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End of ‘Cheap Money’ ? End of Property Boom ?

 

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 soon. The day of reckoning may not 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’

Mr. Bernanke may just be testing how his words would have on financial markets, or is he seriously mulling that the US central bank will consider cutting back its 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 (QE) had 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, i.e. real estate, though not overnight, but 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), the Bank for International Settlements (BIS) in Basel, Switzerland have expressed concerns for 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 these cheap money created by key advanced economies, while at the same time warning that such a move will likely to 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.” She also mentioned a sharper global slowdown more than thought a month ago.

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 ‘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 resulting higher interest rates in the US, our interest rates will also rise for Singapore, 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 remained the main area of concern, with the 17-nation Eurozone being in recession for 6 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

The Singapore residential property market is expecting to meet its target of 13,600 flats and 18,400 private homes this year.

As of 31 May, 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 2015-2016, 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 4 years. With so much cheap money flowing into our shores, it has driven our local stock and property market far and fast. 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 so much 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 soon after, flows back out of these temporary emerging market havens.

Inflation – An Angel or a Devil in Sheep’s Skin?

Inflation is like morphine. Too much of it leaves you feeling high and mighty.

But inflation may sometimes be a good thing to enrich the lives of the poor & middle class… as long as it is supported by pure economic fundamentals. However, 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 & 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 with a fall in asset prices especially property, the cause and effect of deflating that balloon filled with ‘cheap money’ over the last 4 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 & 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 4 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.


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About the Author

Gerald Tay Author, entrepreneur, professional investor and loving father, runs crei-academy.com with a tongue-in-cheek approach to property investment - and himself. He is widely regarded in the industry as 'The Common-Sense' Investor. Gerald writes with passion and straight-forwardness, disclaiming wild claims and impractical investment strategies behind lies and ignorance pervasive in the property industry for vested interests. His well-known statement, "All I did is to value my investments with science, logic and common sense.'

Comments (2)
  • chris wee Jun 26 2013 - 1:41 pm Reply

    Hi Gerald,
    Govt just announced that the nos of site in confirmed list is reduced for H2 2013. Govt is acting to limit the no of private condo units. These measures would reduce the supply of private units and thus making oversupply of condos less likely.

  • seo Barnet Oct 13 2014 - 4:19 am Reply

    Excellent bog post. I definitely love ths site. Keep it up!

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