Lately, a report on Singapore's residential property by Standard Chartered Bank has caught the attention of many. The report said that residential property will probably drop 20 - 40% between 2012 - 2015. It cites issues like over supply which will peak in 2015, slowdown in population growth and rising interest rates from 2013 onwards.
Credit Suisse came out with another report to say that the over supply can easily be absorbed by another influx of immigrants, the government can easily tear down old HDBs to reduce supply.
I do not think highly of the report from Credit Suisse. Singapore's property index has undergone tremendous swings in the last 30 years. There is a tendency for sell-side research to be always positive because the investment banking arm gets deals from the companies they analyse. Don't believe me? Read "Confessions of a Wall Street Analyst" by Dan Reingold. http://www.amazon.com/Confessions-Street-Analyst-Daniel-Reingold/dp/0060747692 It was the same kind of pressure that I faced in my stint as an analyst between 2001 - 04.
Back to Singapore's property index. We now have 5.1 million residents (PR + citizens). If I assume that we increase by 100,000 every year, we will reach 6 million by 2020. Assuming 4 people per household, we can comfortably absorb 25,000 public and private homes completed. Just in 2012, this number will be surpassed. By 2013, completed homes will hit over 30,000 and by 2015 a staggering 50,000. The government can remove the old HDB flats to bring down net supply for sure. But I'm not sure how many they can do every year. Even if they start tearing down old flats, can they afford to do so at a rate of 20,000 per year from 2012 - 2015? I believe what the government wants is to stabilise HDB primary sale prices and bring down the resale prices. Mass market condominiums will definitely follow.
What about foreigners buying Singapore property? They now account for 20% of purchasers. This number could disappear if China's property market drops. Already, analysts are talking about 20 - 40% plunge in property prices in China. The tycoons from China who wish to park their wealth here may just repatriate some money back to China to shore up their flailing businesses. The existence of foreign buying, when uncontained, will increase the price swings.
Then there's the stock market. Will it be bull or bear market in 2012 and 2013? The Singapore residential property correlates somewhat with the stock markets. I said "somewhat" and not "strongly" because there are periods like between 2003 - 2005 where stock markets rallied worldwide while the property remained at the trough. The reason is supply plays a big part.
If we have a recession in the EU, slow growth or a mild recession in the US, a hard landing in China, bringing global GDP down to 0.9% in 2012, will property price fall in 2012? Let's say if stocks rallied from now until beginning 2012, and the US followed up with QE3 in 1Q 2012 and the EU deciding to fund EFSF, would stocks not rally until June 2012? Wouldn't this disconnect with economic realities?
My thoughts are: short term, we are likely to see a stock rally. In 2012, the world will focus on economic data. Any further plunge in PMI in China, ISM in the US will probably trigger another 20% plunge. During this time, value hunters will come in. The Federal Reserve may also help. and stocks may rally 25% from thereon.
So the first half of 2012 could be a volatile one, with the S&P 500 fluctuating between 1300 - 1000, the STI between 2400 - 3100.
For the second half, inflation may start to flare up. EU's inflation could hit 3 - 4% if the ECB yields to pressure. Same as in the US. So QE and money printing option will be out. Will it then crash towards the end of 2012? It could capitulate. Property, which has been stubbornly stable until then, could finally fall 10 - 30%. I feel that S&P500 will at most fall to 800, STI to 2100.
2013 could be a year of recovery. Global GDP could rise to between 1.8 - 2.2%. I feel that property will continue to trend down until mid 2013 before stabilising. Second half of 2013 could be the year stocks start to rally while property remain stagnant.
The question is, oversupply is going to get worse for property while we expect economic recovery in 2014. Which factor will prevail? I sense that we could see a period of stagnation and slow rise in property for 2014 and 2015. We went through 7 good years before 1997 for property. Then we went through 7 very bad years between 1998 - 2004. This is followed by 7 very good years between 2005 - 2011. 2012 - 2018 may not be a very good period for real estate. I may be wrong. But we'll see.
