posted Aug 12, 2015, 8:29 PM by Benjamin Ng
There was a recent article in the newspaper with the headline "Time to review property cooling measures" (Straits Times, July 4).

The argument is that, if private home prices have been down; HDB flat prices have dropped; oversupply has worsened; rents have weakened; interest rates have risen; the real estate industry has shed jobs, it may be time for the government to review the cooling measures.

Many people fail to see that the government can only do so much to cool or stimulate the property market. After all, it is an open market and there are many other factors that could lead to the continual boom or downturn of the market, such as supply and demand, economic outlook, market confidence, etc.

I am re-reading James Rickards's book The Death of Money: The Coming Collapse of the International Monetary System. Below are some new inspirations from this interesting read.

 1. Regime Uncertainty

When the Singapore government finally decides to withdraw the cooling measures, it may do little help to restore the fallen prices.

Remember those government measures taken to stimulate the property market back in year 2005? Loan-to-value limit was raised to 90 percent. But not many buyers were interested.

The "regime uncertainty" theory from Charles Kindleberger explains the reason behind the lack of investment during the Great Depression.

"... even when market prices have declined sufficiently to attract investors back into the economy, investors may still refrain because unsteady public policy makes it impossible to calculate returns with any degree of accuracy ... the added uncertainty caused by activist government policy ostensibly designed to improve conditions that typically makes matters worse."

From mid-June, stocks in China tumbled 30 percent from their seven-year high. Then the Chinese government and Chinese brokerages suddenly announced drastic measures to revive the stock market. The intervention might have saved the market from the brink of collapse and demonstrated how powerful and cash-rich the government is (and compared with China's $3 trillion reserves the money spent is just peanuts). However, the whole incident exposes the vulnerability of the fundamentals and further undermines the market confidence of investors.

After all, who needs the government to step in if a market is healthy enough to recover on its own?

 2. Market Oversupply

With 24,800 vacant private homes, an additional 22,000 to be completed this year and another 21,000 to be ready next year, what kind of population growth do we need in Singapore to absorb the surplus?

Like what Rickards says: "In the end, if you build it, they may not come, and a hard landing will follow."

 3. Wealth Effect

Rickards points out the fact that two asset classes - stocks and housing - represent the wealth of most people (which is certainly the case in Singapore). When prices of stocks and properties go up, people "feel richer and more prosperous and are willing to save less and spend more".

It is a chicken-and-egg situation: Low borrowing rate and easy money make properties look affordable, attracting Singaporeans to put more money in properties, thus driving property prices to new highs.

4. Wealth Inequality

The wealth effect only benefits the "haves", not the "don't haves".

Wealth becomes heavily concentrated on the privileged who own properties, or businesses who own a stake in the industry (property developers, real estate agencies, banks, brokers, etc.).

When prices are rising faster than wages, housing becomes unaffordable for the common people who are the end consumers of all the housing products. The average person does not get anything from inflated housing prices, except the adverse effect of inflation.

 5. Asset Bubble

Cheap money widens the disparity between the rising costs of housing and the unchanged affordability of home buyers, all disguised under the continual growth of debt.

But many people fail to see that this wealth effect is superficial in the sense that it doesn't come from real economic growth of the country. In other words, the booming property market is not created out of increase in productivity, trade surplus or foreign direct investment.

When the real estate market softens, the net worth of people who are asset rich in properties diminishes with the deflated asset bubble.

 6. Asymmetric Information

Many buyers are looking for great bargains in this market. They assume that sellers would hang on to their properties if they are not so desperate to sell. This belief causes buyers to lower the prices they are willing to pay.

However, not all sellers letting go of their properties now are desperate sellers. They refuse to sell at unreasonably-low prices and withdraw their properties from the market. The see-saw situation results in less properties for sale and lower transaction volumes every quarter.

 7. Self-fulfilling Expectation

Buyers are sitting on the fence and holding back on home purchases. Investors are losing appetite for property investment and looking for a safe haven to park their wealth. The drop in transaction volumes and prices eventually becomes a self-fulfilling expectation.

A persistent depressed market, coupled with adverse factors like supply glut, interest rate hike, soft rental market, etc., requires strong holding power to tide through the storm. And holding power means a healthy level of cash reserve and high liquidity of other assets. Unfortunately, the near-zero-interest rate discourages savings which has depleted bank savings and fixed deposits in the past few years.

The market can be more vulnerable then what it appears to be. The loss of market confidence can trigger a ripple effect which causes frenzy dumping to cover losses.

It doesn't matter what the industry stakeholders are saying. It is still early to say that the Singapore property market is recovering.

To be prudent investors, take the hint from James Rickards.

"The key to wealth preservation is to understand the complex processes and to seek shelter from the cascade."