We are in the 2nd half of the bull run. In terms of a football game, we are probably at the 50th - 60th minute. There might be a good 12 - 18 months more to run. It means that we could see the stock market trend higher to as late as Oct 2012.
Likewise, residential real estate could continue to trend higher, because the stock market is a fantastic leading indicator of economic growth whereas real estate is a coincident to lagging indicator. But my take is the government could slap a 5th measure sometime by June or 2nd half of 2011, stopping the residential prices from rising beyond 10% per year. Don't fight the government. You can't win. The truth is, residential price indices have been rising as much do to the shrinkage of units as much as real demand. A shoebox unit on a psf basis can fetch up to 30 - 50% higher. Developers are having a field day selling their little units to aspiring local owners.
Can you get used to living in a 400sf home? In my opinion, shoebox units near financial / CBD districts can attract tenants because people like to live near where they work. But shoebox units in Balestier?? I really doubt if such units can find tenants at attractive yields when completed. 2011 is probably the last and final year of price appreciation for residential. 2012 could be a flat or down year. When stocks start to hit the bear market that year, we could see residential properties sliding down too.
What about the en bloc fever? It could burn until 2012. But remember, Development Charges have been raised. Government land sales at half the price of collective sales are at full force. Cost of construction is beginning to creep up again. We could see a couple more successful collective sales fever, mainly in the central areas, and in small projects before it fizzles out. Developers are very mindful of the avalanche of supply coming in 2013/14. It does not auger well for en bloc fever.
Why will stocks rise until mid to late 2012? I like Russia, Brazil, Latin America, China, nothing more. I love countries that export commodities. I like frontier countries. I don't like the US, or Europe. I only bought Japan on 15 March because of the 20% collapse. It subsequently rebounded by 10% so I'm up several thousands and will go for a trip.
Interest rates in the EU will start to rise in April. They could hike say 4 times in 2011, making it 2.5 - 3%. It still won't invert the yield curve. The German 10-yr bond is at 3.5 - 4% yield. In 2012, when CPI rises beyond 3%, capacity utilisation rises above 85% - 90%, we could see the yield curve inverted in 1H 2012.
The US' Fed fund rates could begin rising after June. We could see it hit 1.5% by end 2011. The 10-yr US T bills is at 3.3%. We could see Fed Fund rates hitting 3.5% by 2H 2012. Inflation in the US could hit beyond 4% then. US stocks could start falling by 3Q 2012, but commodities could rage on until 4Q 2012 or even 1Q2013. We will have a worldwide recession by 2H 2013. It will be the perfect storm where residential properties fall together with stocks. The recession could be worse than the one we see in 2008 because this time, we could face stagflation. Inflation could remain stubbornly high because of high energy, food and material prices. Half a decade of quantiative easing could also rear its ugly head. With inflation falling to 2% in the EU and 3% in the US in 2013, both governments may have limited tools to fight the recession. Quantitative easing will be out of question. There will be limited room to cut rates due to the high inflation. Welcome to the age of stagflation.
Till then, enjoy the ride.
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