Monday, 25 October 2010

Annual Retreat

I will be taking my annual retreat in China, Jiangsu province.

This will give me first-hand experience to appreciate the rampant inflation facing China's economy and how it impacts the daily life of the local people. It also gives me the chance to understand the Bubble of the Chinese Property Market better.

I will continue to post about property issues from a transnational perspective on the USA, Japan and China property markets.

I may have limited Internet access during the period in China and I do hope to be able to do postings from there.

Reference #1
Abstracted From TODAY Oct 21, 2010

by Patrick Chovanec

Money, money everywhere. At least that's what it feels like at the moment in China. Awash in luxury cars, condos and expensive jewellery, the Chinese are enjoying what looks to be an unstoppable boom.

Inflation figures due today should give pause to those who assume China's economy is on sound footing. To an extent few appreciate, China's astonishing growth rates these past two years have been fuelled by an even more astonishing expansion of its money supply, by more than 50 per cent. Until now, the inflationary consequences have been largely camouflaged in the form of rising asset prices.

High-end property prices in dozens of Chinese cities doubled during the global financial crisis. Sales of gold bars have done the same this year. Fine pieces of jade are selling at US$3,000 ($3,950) an ounce, up 50 per cent in the past couple of months, while packets of certain types of Da Hong Pao tea are going for US$30,000 a kilogramme. Art and wine auctions in China are pulling in record prices, while the Shanghai stock market surged 8.5 per cent last week to the highest level in almost six months.

Now there are signs that inflation is spilling over into consumer prices. China's CPI has been climbing steadily all year and Chinese officials are making noises about raising their CPI target to 4 per cent or even higher. Food prices gained 7.5 per cent in August, from a year earlier. Economists estimate wages are rising about 8 per cent. The HSBC Holdings Purchasing Manager Index survey for August reported a marked increase in input cost being passed along in higher output prices......

In reality, there is rampant inflation in China. It's just showing up in asset prices. The new money that was created entered the economy as loans, mainly to fund investment in fixed assets. When it finally reached consumers, they bought tangibles, like property, instead of spending on consumer goods.

Asset-price inflation is tricky because it doesn't feel like inflation. When the price of bread doubles, it feels like it's getting harder to make ends meet. When condo prices double, it looks like smart investors are getting rich. But it's only a matter of time before asset inflation starts working its way through the rest of the economy as broader price inflation - and puts China's policymakers in a serious bind. Bloomberg

Sunday, 24 October 2010

The Property Bubble & Investment Trap Part XI - Currency war may fuel bubbles - Impact on Mid Range & Luxury Class Properties

Last week, I wrapped off the last leg of my posting on the mass market condo with a cautionary note on a likely "currency war" that could boost inflation and asset prices in emerging markets and thus fueling a property bubble which may burst and hurt the overall market generally.

What the Currency War Really Means?
I was surfing the web for news about the "currency war" to study implications when I hit upon this voice blog -"Gold, Currency War, ADP, Inflation, Jobs" - How Currency War Affects Stock Market and Economy. What the author said was interesting. He said in a "War" you are killing the "Enemy Forces", but in a "Currency War" you are actually killing your own "Friendly Forces". Hence as Govts and their Central Banks fight it out, it is the ordinary citizens within these countries who suffer. As a currency war wages out, it boosts inflation and asset prices. The US is pretending as if  there is no inflation, maintaining low interest rate and arguing for other nations to appreciate their currency so that they (US) would be competitive in exports to correct the trade imbalance. Gold and Silver hit their peaks. The Swiss and Aust  saw their currencies hitting 52 weeks high. Japanese Yen  hit its 15 year high ... inflation will go up in emerging countries as hot monies flow in to hunt down "affordable" properties, leading to asset inflation and perhaps general hyper-inflation later on when interest rate will just escalate.

And taking global markets by surprise, the Monetary Authority of Singapore (MAS) tightened its monetary policy last week - signaling its intent to combat inflation even as the Republic's economic growth slows.  The move, which allayed the fears of business owners and consumers about rising costs, sent the Singapore dollar soaring to a record high against the greenback - it also sent the US dollar tumbling against a wide range of currencies. The US dollar was at 1.2953 against the Singapore dollar and was being quoted at a record low of 1.2893 shortly after MAS' announcement. All must be waiting to hear what our PM will say  on the forthcoming G20 Meet about why Singapore is going against the trend of fighting currency appreciation for emerging countries.

Immediately after the MAS's announcement, banks pulled another stunner when SINBOR was lowered from 0.5 to 0.44 % the next day.

Very often in Singapore, our policies are just not simply mapped out and aligned to help out needy individuals by implementing  simple control measures. They are often swayed to be so called "sustainable" which is actually making them more "pocket-centric" for the Govt, either in terms of earning more revenue and /or to cut costs. If everyone upstream only care about their own pockets, what should property buyers at the downstream of the value chain do? Afterall, the Govt simply pushes out the land plots, and it is the developers who are pricing the units built for the buyers to take up, with "easy" money entering state coffer no matter it is "boom" or "bust" for the end-purchasers.

Meanwhile, MBT will let out more land supply and leave you to "fight it out" with the developers if you take it on now, and even with more FTs or hot foreign investors. I had illustrated my claim with a few analysis of recent land bids in earlier postings but it is not exclusively mentioned by me, but also by others (read this link). HK has just restricted giving PR to foreign investors but not Singapore. Singapore is letting them in and restricting them from leaving with the newly announced stricter measures as in the case of landed housing. For the price band from mass market condo to luxury class condo, they are still free to roam. Singapore's policies are seldom really consistent. They often get you caught-in-between. The only instance you see consistency is when the state thinks about making money and you are paying.

Too strong a SingDollar may still encourage more hot monies to flow in to speculate instead of checking it by making property a little more expensive notwithstanding the cooling measures. It is not bad a time to do some "positioning" in your strategy now by watching external economic drivers and doing some field recce of potential properties, but it is certainly not the time to buy yet. As MBT puts it in Parliament, since the measures "have been introduced less than two months ago, it is too early to assess their full impact". But we do know that developers only sold 911 private homes in Sep 2010, down from 1,259 in August, with the bulk of the sales due to heavy demand in one project, the NV Residences. Don't forget MBT has no obligations to help HDB owners upgrade to private properties. But he has obligations to make as much as possible for the Govt coffer from his land sales for DBSS, EC or mass market condo, which will spiral up the price of re-sale flats, and upon which his new BTO flat prices will be pegged.

Targeting the Market Segments
With more hot money likely to flow in as the currency war wages,  is it then time to buy ? Foreigners are unlikely to be buying and speculating on new DBSS and ECs, or even mass market condos - so why the hell are those EC buyers at the recent launches willing to pay so much when the price has not consolidated? The action is more likely to be shifted up the price spectrum on the mid-range and luxury class condo segments. Foreign buyers are more likely to target this part of the price spectrum for speculative investment with the Govt leaving it to market forces, while the GOVT and Developers target to make more money out of Singaporeans' pockets for the DBSS, EC and mass market condo segement, out of the land bidding and development process.

Market Forces - Buyers vs Sellers
Now, with SIBOR rates lowered, the Buyers have more time to mull over their purchases and put even more pressure on Sellers. The Sellers now have a bigger disadvantage than initially anticipated especially amongst those who were contemplating new upgrades with the current low rates – they will get desperate to sell to bank-roll their new investments. Speculators who have already purchased their new projects will sell quicker than those under no such pressure. The correction in housing prices will start with these under-pressure. Sellers who cave-in to consolidate their finances even if it means selling at a lower-than-offered price as long as they do not lose out. Savvy players have already started to make compromises in negotiating prices. This sudden turn-about has caught a lot of Sellers on the wrong foot. Those who have not realized it yet will yield to pressure later and these are the ones who end up bringing the market down.

The Buyers, with the help of the drop in rates, have more time (around a quarter) to mull over their purchases and put more pressure on the Sellers. The measures by MBT has effectively sifted out the small-time players and will hit the over-leveraged speculators. The Buyers now are the cash rich investors who are more likely to be savvy and experienced homeowners with real leverage on their side and now, time to mull and pressure. Amongst the Sellers will be those over-leveraged speculators who will come under pressure to consolidate their investments as their debts catch up with them.

Will Low Rates Last Forever?
But will the rates stay this low forever? We’re getting less than pittance on our savings. An argument in supporting why the MAS had tigthened policy was Singapore had slackened while the financially powerful nations around us like China and Australia have tightened their monetary policies, just as they continue to pursue a firm stand against speculation in containing the asset  bubbles. Ultimaltely, if we did not act, we would end up paying more for imported stuff because the value of our currency remains constant. But this monetary move will also prompts the banks to start raising their rates. While Singapore had surprising done the reverse, China announced a rate hike on 19 Oct 2010.

More significantly, prime rates will drive up and this is going to drive the property market later on. Expect a surge in buying as real buyers rush in to lock in the current low rates before the banks start hiking. This should send property prices up in a flurry. And as quickly as it starts, the buying will end. Real investrors  should wait for this to happen. When it does, prices will come down as the Bid/Ask spread inevitably changes direction. With so many properties in speculative Sellers’ hands, the onus will once again swing into the real Buyers’ hands and there will only be a few of them left to snap up the many choice units still left on a down-trending chart of housing prices. The higher prime rate will not bother those dealing with more real cash. Sellers in need of cash to bank-roll their next investment (which they will buy/have bought at a higher price) will be desperate to sell. The fact is that most Singaporeans and PRs eligible to buy homes are over-extended on credit (unlike in China) and will need to consolidate the assets within this opportunistic window. The current measures have limited their ability to weigh in on more credit and they will be forced to liquidate if they wish to continue their property binge or settle their debts – the banks will come calling for the next (huge) payment phase as many property projects come to fruition next year.

Re-cap on Affordability
The real issue about "affordability" is then "can we afford to spend the whole life working and paying for it". When inflation becomes hyper inflation and interest rates starts to hike constantly, that is the time to worry for most owner-occupiers, even if they stay employed. I like to re-cap what Mr Colin Tan said in one of his article in TODAY, "The key to investing in homes" - "When an owner-occupier mis-times his purchase, he spends his whole working life paying for it. When a fully-leveraged investor gets it wrong, like in the real estate board game Monopoly, he becomes a bankrupt and retires from the game."

Patience for the Buyers
New developments are not the way to go now as the resale market will start to look like better and safer bets. Patience is key for the savvy Buyer. Plus with the lower SIBOR rates in place now, the Buyers, have time on their side. If you are a Seller, the Buyer will not envy you. Timing is of the essence :-
•   Wait too long and get too greedy, and you will pay for that greed.
•   Sell too soon and the prices continue to rise and you will pay for that impatience.
It becomes a Buyer's Game, like in Reversi when a corner chip is placed as I mentioned before.

Specifics About the Mid-Range Condo Segment
I like to leave aside the monetary policies for now, unless some interesting events and statistics do crop up soon, to take a quick look at the evolving mid-range and luxury class condo segments. The luxury class is not worth the time for discussion here in this blog as it is a unique niche for the wealthy and I doubt any of these priviledged buyers would be even here to read this blog.

The "mid-range" condo still deserve a closer look to appreciate the mechanics of property investment,  although with escalating prices it is getting out-of-reach for most average purchasers. It used to be the "battleground" in the property market and comprised mainly the 999 Yr LH and FH condos in the prime suburban areas or "outside central region", or roughly the band from $850~$1,200 psf of the current price spectrum. I can divide them into 2 sub-bands - $850~$1,000 psf and $1,000~1,200 psf.

In the historic high of the 1996 Peak, these mid-range condos were released into the market at about $650~$800 psf and $$800 ~$950 psf respectively. So you see current prices has appreciated more or less by $200 psf. In fact what prompted MBT to implement control measures was almost every other private condo transacted just before was above $1,000 psf.

My focal points will be approaching it from 2 angles to round off :-
(a) that of "risky buying" vs "good investment value"
(b) summarising the overall pricing trends from 1996 ~ 2010 in relation to the PPPI and economic crisis.

When young, I was told by my granny simply what property investment was all about. "If you could not afford a property in Holland Road or Orchard Road, you have to look for one nearby 'Hwa Chong' in Bukit Timah".  In those days, it meant "landed" properties because nobody would have dreamt of living in a condominium with facilities. That was simply about LOCATION. In those days, flooding had nothing to do with "Acts of God" and if did not flood at  Bukit Timah then "The Gods Must Be Crazy". Today things get more complicated,  it means choosing something affordable from the properties scattered all over Singapore. The different paces of developments had carved them out quite distinctively to characterise some of these niches.

Affordability at one time meant simply buying outside the prime areas, at the suburban. Hence, we have the Bukit Timah Condo Belt which once defined the mid-range band of condo during the 2006 / 2007 Peak. Today, property value means "Location, Location, Location" and more "Locations" over Singapore ... it not only must be located nearby "Hwa Chong" but it should be next to a DTL 2 MRT station say TKK Station has a famous institution next to it. If not, it  must be say coming up near Upper Serangoon along the Circle Line and such mass market properties 99yr LH are now priced just as expensively as those near Bukit Timah used to be. This brings me to my point about "risky-buying" versus "good investment value" . I like to illustrate with the "en-bloc: redevelopment of Good Luck View or currently known as The Beverly at Toh Tuck Road which was launched at $750 psf.

I happened to be around that area recently and took a picture of the advertisment still posted near the entrance of the site, although the project is SOLD OUT. It says "price from $681 psf onwards". This must have been "an invitation to treat" in the legal context at the time of launch. The project was launched at $750 psf and re-sale price hit as high as $1,130 psf even though current progress is at the "substructure" stage.

View of the Beverly Site from its entrance, showflats had been demolished.

Without even progressing beyond the "substructure" stage, the price of these "invisible" units had shot up from $681 psf when the advertisment sign was put up, to $750 psf when first soft launched, and to about $1,200 psf in the secordary re-sale market when The Terene was launched nearby at about $1,200 psf. Check out this website [Link]. The Terene is nearer to the Beauty World MRT, about half the distance to the Beverly which is about 1.2km away.

Now, I like you to take a closer at the photo of the Beverly advertisment again and zero in on the asking price of $681 psf. Does this seems familiar to you? If you don't, you must re-visit my earlier posting on 28 Sep 2010, "The Property Bubble and Investment Trap Part IX - Land Bid for Punggol 99 Yr LH EC Condo Site", go to my advice on the whole consolidation of the market and re-banding of sale prices. If you note item (c) for the consolidated Price Banding predicted by me, I advised "(c) Mass Market Private 99 Yr LH Condo $680~$720 psf". I am no professor researching on the property market, but I had re-constructed from raw land bids results and news reports, and based on my own insight knowledge of construction costs to decipher and give you this indicative position of a possible consolidation in price of the overall property market. Now, you will appreciate why a mass market LH condo is only worth so much psf, and I had given a reasonable margin of $40 psf. $681 was supposed the launched price of The Beverly but it never did. It shot up by $70 psf on soft-launch and spiral to $1,200 psf for a FH property at a reasonably good suburban exclusive location. I doubt any Analyst or Agent would show you this true perspective, but I have shown you a true picture above.

The FH condo re-sale market prices for reasonably new condo (about 10 years+) in the vincinity of The Beverly are unlikely to go back to $681 psf. It is a reasonable starting price for a mass market LH condo as I said. Re-sales prices for FH condo in this area is about $850 ~ $950 psf. It is quite unlikely to fall below  below $830 psf again because it is pretty close to the Beauty World DTL 2 MRT Station.

This Beverly case illustrates the upside of property appreciation when a purchase is well-timed. Conversely, it also illustrates "risky-buying" which is common when foreign capital flows in and attracts speculators. But as a keen home-occupier you must always be walking in with "eyes-wide-open", this point it is alright for you to take cue from none other than MM Lee.

When prices has reached a level to test the next benchmark at $1,200 psf, you should play it safe by assessing your true affordability and understanding the true mechanics of the whole game play as I explained above and my previous postings.

Summarising the overall pricing trends from 1996 ~ 2010 for Various Property Classes

I could simply tagged various categories of property with obvious price fluctuations to the various crises although the general trend of the boom and bust cycles are always the same. The PPI for the various categories is illustrated here. (Link)

(a) 1996 Peak - private landed properties (Detached, Semi-D, Terraces was still the focus with FH suburban condo catching up the fray.

(b) 2000 Mini-boom - 99 Yr landed terraces and FH suburban condo prices climbed.

(c) 2006 Boom - Focus shifted to the Luxuary Class Condo ... like The Sail, One Shenton and also Sentosa Cove, with the 2 IR projects announced in Q1 2005.

(d) 2010 Boom - Focus shifts to EC and Mass Market Condo along NE, Circle Line and DTL 2 MRT Lines.

What is notable from the above trending ?

(a) Those who invested in FH condo at the 2006 Peak, when interest rate (mortgage) also peaked, saw their their property values depreciated or stagnant following the 2000 Mini-Boom till the 2008 boom and 2009 sudden bust. They were lucky that with the several crises that followed - Dot-com Bust, Sep 11, SARs - provided several opportunities to re-finance which was a blessing in disguise for those once locked in high and long mortgages.

(b) Current focus is totally in reverse ... EC and mass market climbed to ridiculous high prices while SIBOR reached its lowest at 0.44% just recently on 15 Oct 2010.

(c) In between the cycle booms and busts is a period of about 5 years with the property play always focussed more on a particular property class with intermittent supporting play of the HDB resale market in tandem as the upgrading class. Will the next boom then be in 2015? And will there be a severe correction or even burst of the bubble between 2012 ~ 2013? Now following the 2003 SARs crisis, the annoucement of the IRs then boosted property prices and boosted it to reach the 2008 Peak, with rising steel prices; while the China economy impressed to become the World's No 2. It is also a period that Singapore capitalised on cheap and abundant labour resources from China. Given the post Financial Tsunami scenario as equivalent, if not greater in impact to the SARs crisis; will the next severe correction or burst of our bubble then come with the burst of The China Bubble around 2012 ~2013?

Why watch the external drivers and external environment?

I had mentioned my last serial posting about external drivers to watch for further price correction. The reason is simple. On a negative note, when will our bubble burst? On a positive note where and what to target for property investment, even as an owner-occupier (having shown you the The Beverly case) :-

(a) If the external environment is causing further capital inflow into our property market, there will be much action in the mass market condo, and also the mid-range condo market. We may expect more property control measures just like those in China.

(b) If the external environment is not pushing capital inflow into our property market, we would expect actions to be more on the EC and probably mass market condo; with EC prices even boosted due to greater demands, as we note the Govt's interest to gain from high land sales bidding. You may have noted that I had mentioned that established developers are moving into land bids for EC to win "price-leadership" position even on JV. If demand is there, it makes no difference for established developers to be in the EC market or mass 99 Yr condo market; afterall it is end-purchasers who are actually financing the projects, if these projects are 30~40% about sold.

(c) If you look at the overall trending, say there is a boom again in 2015; it is good to buy a new EC now and time to sell then to PRs in say 3 years. But you will be taking over that property at a time when the market might burst (say in 2012~2013); so you may see the price to drop substantially then. But if you choose to buy other re-sale condo say in 2~3 years' time (new buyers now cannot sell in 2~3 years) when the bubble actually burst, you will be buying at an attractive price if there is a severe correction. The same applies for other categories if you buy new.

With this posting I have completed my own "internal" environmental scanning of the property market and hopefully what I have posted here is helpful for you and gave you an idea about the property investment game (or trap). I will soon move on to wider transnational context to look at the external business environment. I hope current visitors to my blog would also be keen to follow up further.

Reference #1 :-
Straits Times Online  Oct 16, 2010

Cooling measures seem to have immediate impact, with 911 units sold last month PRIVATE home sales last month were down sharply from August, suggesting that the recent steps to cool the surging property market had immediate impact.

Developers sold 911 flats last month - down from 1,259 in August - and a substantial part of that was due to heavy demand for one project.

The level of launches was slightly lower, with 1,058 units released last month, from 1,165 in August, according to the Urban Redevelopment Authority yesterday.

While last month's figures were down, in comparison with the preceding months of mostly bumper transactions, they were still fairly robust and brought sales of new private homes for the first nine months to 12,136. This compares with 12,828 units shifted in the same period last year.

Developers sold 14,688 new homes in the whole of last year, just short of the 2007 record of 14,811 units.

The Aug 30 cooling measures introduced tighter lending rules for people with existing mortgages looking to buy another home, and barred owners who plan to buy a HDB resale flat from keeping their private property, including any held overseas.

Reference #2 :-
ST Online Oct 12, 2010
Currency war may fuel bubbles

BEIJING - THE world faces risks of a currency war that could boost inflation and asset prices in emerging markets, an official Chinese newspaper said on Tuesday.

The China Securities Journal said in a front-page editorial that Beijing would have to control the pace of yuan appreciation and refrain from raising interest rates in order to ward off inflows of speculative capital......

'The financial crisis could escalate into a currency crisis,'the newspaper said. 'There will be no winner.' Efforts by the United States and Japan to weaken their currencies would lead to higher global commodity prices and fuel money flows into emerging markets, pushing up inflation as well as stock and property prices, it said......

Reference #3 :-
TODAY Oct 15, 2010

MAS signals its intent to combat inflation, even as economic growth slows

Taking global markets by surprise, the Monetary Authority of Singapore (MAS) tightened its monetary policy yesterday - signaling its intent to combat inflation even as the Republic's economic growth slows.

The move, which allayed the fears of business owners and consumers about rising costs, sent the Singapore dollar soaring to a record high against the greenback - it also sent the US dollar tumbling against a wide range of currencies.

The US dollar was at 1.2953 against the Singapore dollar and was being quoted at a record low of 1.2893 shortly after MAS' announcement.

While some experts worldwide expressed surprise at the global impact of MAS' move, a Barclays Capital report pointed out that Singapore was "seen as a barometer of Asian economic growth" and investors may read MAS' move "as a sign of greater willingness" on the part of other central banks in the Asian emerging economies to allow the US dollar to further depreciate.

Reference #4 :-

As the larger trend of flight out of USD continues, the Singapore government decides to throw the doors wide open…nay, tear them off the hinges and break down the walls as well, in anticipation of having more hot money flow into the country. The media has made much of MAS’ intent to “combat inflation” by allowing the SGD to appreciate, but we think you ain’t seen inflation yet, if you think setting the expectations for a stronger SGD will actually help keep prices in our tiny little red dot stable. Anyone recall the USD100 billion flow into Singapore during the GFC? Where did you think that money went to? So, was this unexpected? No, because it just confirms that SG is prioritizing the “Monaco” model, and local business be damned. Good for St Regis property prices? Hell yes....

Reference #5 :-
TODAY Oct 15, 2010
by Colin Tan

With Beijing acting to cool red-hot domestic market, sellers here could benefit from influx of Chinese buyers

Within days of Beijing announcing new measures to cool the overheated property market, thousands of people have been flocking to housing shows in big and small cities across China. Strong enthusiasm was seen in the property shows in Shenzhen, Shanghai and Nanning, though sales were lower compared with last year.

The Chinese authorities had ordered local banks to demand a downpayment of at least 30 per cent from all mortgage applicants and to suspend loans to buyers of third homes on Sept 29.

Following the move, Shanghai, one of the country's top-tier cities, issued new rules to limit home buyers to one new apartment and will impose a revised land appreciation tax soon.

While some analysts foresee a drop in prices in the coming months, property agents say initial signs suggest buyers are still not taking the measures seriously. Buyers react relatively calmly this time, compared with April when they disappeared in a flash.

Is this irrational behaviour or what?

'Noise' in the market

Economists have an explanation for this. Almost all of them agree that an excessively loose monetary policy - with interest rates kept low for too long invariably leads to asset inflation and this includes property.

At the micro level, individuals cannot comprehend this. It does not help that there is a lot of "noise" in the market. Instead they see rising asset prices - of houses, stocks, bonds - touted as a reflection of the real wealth being created......

Reference #6 :-

Singapore Releases 3Q 2010 Public Housing Data

Latest Data and market updates for 3rd Q 2010.

Thursday, 21 October 2010

The New Millennium Dream In Retrospective

The report below, re-posted from TODAY, seems to suggest that PM Lee and / or our Govt were unaware 10 years ago of "how quickly the pace of change would accelerate and how much our people would be under pressure from globalisation, we would have prepared them for it earlier".

I thought the whole world including Singapore was all "fired-up" and ready to face the NEW MILLENNIUM then. He must have missed the DOHA Round and the related Global Issues. It's no wonder that Singaporeans are now complaining about having too many FTs here.

Can this lack of foresight be true of our LEVIATHAN state and its multi-million-dollar Cabinet?

Reference # 1
RE-posted from TODAY Oct 21, 2010
by Neo Chai Chin

SINGAPORE - Given the world's accelerated pace of change and how hard it is to predict tomorrow's economic "winners", Prime Minister Lee Hsien Loong said he would, in retrospect, have started equipping Singaporeans five to 10 years earlier.

"I think if we had known how quickly the pace of change would accelerate and how much our people would be under pressure from globalisation, we would have prepared them for it earlier," said Mr Lee, in reply to CNN International Asia-Pacific managing editor Ellana Lee's question on whether he would have done anything differently on hindsight.

Mr Lee, who was invited to give a speech and take part in a dialogue session as part of CNN's 30th anniversary celebrations, said the Government has invested heavily in education and training. But if it had known how critical skills and ability were to "get ahead and do better", it would have put "even more resources in", Mr Lee said.

Nevertheless, "in a rather unpredictable world", Singapore has a great opportunity to become a "first class economy (and) society" - given that it is being plugged into a prospering Asia and its ability to put its mind to achieving targets. But Mr Lee cautioned that many things could go wrong: The economy could malfunction, or the spirit of society may change, for instance.

"The new generation may say, 'I want a different tradeoff between working and smelling the roses'," he said. Another challenge was finding capable leaders who can - with the people - make things happen.

Asked about leadership and figures he admired, Mr Lee cited former Indonesian President Suharto, who fostered stability and growth for the region in his time, and former Israeli Prime Minister Yitzhak Rabin, who fought for peace. Good leaders need ability, conviction, and persuasive and staying power, he said. But how they reach out to the people varies from generation to generation, with outreach today more complicated than a decade ago, he added.

Mr Lee was also asked for his thoughts on protectionism, which major economies have accused one another of.

"The problem is that developed countries are in distress ... and people look for bogeymen. And the other country doing bad things to you is a very soft target, particularly at election time," he said.

Singapore has consistently spoken up for cooperation, free trade and open markets - and there is no alternative, as no country can prosper alone, he said.

In his wide-ranging speech earlier, Mr Lee noted that China-Taiwan relations and overlapping territorial claims were potential flashpoints in regional stability. He also pointed out that Asian countries were still searching for the political system that works for them.

For each country, Mr Lee said, the system has to fit societal values, deliver an effective and honest government, and provide security, jobs and prosperity for the people.

Tuesday, 19 October 2010

The Next Bubble

"The Next Bubble" abstracted from the New York Times.

Note Other Updates on the Property Market :-

(a)  Friday 15 October 2010, the banks pulled a stunner by lowering the SIBOR rate (Singapore Inter-Bank Offered Rate), from 0.5 to 0.44%, after MAS's tighening of monetary policy the day earlier.

(b) First the government raises monetary policy then the banks lower the SIBOR rate and now the government gets tough on developers and curbs foreign speculation :-

(i)   Another key change will affect property developers, who have to complete their developments within a certain timeframe and sell all units within two years of receiving its Temporary Occupation Permit (TOP). Now, developers will be charged a daily fee for any extension of time beyond the given period, similar to the Urban Redevelopment Authority’s (URA’s) Government Land Sales programme.

(ii)   Foreign buyers can only purchase one landed home for owner-occupation and not for rental.

He must also sell his existing property before buying a new one, and is not allowed to sell the property in the first few years of ownership. The exact period depends on whether the property is still under construction or completed.

Owners found to breach the above rules will be fined up to $200,000 – up from $5,000 previously, with an additional fine of $2,000 per day for any continuing offence.

In the past, a foreigner who inherits a landed property must sell off the property within 10 years – the new bill has shortened this to five.

(c) Then China raise interest rate on 19 Oct 2010, aimed in part at curbing a red-hot property market, prompting the Shanghai property sub-index to fall 3.3 percent at the open. [Why is Singapore acting differently?]

"The Next Bubble" abstracted from the New York Times
It seems premature to start worrying about the next financial crisis. Yet amid the current gloom, Wall Street is snapping up assets of the “emerging economies” that are growing faster and offer higher, more consistent returns. Financial regulators and policy makers in these countries need to pay close attention.
The Institute of International Finance, which lobbies for big banks, estimates that $825 billion will flow into developing countries this year, 42 percent more than in 2009. Investments in debt of emerging economies alone is expected to triple, to $272 billion.

While developing countries often benefit from foreign investments, huge inflows of capital complicate their macroeconomic management. They push up the value of their currency, boosting imports and slowing exports, and they promote fast credit expansion — which can cause inflation, inflate asset bubbles and usually leave a pile of bad loans. This money turns tail at the first sign of trouble, tipping countries into crisis.

Those are the dynamics behind Mexico’s 1994 “tequila crisis,” the 1997 Asian crisis, the 1998 Russian catastrophe, the 1999 Brazilian debacle and the 2002 Argentine collapse. The housing bubble that burst here in 2008 was painfully similar, with irrational investments and then a sudden flight.

A collapse in emerging market bonds would further damage the weak balance sheets of American banks. Still, it is not time to panic. Developing countries are in relatively good economic shape, while interest rates in the wealthy countries are likely to stay low for years. Yet the financial system remains fragile. And a shock — say a default in Ireland or Greece — could prompt a fast U-turn away from emerging markets.

There is little policy makers in the rich world can do to stop these flows. Governments in the developing world must prepare now for when the money masters change their minds.

That means they cannot let their budgets get out of hand. And they have to keep a very close eye on their own banks. This might also be a good time to consider capital controls to slow inflows. Chile managed them successfully in the 1990s. Even the International Monetary Fund — long a foe of anything that got in the way of money — acknowledged this year that controls should be part of the toolkit.


Wednesday, 13 October 2010

The Property Bubble & Investment Trap Part X - External Drivers to Watch for Further Price Fall

I had delayed this posting to observe the market response to the 2 recent EC launches. As buyers flock to the Esparina and Canopy EC launches over the last 2 weekends, the first and second in 5years; what can we interprete off these "signals" from the current market since those control measures were implemented in End August 2010.

The Financial Quotient (FQ) of these buyers must have been fully stretched if these signals were indeed to be representative of their sentiments for the EC sub-market.

The following are my general observations of the whole property market thus far :-

(1) Falling prices in land bids by developers
(a) Fall in price of DBSS land bids by about 10% to a base of about $220~$230 psf ppr.
(b) Fall in price of EC land bids by about 20% to about $230 ~ $ 240 psf ppr
(c) Fall in price of Private Mass Market Condo land bids by about 10%~15% to about $320~$340 psf ppr.

(2) Fall in volume of transactions

(a) HDB re-sales volume dropped by about 25% with COV moderating by at least 15%~20% (from $35K to $28K), and possibly towards the median of $10K~$15K by year end.

(b) Mass market condo re-sales volume dropped by about 10% ~ 20%. This is a flash estimate from part September data and the fourth quarter would be a better gauge of the actual impact of the cooling measures. Without the control measures, it was estimated that possibly the whole year growth would close at maybe 16 or even 18 percent higher. But now with the control measures, the market is likely to rein in growth to a more sustainable level of 2 to 3 percent on-quarter growth, with full year growth coming in at about 15 to 16 percent. On the overall, analysts expect prices to continue to moderate through the first quarter of 2011, with more supply entering the market.

(c) BTO Launch. A WOODLANDS build-to-order (BTO) project has attracted fewer than 3,000 applications for 1,329 flats, or about two buyers per unit - the lowest demand for a BTO launch in recent years. The numbers are similar to those for the last BTO project, Yishun Riverwalk, which concluded last month. It averaged about three applications per unit, well below the ratio seen in past BTO launches.

For example, in May, projects Punggol Emerald and Punggol Waves saw application numbers reach up to six times the 1,429 units on offer. Analysts said the lower number of applications for both the Woodlands and Yishun developments may be an indication that first-timers are returning to the resale market. My own opinion is that it might be those buyers who could really afford are also waiting in anticipation of the consolidation in prices of DBSS and EC units. I think that would be wise, considering that greater supply will enter the mass market condo segment in Q1 next year.

My only reservation is a certain degree of imperfection with the property market in Singapore, since land supply is manipulated by Govt. policies and it is the developers who are bidding for the land and fixing the property prices and the buyers of properties actually paying for the final product of  the real estate "development and construction" business. However, buyers should be aware that buying properties is different from buying stocks. Determining "when to sell" is a more important decision in investment on stocks to determine profitability and yield, but this is not equally true for property investment.  I personally consider "when to buy" to be the more important decision in "property" investments. Hence, the greatest trap in property investment is still a "personal" one, that of blindly following market euphoria to  purchase. Unlike stocks, there is seldom market euphoria to sell.

(d) DBSS Launch

There are no new launches since the control measures were implemented. I am looking forward to see how the public would respond to a DBSS launch, since PM Lee had announced during the N-Day Rally that those with a monthly household income of between 8,000 and 10,000 dollars will be eligible to buy DBSS flats. Meanwhile, the Govt has announced another DBSS site for tender at Upper Serangoon Road.

It should be noted that land bids for both DBSS and EC plots have dropped drastically and are only marginally different. It will be interesting to see how developers will price DBSS units. My own opinion is that if BTO and EC were to be priced fairly, the DBSS scheme might become a "monster" as suggested by this blogger? It seems to be there in the price spectrum just to illustrate the difference in quality between a subsidised public apartment and a non-subsidised one? If EC are priced fairly, I personally doubt the "sustainability" of the DBSS scheme, in view of the available property crowds frolicking to EC lanuches.

A DBSS is not really for "investment" but for a better quality living environment the way it is conceived.

(e) EC Launch :
The Esparina Residences, located in Sengkang, has attracted 1,155 applications or more than double the 573 units available, according to its developer.  The units are priced at $730 to $750 psf on average. Although located close to Buangkok Park MRT, this asking price is high in my opinion.  Land bid was $315 psf of GFA. My opinion of a fair price is between $635 ~ $690 psf without looking into greater details. 344 or 60% of the units were sold on the first day. 75% of the applicants were young professional aged 25~40, and half of them falls within the sandwich class bracket earning $8,000 ~ $10,000.

The second EC launch after 5 years is The Canopy at Yishun Avenue 11.  240 out of 406 sold on the first day of the launch with 60% below 35yo. The units were sold at prices of around $650-$700 psf. You may recall that I mentioned briefly this EC land bid in connection with the Milton Close bid, in my posting on 15 Sep 2010, "The Property Bubble and Investment Trap Part VII - Land Bid Analysis for Yishun 99 Yr LH Condo Site", that the land bid price was $281.31 psf GFA. The launch price is within what I expected of a private mass market 99 LH condo but is expensive for an EC and about 1.58km from the Yishun MRT Station. An analyst had predicted earlier that the winning land bid will translate into a break-even price of around $520 psf with the final selling price of the EC units likely to be around $600-$650 psf. My own opinion for the fair price is about $570~$600 psf without looking into greater details. It seems like buyers are paying for a future price with MOP.

From both asking prices, we can see that Developers are still asking for a high price considering current demand as they will not price in anticipation of the worst for the economy, and it is for the buyer to take risks and decide. Considering that construction costs may not be too transparent, the degree of market imperfection will allow the developers to enjoy this "premium" in pricing until such time more control measures are implemented or when the economy get worse. Anyway, it is always a willing market with buyers walking-in with eyes "wide-open". The issue is about timing and whether to commit now at still a high price or to wait for further price correction. The larger developers generally have substantial holding power for "land parcels" while there are sufficient willing buyers for these EC units.

Having seen the fast take-up rate at these 2 EC launches, is it then the right time for "market-watchers" who are keen buyers to act now? Personally, I consider "time to enter the market" as the more important decision, especially if it is not meant for "owner-occupation" but investment.

But even as an "owner-occupier", it is equally important to make a good decision considering that it is a big sum of money now to buy an EC. With prices expected to be stagnant and moving sidewards, with full impact only to be felt after the 4th Q 2010  and even continues through the 1st Q of 2011, it is worthwhile to "wait and see". But external drivers have to be watched.

Affordability in Perspective

In a side posting on 8 Oct, I had provided a link to Blogger Lucky Tan's posting on "Different countries same mistake" and the related issue on "affordability". To me, timing to purchase a new expensive property in a "bull" market is the same as if we are investing in an IPO in a "bull" market, and is not advisable. It is appropriate that I provide a link here to Mr Tan Kin Lian's posting (ex-NTUC INCOME CEO) on his advice to a "green" investor for a REIT IPO. You should read his advice which I feel is applicable to new investors of expensive properties. These are experts with rich Financial Quotient (FQ) and a sound understanding of the market.

It is noted that 60% of the EC buyers are young professionals. Many young purchasers are easy in their spending habits. Developers commonly use "sales" techniques such as employing good ID to do up their show units. Do be warned that the unit purchase will be bare without the furniture and furnishing!

Strategising for Appreciation in Property Value

I like to pitch these 2 different approaches to illutstrate on the issue of combining affordability and strategy :-

(a) Buying an EC immediately and with a high mortgage now on a high price psf for over 15~25 years (it should be noted that purchasers of new ECs are actually helping the Developer to finance his development while they enjoy their profits and you bear the interest), the wait is still 2~3 years to TOP.


(b) Buying a BTO or DBSS re-sale flat (or even renting) within a year with a lesser mortgage for 5~15years when price has consolidated and selling later on at higher price at an appropriate time and then upgrade to condominium  later on when the whole market is at its trough, say even by choosing a re-sale condo with good future potential for en-bloc or close to the anticipated East Coast DTL MRT line.

The latter is best illustrated by the HDB resale market when it was once more worthwhile to purchase 3Rm and 4Rm HDB resale flats, rather than 5Rm ones; to enjoy better return and yield. Ironically, the timing was when there was an influx of immigrants from China then who found 3Rm and 4Rm more affordable, and just when FH condominiums was about to fall in price by as much as 30% due to the financial crisis. But some 3Rm and 4Rmers had sold off too fast to upgrade to DBSS or even an expensive condominium which went through a severe 30% consolidation in price as the crisis went full blown. In fact, the ideal timing would be to enter the market at its "trough" and not during its "bull run" which is what these experts with rich FQ are advising, especially if it is meant to be a long-term investment. The decision must also be balanced with the posibility of being trapped in the long-run with rising interest while income (or employment) may be uncertain.

What could be mistaken?

(a) Most buyers are taking the mass market condominiums, particularly ECs as equivalent to the FH ones previously; and paying at the higher benchmarked prices. During the "trough" of the last downturn, even FH market condo prices consolidated by 30% or more. The future behaviour of mass condo market prices and valuation is a big question mark in a depressed economy. Its impact in a crisis is yet to be fully tested at such high prices.

From Q1 2007 to Q1 2010, the prices for EC shot up by 70% at the prime locations, compared with the 39.6% rise for mass market condo. But you should note the same degree of drastic fall in the 2009 Trough. The surge by 70% for the "performers" is due to locational factors and the imminent expiry of the early batch of condo from the 10 limitation period for re-sale to foreigners. You should also note the "laggards". Talking about fall in price, you should note that the HDB re-sale index was just a minor kink during the 2009 Trough. But the degree of consolidation of private mass market 99 Yr LH was about 30~35% and now it appreciate back by 39.6% and there is a stay in value. But the great difference now is that the EC buyers are paying for a very "high" price as compared with the first lot of ECs first introduced, and now "graduating" to become full private properties after clearing the 10-year bar from foreign ownership.

I hope readers can see my point here - to climb from a high point to the next high point is not easy as compared to climbing from the "trough" to its previous high. It took the private FH or 999 Yr LH condo sub-market more than 10 years to climb from one peak to the next peak, with most being supported by appreciation due to the MRT DTL 2 in order to re-coup back the cost of investment or interest incurred.

(b) Analysts argue that as long as there is a price differential between EC and mass market condo, there will be demand for ECs. There is a differential of about 14% below the 99 Yr LH mass market condo. (This differential was 29.7% in early 2007). But considering that units such as those at Esparina are priced at $730~$750 psf, I doubt about actual affordability and whether this differential will remain in future. And will there be another differential with mass market 99 Yr LH ones by another $100 psf if supported by favourable factors like proximity to MRT stations, such as in the case of LV Residences?

What external drivers to watch?

If you look at the "peaks" and "troughs" of the property cycle, they are all linked to the performance of our own economy in relation to the world economy. The immediate economic risk and concern is whether the world will face a currency war. Efforts by the United States and Japan to weaken their currencies would lead to higher global commodity prices and fuel money flows into emerging markets, pushing up inflation as well as stock and property prices. When this manifests, will there be more control measures? And for those who bought, especially if it is a new property; can they simply sell off to reap a good profit considering current prices is already higher than the 2006 peak - there must be another risk-taker. If you re-visit any of the property cycle graph or index again, you will see what commonly follow a peak is always a drastic fall. It is hard to imagine that the PPPI or the HRPI will plateau after a peak. It had never happen before since 1975.  In my opinion, it is impossible for the property index to repeat a climb similar to the the stretch from Q2 1986 ~ Q2 1996 at today prices and therefore a drastic fall is more probable after a climb to a peak.

My final point is : Do you purchase an expensive property blindly by looking at "affordability" alone?

Sunday, 10 October 2010

Friday, 8 October 2010

Diary of A Singaporean Mind: Different countries same mistake....

Read what Blogger Lucky Tan said about "affordability". The other day, I was watching the news on TV about the EC launch at Esparina Residences ...... and it was exactly the same in meaning, what a lady interviewed said - she "worked out" the sums and thought it was "affordable" and booked a unit. I was wondering if she was genuinely picked to be interviewed or was staged by the Developer or Property Marketing Agent.

"A few days ago, it was reported that a HUDC flat in Bishan was sold for $1.1M. I think Singaporeans who are so used to high property prices are only mildly alarmed by this transaction but this perhaps one of the most expensive, if not the most expensive, public housing transaction in the world. People often argue that these prices are okay because Singaporeans can afford it and are used to it. I'm sure that in Ireland, Dubai or US, when someone bought a property during the property bubble, that person can also "afford it" at that point in time. If the banks are willing to lend and you can service the loan, you can afford it."

Link :-

I will make my comments about this EC launch in the next posting soon.

Read Also :- To cool property deals, Shanghai sets 1 home limit

Saturday, 2 October 2010

Civil Service processes come under review - What about wrong priority and mindset?

This multi-million fraudent case at The Singapore Land Authority (SLA) brought up a few pertinent points.

The two former officers charged in Court belong to a young talented pool of  public service officers of the  post-70 generation who had been well moulded by our much acclaimed education system and worked for a well-paid civil service which has its pay structure closely-pegged to, if not better than; the private sector.

The fraud not only involved a huge amount of public funds but was also well planned by a small "task-force", with sound knowledge and understanding of the IT system and audit processes as a back-drop, but went unnoticed for a 2-year period, despite the tight auditing processes very typical of our Leviathan state.

Internal audits are carried out annually in the SLA by its internal audit department. External audits of financial statements of statutory borads are also done by independent commercial auditors annually. Most of the statutory boards (including SLA) are also audited by the Auditor-General's Office (AGO). The SLA was last audited by the AGO in 2007/08 financial year.

The alleged offences occurred between January 2008 and March 2010 as reported. Although the Finance Ministry stressed that "no system can provide a hundred-percent safeguard against fraud", the acts were committed over a 2-year period but went un-detected with 3 layers of checks for 2 years.

I recall the recent "wrongful dismissal" case involving Ms Lai Swee Lin, Linda  - a former Senior Officer Grade III at the Land Office (also under SLA and the Ministry of Law). It took them from 1996 ~ 2010, nearly 14 years to fight the case out in Court over the employment issue with the Land Office. The background was purported over her complaints in an email to her superior, part of which is re-produced hereunder; as reported by the local mainstream media :-

"I bring this (issue of backlogs and delays in the Land Office) up in good faith, for the good of the Land Office in the long run. Also in the spirit of PS 21, [and] not to find fault with others. As a responsible Singaporean, I cannot just keep quiet [and] be unconcerned, when I know that delays and backlog are not being resolved for years. In my opinion, Directors should ensure that their Divisions run efficiently, thank you."

Critics had asked, "Was she penalised for what she said? If a government officer (and a scholar) can lose her job for speaking up, will that send a message that Singaporeans should "just keep quiet and be unconcerned"?.

The mainstream media had reported :- 
"Ms Linda Lai, 45, the former head legal officer of the Land Office, started the current chain of events when she cried foul, saying she lost her job after she exposed her superiors' incompetence. The Land Office had extended her probation unfairly, then terminated her service soon after she sent an e-mail to her supervisor about the backlog in land-title cases.

The PSC and the Land Office belonging to the Ministry of Law had gone at length to fight out the  said employment case with its ex-employee in Court since 2004 till August 2010. Although the Court case was 6 years old, the actual tussle took nearly 14 years.

Just imagine the amount of public resources committed and wasted in fighting the employment saga, with the  Government finally conceding that there had been a breach of employment contract; versus the SLA taking 2 years to discover a $11.8-million internal fraud with 3 layers of built-in audit checks.

The above illustrates an internal issue. There must be many other issues involving public complaints to our public Authorities which had escaped limelight, with our public Authorities just maintaining its position by simply keeping quiet and indifferent in order to avoid problems and blame. Very often, it is simply wrong decision- making and the refusal to see the obvious despite good feedback.

It is ironical that the Government has to call for a productivity drive under its current economic plan. Something is still ridiculously wrong with the "priority and mindset" of our public servants within this Leviathan state.

Reference #1 :-
TODAY Sep 30, 2010
by Leong Wee Keat

SINGAPORE - The Finance Ministry, which holds the purse strings for the Civil Service, is reviewing procurement and financial processes "to address possible areas of weakness and, where necessary, strengthen control measures against fraud".

The review comes in the wake of the alleged $11.8-million fraud at the Singapore Land Authority. Lessons learned from the case will be shared across all Government agencies, a Finance Ministry spokeswoman said yesterday in reply to MediaCorp's queries.

Two former officers at SLA had purportedly rendered false invoices over a two-year period for fictitious IT maintenance services and goods not delivered.

Koh Seah Wee, 40, has been charged in a District Court with 249 counts of cheating and other offences. Christopher Lim Chai Meng, 37, and several individuals running businesses that allegedly provided the false invoices, are assisting the police with investigations.

While the SLA has since put in place safeguards, a spokesperson yesterday told MediaCorp it is now also reviewing audit controls.

Court documents had shown that 30 of the IT contracts were awarded to a company with a seemingly misspelled name: MSB Techonogly And Services. Founder Ho Yen Teck spelled "technology" correctly in his six other businesses, which also had contracts with SLA.

Audits are carried out annually in the SLA by its internal audit department. The spokeswoman reiterated that Koh and Lim allegedly colluded together with the business entities "to circumvent the checks and balances in the system".

"Moreover, they supported the fraudulent payments with 'valid' invoices and approvals by authorised personnel in accordance with established procedures," she said yesterday.

The SLA was last audited by the Auditor-General's Office - on the management of state properties - in the 2007/08 financial year. The alleged offences occurred between January 2008 and March this year.

"Most statutory boards (including SLA) are audited by AGO on a rotation basis given AGO's limited resources. Such audits, carried out at least once in every five to seven years, are typically audits of selected areas," said an AGO spokeswoman. Audits of financial statements of statutory boards are done by commercial auditors annually.

While not wanting to prejudice the case, Member of Parliament Liang Eng Hwa, who sits on the Public Accounts Committee, welcomed the Finance Ministry's plan to share its findings across the Civil Service. He also felt a balance should be maintained between efficiency and having more checks.

The Finance Ministry stressed that "no system can provide a hundred-percent safeguard against fraud". "Supervising officers will need to exercise vigilance and ensure that audit processes are in compliance with Government rules," said the spokeswoman.

Reference #2 :-

Reference #3 :-