s mega-bond purchases (the main instrument of its QE policies) soon? With recent positive economic news in the US, has the Fed decided that quantitative easing has done its job and it is time to take away the crutch?
If the Fed is serious in its intent, the current fuel for the international flow of capital to investors will be sluggish at best and this may result in a fall of asset prices, including real estate. But this may not happen overnight, and may take another year or two before we see a serious price correction.
Markets are under the spell of central bankers
Recently, many major global economic financial institutions, like The International Monetary Fund (IMF), The Institute of International finance (IIF), and the Bank for International Settlements (BIS) in Basel, Switzerland have expressed concerns about flooding Asia and emerging markets with cheap money, which have been driving stock and other asset prices like property to levels not justified by economic fundamentals.
The International Monetary Fund (IMF) said it might be time to consider pulling back this cheap money created by key advanced economies, while at the same time warning that such a move will likely have adverse impacts and create turbulence in global financial markets.
As IMF managing director Christine Lagarde recently put it, “The persistence of easy monetary policy increased the flow of capital to emerging markets, especially in Asia and Latin America. Such flows can be beneficial to an economy, but they can also lead to financial stability risks. Even worse than the tide coming in is the tide going out – a possible sudden reversal of large capital flows can overwhelm an economy.”
Robert Pringle, a member of the Group of Thirty Bankers and other financiers said, “the risks and dangers for the global economy from mega-monetary easing by central bankers are like hidden reefs for a ship – invisible but deadly.”
Bye-bye to bull market in bonds, hello to higher interest rates
With the reduction of monthly bond buying from the Fed, this might be the end of a 30-year rally for bonds in USA.
The Fed’s stimulus programs have helped flatten the yield curve, resulting in the lowest rates in the history of the United States today. With a decrease in bond prices, investors will be asking for higher yields to compensate for lower bond prices. Thus, with the resulting higher interest rates in the US, Singapore’s interest rates will also rise, which will ultimately create a ‘slow death’ for many property investors and buyers who are over-leveraged or over-committed on illusionary low rates.
China and Eurozone’s problems remained the main area of concern
As for further risks, a severe correction for Asian markets, i.e. Singapore, might come from news of Chinese bad debts. Negative sentiment could overflow to Asian equities, followed by real estate, if one or two Chinese local governments are allowed to go under.
The IMF has recently cut its GDP projection for China, the main engine of the global economy to around 7.75% from 8%. Even then, we might want to question if all economic data coming out from China are simply a ‘black hole’ in disguise.
The Eurozone is also entering a softer patch and remains the main area of concern, with the 17-nation Eurozone being in recession for six consecutive quarters and operating at ‘zero speed’. Going forward, the financial indicators are not encouraging either.
Fall in property prices beyond government’s control and require a bit of ‘luck’
The Singapore government is “engineering a soft-landing” for the housing market. The smart question for everyone is: “will these efforts be enough to withstand possible external shocks that have similarly brought down the Singapore property market historically in the past years despite previous cooling measures?”
The answer is a resounding ‘no’.
In his latest blog post, National Development Minister Khaw Boon Wan said a soft-landing in property prices would require a bit of luck with factors beyond the government’s control, such as the global economic conditions. One key strategy being taken is to ramp up supply of public flats and private residential units.
A double whammy – oversupply with lower rental growth
Singapore’s residential property supply is expected to meet its target of 13,600 HDB flats and 18,400 private homes this year.
As of 31 May 2013, the HDB has built 6,000 flats and is confident of delivering the remaining 7,600 units by end 2013. 3,500 private housing units have also been completed as of April, with the remaining 14,900 expected to be completed by this year.
Coming closer to 2015 to 2016, we shall be expecting at least 200,000 units to be completed, coming from both HDB and private.
Moving forward, investment demand is expected to moderate due to stricter financing restrictions and higher stamp duties from the government’s latest round of cooling measures.
In addition, rental growth might continue to slow down due to the substantial number of completions this year and lower rental demand as a result of the government’s restrictions on foreign labour inflow.
Jury still out
Mega-monetary easing by many key advanced economies has been remarkably successful, especially for our Singapore property market over the last four years. With so much cheap money flowing into our shores, it has driven our local stock and property market fast and furious. This has produced the ‘wealth effect’ which is supposedly to help buoy businesses and fuel more consumer spending. To quote Anthony Rowley, a prominent Tokyo News Correspondent, “The jury is still out on this, however, and meanwhile asset prices like property are looking ‘over-rich’.”
Cheap money has drawn a lot of money out of key advanced economies where yields are low, into Asia and emerging markets, where they are higher. Once these economies start tightening financial policy, this money will head home and where will Asia and emerging markets be then?
Singapore, Asia and other emerging markets may be in for a rough ride, once the tide of money that has flowed out of US, Europe and even Japan, flows back out of these temporary emerging market havens.
Inflation – An Angel or a Devil in Sheep’s Skin?
The recent years of too much easy money flowing into our shores has fuelled inflation to an unprecedented level. Affordable housing and lower cost of living to the masses should be the priority of any government policies. In other words, inflation if needed should benefit all classes of society as a whole, and not simply provide that convenient ladder for the rich to get richer, at the expense of the poor and middle class.
Recently, I overheard a prominent CEO of a local property agency saying to his seminar participants, that anytime is a good time to buy property, and even though the property fetches a negative or marginal yield, buyers will compensate their losses eventually through future capital appreciation.
Either this already rich CEO is in serious disillusion of current affairs, or he’s deepening his personal pockets at the expense of the average mass market buyers.
This article is written to educate the mass market buyers/investors on the potentially serious global financial issues we are currently facing and how it will ultimately affect everyone financially. As long as you’re not over-leveraged in mortgage debts or over-committing financially because of illusionary low interest rates, and able to service your loan regularly, an imminent downfall in your property value will not affect you.
If I may say so, I believe a fall in asset prices and especially property, the deflating of the balloon filled with ‘cheap money’ over the last four years, will tremendously benefit the financial lives of the very people who have been most prudent, especially for the poor and the middle class. They will be able to buy affordable homes through enough savings, or grab ample opportunities of investing in a downturn to grow their wealth for retirement.
Perhaps this potential outflow of cheap money may be the start of a time where the poor and middle class ‘steal’ back some of the wealth stolen from them by some selfish Rich.
It’s payback time if you are savvy enough.
To sceptics who think I’m trying to ‘talk the market down’ with this article because I have missed opportunities, here’s my reply – I’ve bought three more local properties within the last four years, with two of them currently sitting on good capital appreciation with decent cash flow and one of them sold with solid profits in my pockets.
By guest contributor Gerald Tay, CEO of CREI Academy Group, who exposes widely-held property investment myths that have proven highly ineffective in creating wealth, and prevent a comfortable retirement for the ordinary investor. Posted courtesy of www.Propwise.sg, a Singapore property blog dedicated to helping you understand the real estate market and make better decisions. Click here to get your free Property Beginner’s and Buyer’s Guide.