Too Much Money is Looking for a Home... Corrective Phase Has Begun

On Saturday, I was looking at several projects launched by Far East Organisation in the central region. They are often 99-year leasehold and break the all-time record around the area. The snazzy show-flat really tempted me. But I held my cheque book firmly because I know that by the time these homes TOP, the real estate scenario may have changed. I remember the nightmares of 1997 and 2000, where people lined up overnight for new condominium launches, buying units at record highs. These people had to hold on to their flats until 2011. That's 14 to 11 years to break even, excluding rental.

Then I visited Oxley Tower on Sunday. The show room was full! It was unlike luxury condo's showrooms, which are dead quiet. They were pitching freehold offices at S$3,200 - 3,400 psf, retail units for S$6,000 psf. The agent was very confident that by the time the offices are completed, they will fetch $15 - 20 psf per mth. At $15 psf pm, and at $3,200 psf of purchase price, it will fetch 5.63% of yield. However, as the agent rattled on, I checked Property Guru for surrounding asking rent. At Springleaf Tower, the asking rent was $7 to 10 psf pm. I asked the agent to give me a feasibility study on the surrounding rentals. He said none was available. "Just believe me!" I can't fathom that in Singapore, a supposedly first world country, sales of property is done in such a third world way. It's all just heresay, leap of faith. It was impossible to verify information. Singaporeans will believe anything. If you tell them 5 years later, Santa Clause will appear from the north, they will believe you. I believe such reports are available, but the agents and sellers are not releasing them because information is power. Disinformation will confuse the public and make the market inefficient. I just think this is plain immoral.

Anyway, as I looked at the stock markets, the correction that is supposed to occur in March seems like "almost over". There's just too much cash on the sidelines looking for a home. The low interest rate environment is forcing money to flow out of deposits into real estate and stocks. It's frightening.

But as I look at the charts closely, even if we escape this a big correction this week, another bigger one is lurking round the corner because stocks are heavily overbought on the weekly chart.
Perhaps by May 2012, the rally will finally end. Perhaps it may last all the way till Oct 2012. credit spreads have risen. Credit spreads don't lie. They have been falling 30 Sep 2011, making lower highs, lower lows. The good times are back... I doubt if this rally can last beyond Dec 2012... I watching it like a hawk and riding the trend up, taking profits along the way...

Beware of Unscrupulous Agents Selling Overseas Properties to Gullible Singaporeans

Today, a lady called me at 6pm while I was in a meeting.

"Sir, we would like to invite you for a preview of overseas property investments," She said.

"Ok, where is the investment?" I said.

Agent: "It's in London. We're selling land."

Me: Land? Hmmm... where is it located? Which zone is it?

Agent: It's in Zone 5, North East London. Have you heard of G???? (some crappy name I've never heard of).

Me: (increasingly suspicious) How much are you selling it for?

Agent: GBP300 psf. It's very cheap.

Me: What is it zoned for?

Agent: It's a green zone.

Me: (Alarm bells ringing). Do you know land in London is very cheap? I can buy something near Canary Wharf or Covent Garden at GBP400 psf. Building cost is GBP200 psf. That means freehold land in zone 1 and 2 is only GBP200 psf. This is unlike Singapore, where land is ridiculously expensive. Who's selling it to me?

Agent: Errrr, perhaps you'd like to come down so we can show you various packages that suit your needs.

Me: Are you a land banking firm? Which means like Walton, UK Properties, Edgeware etc, you sell land to me that you've bought previously? How much did you buy the land for?

Agent: (sounding increasingly uncomfortable). Yes we own the land but I don't see why you need to know the price which we bought it for...

Me: Which developer will buy from me a Green Zoned land after you've built in 300% of profit? I need to keep it for decades!

Line went dead. She hung up.

I think the Monetary Authority of Singapore needs to seriously step in. There are many fools minted by the HDB price boom. Vultures are circling this bunch of gullible people called Singaporeans, who have always relied on the government to shield them from harm. Their thinking caps are rusty. They have turned into robots with no independent thought.

Many of these land banking companies buy pieces of agricultural land hoping that they will eventually re-zoned to residential. But the most unethical thing is these land banking companies actually own the land at dirt cheap prices. They pile on 300% of profit when they sell to unsuspecting Singaporeans.

The buyers end up holding it for a long time, perhaps even for decades before seeing any profit.

Then there are some agents who claim to sell US and UK properties at very cheap prices. Unknown to locals, these properties may be located in terrible areas where the houses are virtually worthless. The agents could have marked up 20 - 50% commissions. You will never know.

The best advice I can give is, fly to the place and do some research before you buy. The location that they claim is fantastic maybe in a toxic wasteland. Check the prices on internet, with agents in the US and UK. Don't take the agents' words for it over here. Be skeptical, never giving anyone a benefit of doubt.

Nobody will give you money on a silver platter. Unfortunately and sadly, most people want to snatch your hard earned money from you. It's important to note that you have to start from a basis that every body is a crook until proven innocent when it comes to business.

A Small Correction Of Stocks Is Looming

The rally which began from 4 Oct 2011 looks very stretched. However, the S&P500 Index has just surpassed Apr 2011's high. It took almost 12 months to surpass the 1,380 level seen back in Apr 2011. The corrections are getting more violent as the bull run goes into the fourth year. Back in 2010, where the first big correction occurred, it took only 6 months to surpass April 2010's high.

This current rally will probably correct a little bit in March or April, to a tune of 5 - 15% before resuming it's upswing. Then around the second half of 2012, we could see the rally being increasingly volatile.

The size of the QE from Europe is around EUR 1 trillion. From UK and Japan, it's around USD500 billion. This is a bigger QE than the one started by Obama back in Nov 2008. I think we could be surprised by the strength of the rally, which could last until Nov 2012.

It's very difficult to predict beyond 3 months. I am not in the business of forecasting too much. Most analysts fail to forecast accurately anyway. But I'll be increasingly cautious as the rally progresses, constantly dialing down risk from high beta stocks to low beta, high dividend ones, and the low beta stocks / funds, I'll move them to high yield bond funds. For existing high yield bond funds, I'll move them to alternatives.

My asset allocation is now 40% equities, 10% commodities / gold, 30% high yield bonds and 20% alternatives.

The real estate scene is still thriving in Singapore but watch out for more measures from the government to control it. 2013 looks like the year of reckoning for properties and stocks. It could be the perfect storm. We shall see.

Why Mass Market Homes Prices Have Shot Through the Roof

It all began with the under building of HDBs between 2000 - 2012. During that period, we let in unprecedented number of foreigners into Singapore. If you check Sing Stats, our population grew by around 100,000 - 150,000 per year. We needed between 28,571 and 42,857 new homes a year, assuming 3.5 persons per household. Instead, around 5,000 - 10,000 HDBs were built per year. In the private sector, only 6,000 - 12,000 were built per year. The total incremental supply was as little as 11,000 - 22,000 per year.

Look at Table 1: Median Resale Prices... A flat in Bukit Merah costs $712,000 for a 5 room. Table 2 shows the rise in HDB resale index, which rose by around 80% from 2005 to 2011. So a Bt Merah 5 room flat should cost around $395,555 back in Q2 2005. This meant that HDB has created $316,444 of profit for those who bought HDB on the resale market in 2005 in HDB.

If the average price of a HDB resale was $300,000 in 2005 Q2, the profit would have been $240,000 (see table 2). No wonder that the average household wealth of Singapore residents is over $600,000. If you add CPF, cash savings, other investments, the wealth adds up.

But the initial HDB profit has set up the average Singaporean household to upgrade to a private home. That is why condos in suburbs are hitting $1,000 - 1,400. It was the unintended consequence of supply crunch for the last decade.

Better still, based on table 3, if you had bought a flat in 1990 and held it till now, you would have a $586,427 of profit because you'd probably have bought a Bt Merah 5 room flat for $112,000. $586,427 is enough to foot the down payment of 2 private condos.

Going forward, our population will grow by 100,000 per year. We will need 28,571 new homes a year. HDB will build 20,000 new units per year and the private sector 20,000 - 35,000 per year. 2013 to 2015 will be very interesting years. It will be even more interesting when interest rates start to rise in late 2013 or 2014. There may be great opportunities then. I'll keep my powder dry in the mean time...

For those who believe that Singapore's residential market will never fall.... good luck... I hope you're right.

Table 1

Median Resale Prices by Town and Flat Type for Resale Cases Registered in 4th Quarter 2011

TOWNS	1-ROOM	2-ROOM	3-ROOM	4-ROOM	5-ROOM	EXECUTIVE
ANG MO KIO	-	*	$341,500	$468,000	$606,400	*
BEDOK	-	*	$331,500	$430,000	$545,000	*
BISHAN	-	-	*	$500,000	$650,000	*
BUKIT BATOK	-	-	$320,000	$427,000	$546,000	*
BUKIT MERAH	*	*	$376,500	$578,500	$712,000	-
BUKIT PANJANG	-	-	*	$404,900	$482,900	$565,000
BUKIT TIMAH	-	-	*	*	*	*
CENTRAL	-	*	$426,500	*	*	-
CHOA CHU KANG	-	-	*	$409,500	$465,000	$571,000
CLEMENTI	-	-	$361,300	$506,000	*	*
GEYLANG	-	*	$313,000	$495,000	*	*
HOUGANG	-	-	$331,500	$423,000	$517,500	$595,000
JURONG EAST	-	-	$325,000	$415,500	$495,000	*
JURONG WEST	-	-	$300,000	$400,500	$475,000	$569,000
KALLANG/WHAMPOA	-	*	$345,000	$515,500	$639,000	*
MARINE PARADE	-	-	*	*	*	-
PASIR RIS	-	-	-	$439,000	$500,000	$620,000
PUNGGOL	-	-	-	$475,000	$521,500	*
QUEENSTOWN	-	*	$370,000	$651,000	*	*
SEMBAWANG	-	-	-	$415,000	$465,000	$525,000
SENGKANG	-	-	-	$450,000	$511,000	$590,000
SERANGOON	-	*	$340,000	$467,500	$565,000	*
TAMPINES	-	-	$356,000	$450,000	$525,000	$630,000
TOA PAYOH	-	*	$348,000	$481,500	$645,000	*
WOODLANDS	-	*	$302,500	$392,000	$446,500	$565,000
YISHUN	-	-	$312,000	$382,000	$487,000	$574,500

Table 2:

Resale Price Index from 1st Quarter 1990 to 4th Quarter 2011

 

Year	Quarter	Index	% Change from Previous Quarter
2011	IV	190.4	1.7%
	III	187.2	3.8%
	II	180.3	3.1%
	I	174.8	1.6%
2010	IV	172.0	2.5%
	III	167.8	4.0%
	II	161.3	4.1%
	I	155.0	2.8%
2009	IV	150.8	3.9%
	III	145.2	3.6%
	II	140.2	1.4%
	I	138.3	-0.8%
2008	IV	139.4	1.4%
	III	137.5	4.2%
	II	131.9	4.5%
	I	126.2	3.7%
2007	IV	121.7	5.7%
	III	115.1	6.6%
	II	108.0	3.0%
	I	104.9	1.3%
2006	IV	103.6	1.0%
	III	102.6	-0.2%
	II	102.8	1.0%
	I	101.8	0.2%
2005	IV	101.6	0.4%
	III	101.2	-0.4%
	II	101.6	-4.8%
	I	106.7	0.1%
2004	IV	106.6	1.0%
	III	105.5	0.1%
	II	105.4	1.2%
	I	104.1	0.2%
2003	IV	103.9	1.2%
	III	102.7	2.4%
	II	100.3	2.1%
	I	98.2	1.6%
2002	IV	96.7	0.0%
	III	96.7	1.0%
	II	95.7	0.2%
	I	95.5	-0.8%
2001	IV	96.3	-1.4%
	III	97.7	-2.0%
	II	99.7	-1.6%
	I	101.3	-3.4%
2000	IV	104.9	-2.2%
	III	107.3	-2.2%
	II	109.7	-1.3%
	I	111.1	0.6%
1999	IV	110.4	2.2%
	III	108.0	8.1%
	II	99.9	1.4%
	I	98.5	-1.5%
1998	IV	100.0	-3.5%
	III	103.6	-4.3%
	II	108.3	-4.2%
	I	113.0	-7.1%
1997	IV	121.7	-6.0%
	III	129.4	-4.1%
	II	134.9	-1.0%
	I	136.3	-0.4%
1996	IV	136.9	2.7%
	III	133.3	6.0%
	II	125.7	12.8%
	I	111.4	9.3%
1995	IV	101.9	8.9%
	III	93.6	5.9%
	II	88.4	11.6%
	I	79.2	4.5%
1994	IV	75.8	0.4%
	III	75.5	5.6%
	II	71.5	2.6%
	I	69.7	2.8%
1993	IV	67.8	2.9%
	III	65.9	20.3%
	II	54.8	31.1%
	I	41.8	5.6%
1992	IV	39.6	2.3%
	III	38.7	2.1%
	II	37.9	6.2%
	I	35.7	2.9%
1991	IV	34.7	-0.6%
	III	34.9	-0.9%
	II	35.2	2.0%
	I	34.5	1.2%
1990	IV	34.1	-1.4%
	III	34.6	2.4%
	II	33.8	0.6%
	I	33.6