Asian and Emerging Market Stocks Look Bad.... My Revised Projections for Global Properties

Long Period of Consolidation for Asian / Emerging Markets But Downside Limited

The latest selldown of financial markets is rather severe. If you look at the monthly charts, MSCI Asia x Japan and Emerging Markets have turned south. It indicates that this correction could last between one to six months! The mining sector is also quite bad. Chinese stocks are still in a doldrums.

But if you ask me how severe the correction will be, I believe it will not be more than 20% because valuations are extremely cheap now. MSCI is trading at around 11.5x PE compared to 13.5x median. If you mistrust PE numbers because earnings can fall a lot in a recession, then use the Price to Book data. It's also around 20% below median. Emerging Markets' Price to Book is around 15% below median. The mining sector is slightly above median, which means there may be more to fall. Chinese stocks are 40% below median.

You may wish to start bottom fishing soon by buying in tranches.

Price to income ratio and net rental yield spread over mortgage rates are important indicators of value for real estate. But mortgage costs to earnings is an even better indicator. This is because mortgage costs are dependent on LTV, which can be very high in boom times (90% in Singapore in 2007, over 100% in the US and UK in 2007), to very low in periods of busts (zero in the US in 2009 / 2010). If mortgage costs are low, or earnings rise, property prices can continue to rise. Conversely, if mortgage burden is high and earnings shrink, property prices are likely to tumble.

Potentially 30 - 35% upside for UK from 2013 - 2016

In the UK, it is now around 28%.  If I assume that mortgage costs will rise 10% over three years, income rise 10% too, and affordability will hit 40% before the cycle ends, we have around 30 - 35% upside! I believe mortgage costs will rise around 10% only because even though BOE overnight rates are 0.5%, mortgage rates are between 3.5 - 4%. Historically, spreads are around 0.5 - 1% due to competition from banks and other lenders. Today, banks care abou repairing their balance sheets more than lending, that's why spreads are so high. But by 2016, even if BOE rates rise to 3%, lending rates will still be around 4 - 4.5%, which isn't much higher than current levels.

I am not hopeful that this housing recovery for the UK will last very long or produce the same upside as the 1996 - 2007 period because of the high level of affordability and slow recovery in wages.

Potentially 40 - 50% upside for the US / Ireland

The US property cycle has taken off for over a year now. Prices are now 10 - 15% higher than the same period last year. In terms of affordability, I believe they are at around 20% level, almost half of the UK's and at the same level as what UK was at in 1996.  I am extremely bullish about single family homes in the US, as well as commercial real estate. That's why I invested in the Colony Homes Fund, which should IPO in the next one to two years. The UK had a 12 year rally which lasted from 1996 - 2008 when it's affordability dropped in 20%.

In most of Europe, real estate prices have just bottomed. Mortgages are almost non existent. If it existed, affordability would be at around 15 - 20%. Another problem with Europe is that wages are still falling so the upside may not be as much as in the US. Politics is a problem in Europe and the governments may slap on more capital gains and transaction taxes on foreign buyers to replenish their coffers.

-30% to +30% For Iskandar

If you bought a condo from developers at over RM1000 psf, chances are there will be no resale market and if you do put it up for sale after it TOP, you cannot find a buyer willing to match your cost price. http://fisheyer.com/2013/06/16/iskandar-property-data-hard-to-come-by/

There are whispers in the market that some secondary transactions were at around RM400 psf. This is why I think most of the transactions done after 2012 will face a loss even until 2016. It is ok if you live in them, but if you expect to rent them out, you will probably be disappointed that no Malaysian will rent it from you at respectable yields and those who can afford to pay a high rent would have bought it themselves.

For those who bought houses before 2012, the psf was between RM250 - 350 psf. I do not think they will lose money by 2016.

If you use the affordability index of mortgage against Malaysians' income, it will be over 150% and indicates a humongous bubble. If you use the same index against Singaporean's income, it will be around 37% of the income. Still extremely high because Malaysia's mortgage rates are 4.2% and that's at a historically low level already!! Wait till interest rates revert to 6.5% and you will see forced selling by foreigners. So there's no way that the luxury condos in Iskandar can find Malaysian buyers in the resale market.

-20% to 10% Upside for Singapore

I've argued about Singapore's bleak prospects for real estate since 2011 and I believe I will be vindicated in the next three years. I'll leave it at that.