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Tuesday, 7 December 2010

The Property Bubble & Investment Trap Part XII - Quick Sizing Up of Current Property Market

Occasionally, we must return to "history" in order to appreciate the present better, to see what is trendy and sensible. Yes, I am first referring to architecture and buildings. However, the same applies to property prices and the value of your "home". From Day 1, I had given you this "helicopter vision" about the Singapore Property Market with historical prices. Buildings and development projects just get me all "fired" up in "thinking" despite its tough working environment, which is why I am still able to find energy to continue working in my profession.

video

Video : Ming Architecture, Nanjing Fuzi Miao.

Likewise, you may have notice a revamp of my blog - it has  more vivid and colourful photos, mostly taken by me with my "idiot-proof" camera. I will soon go more "micro" on issues for shorter read. However, the "Property" theme remains difficult to do so. I like to present insightful information and a true opinion. Those who trust my views may really rely on it to chart their course of investment. Hence, it would be "difficult" not to analyse in detail and explain more. But it takes longer read and is equally "straining" to write.

It makes sense to do a quick "sizing-up" of the property market especially when the General Election date is getting nearer. This means news are getting hotter, more "sensitive" and maybe even distorted. You can see a "star-burst" of news and must look deeper to piece everything together for a better decision. In pictures, I had illustrated what I mean, if you would look at the 2 analogous pictures in my first posting after my return from Nanjing. There must be at least 2 angles to look from.

The maxim is always "Watch what they do, not what they say." During the run-up to the Polling Date, you must follow the maxim twice, "cooling-off" period included. All these extra-ordinary "good" news would certainly put us in a "Golden Age" despite Episode 2 of MSK's Great Escape which Jack Neo should seriously consider as his comeback movie to join back the "Golden Age".

The previous Saturday (27 Nov), I was reading the ST in detail after a 4-week break, first on SITEX and then on Property. Instead of a focus on SITEX, I noted there were more advertisments on PROPERTY, a few developers took up full-page advertisments. As a professional working in this related industry, I hardly paid any attention to the beautiful perspectives and project details (I know where they are located and could imagine how they would look like upon TOP anyway). I was hunting for tell-tale signs which the ordinary readers and buyers might not be able to pick up. Most did not advertise "PRICE psf" despite a full page advertisement. Only 3 did and I will highlight them later on.

Not coincidentally, I had not been receiving those frequent SMS invitation to property launches for some time. Certainly not when I was in China and not the past week after I came back. The same with those postcard advertisments offering high-tea, BBQ party, etc.; when I emptied my mailbox after I came back. Great, are these developers getting more "green" just like their projects?

I had highlighted the following in my previous postings :-
(1) S$ Appreciation vs Fall in SINBOR to new low (Mid Oct 2010)
(2) Tharman mentioned "no capital controls"

A keen reader James Neo had commented and asked me for my further opinion on my prediction of a "bust" in 2012~2013 and a "boom" in 2015 for our property market. I had answered him under "Comments" in my posting "Back From Nanjing City, Jiangsu Province, China". I had addressed him sufficiently and do not wish to repeat in my posting again. You may visit the "Comments" for my views.

Coincidentally, there was this interesting advertisement by "Inflation US" - "The Day The Dollar Died". Though it is scenario building, an advestisement must still be convincing enough when directed at a mix of professionals as potential readers, and the date of the Bubble bust in this FICTIONAL account of QE4 was "December 19, 2012".

A few visitors had also emailed me to ask for personal advice or told me some personal investment stories. I thanked them for the interest in this Blog. While I would try my very best to share what I know and address some of their queries, I wish to clarify that NO 2 properties, investors or purchasers would have the same profile that they could be compared an "apple-to-apple" basis. Property investment is also a very personal matter. It is very difficult to give good advice without a clear understanding of the purchaser's investment profile and the category of property he is buying. Unless more information are volunteered, any advice from me would be general and for information only. I suggest that they follow my blog more closely and "fit" into the picture and pitch against their own observations, unless they wish to make specific query which must come with relevant information.

The purpose of this posting is a "quick-sizing" from where I left before my annual retreat. Let's look at some of these events for the past one month.

(4) MBT announced more land sales for H1 of 2011 in order to cool the market further (Nov 26, 2010). At the launch of Dawson, he reassured the property market has cooled with the same old data. If you had read my earlier postings, you would have known it from this blog even if you had not read the local newpapers. MBT has to do this, because the GE is getting nearer, and he should be more anxious now that he was not voted into the PAP CEC in the recent bi-annual party conference.

(5) Last Saturday (4 Dec), I watched the advertisments in ST again. There were a few large "PTY" advertisments and the only one that listed the "PRICE psf" was none other than the Canopy again.

(6) On Sunday night (5 Dec), I was watching Tung Soo Hua's Money Week. Earlier I had just heard PAP's Mrs Lim Hwee Hua tried to pin the blame for the high prices of HDB flats on "a few private owners who also owned HDB properties", on Channel 8 News, instead of admitting it as due to a myriad of factors, during a Kampong Chai Chee dialogue session. A "few" owners could not monopolise the whole market. She could have escaped the heat of argument by hinting that more measures would be taken.

Three prominent analysts were interviewed by Money Week regarding 4 EC sites to be released in H1 of 2011. It was shocking that these analysts predicted the sale prices for these future EC units to be between $900~$1,200 psf. I feel current prices for EC are already ridiculous and how could EC prices climb to set another record benchmark equivalent to current high prices of mid-range private condominiums. Who is setting and pushing this new benchmark? - The Analysts?  Developers? Or our Star Award winning Presenter of Money Week?

As I watched Money Week, the rolling sub-titles were warning about FED likely to push QE3 as unemployment rate for US has risen to a worse-than-expected 9.8 per cent last Friday. Does that means that the QE4 scenario is getting nearer?

Some newspapers reports are switching to advising Developers what to do (LOL). "Time to build up land banks", screamed TODAY on 26 Nov 2010. Even the experienced Conrad Raj joined the call, with his "Developers keep the faith, make big bets" (TODAY on Dec 3). I guessed MBT must be struggling with his weekly "Cheap and Affordable Public Housing"  column for TODAY. He had to pop out again yesterday (7 Dec) on TV News to impress all that COV has fallen again for a second month. But as a blogger wrote, 'why is there a need at all for "COV" in the first place?', when there is already an independent "valuation" report. In Singapore, "we" create "procedures" to make life difficult while making some people "richer" and the Govt is still so proud of it. I think it is wrong governance. Let me ask all a question, what do you think should be the "valuation" of the old Ming styled building shown in the video clip above? What do you think is the fair rental that the shopowner selling these simple souvenirs  must pay to keep his business as a going concern? Now do you see this wider perspective I am sharing, when it is your property; which is why I added this video of a "historical" building above? Why should there be "COV" as a "tip", just like compulsory "service charge" at a restaurant?

Review of Adverts
 
When I read the ST adverts the previous Saturday, some taking a full page, I noted the "selling price psf" was mostly not there. Obviously, this is attract people to ask for the "price" which Developers would probably have switched to "negotiable" mode by now.
 
(1) Advert 1 - NV Residences 99 Yr LH Private Condo
 
 
Photo : Part NV Residences Advert ST 27 Nov 2010
 
The above is part of the NV Residences. Now look at the price advertised @ "fr $763 psf". If this is not technically "invitation to treat" in "contracts", it must be a fall in price. Now you may recall this star performer selling at $830 psf since soft-launch. I wonder if this is the unit price for a "Penthouse" or "normal" unit or a 8% discount! From my own knowledge, it was standard procedure for this established Developer to offer discount at 8% when appropriate. Those who are keen perhaps may call to check and feedback to me.
 
(2) Advert 2 - The Canopy 99 Yr EC
 
 
Photo : Part of The Canopy Advert ST 27 Nov 2010

The above is part of The Canopy's Advert. Selling price from $530 psf.  You may recall, 240 out of 406 were sold on the first day of the launch at $650-$700 psf. So is it a 18%~24% discount or is it "invitation to treat" again? From my experience, it is unlikely to price a penthouse with such a big discount. From case 1 above, it would be about 8~10% discount for a penthouse at most. Hence, I believe there was a fall in asking price. Perhaps someone can feedback to me too.
 
(3) Advert 3 - City Scape FH Condo @ Farrer Park

Photo : Part of The City Scape Advert ST 27 Nov 2010

The above is part of City Scape's Advert. Asking price "From $1,235 psf". So for a FH condo located close to a MRT and shopping amenities, the asking price stays high for this small development. But if you had watched Money Week last Sunday, and do believe the analyst's prediction for the 4 EC in H1 2011, I am sure you would jump at this price. This is why I am advising you to look at the bigger picture.

As I said, these were only 3 advertisements which listed prices. The others are probably "negotiable" now. And instead of receiving SMS on launches and open houses, I had just been invited to join an "investment club" of a developer for free.

Finally, with QE3 looking more imminent and the QE4 scenario not impossible by 2012, or may be even sooner; as China is likely to raise interest rates in the coming days. This was further to the mid Oct hike. While I was in China, the Bank RR was raised. But the interest rate just have to go up again due to inflation. I had read this article "China's 'bubble about to burst'" in The Daily Telegraph, you may be keen to take a look. (See Reference #4).

Following the last round of rate hike by China, Singapore responded with "S$ appreciation" but "SINBOR" was lowered the next day. Will Singapore keep its "door wide open" again if China up its interest rate in the next few days, and with QE3 coming soon?

Nearer home, "a 2012 bust and 2015 boom" for the property market still look very likely to me. MBT announced further Marina Bay land sale will be in 2013. Developments typically take about 2.5~3 years to complete and will therefore complete by 2015 onwards. If there is no bust by 2012,  property prices will escalate to record high prices by 2015 with more supporting infrastructures like the DTL2 and Circle Line fully in place by then. Prices of residential properties will jump by another benchmark and even DBSS and EC would be out-of-reach to the average person despite the supply MBT is pushing out into the market right now. If there is a bust beyond 2015 like what James Neo suggested to me in his "comment" to my earlier posting, many would be severely trapped "without their pants" if they are overly leveraged and the price correction very drastic.

To keep my posting manageable, I am stopping here. In the next posting, I will do a quick sizing up by property class to look at certain recent land bids and property prices while I was away in China, before moving on to write about the China Property Bubble.

Next Posting - Quick Review By Property Class
(a) BTO
(b) DBSS
(c) EC - NTUC Choice Home with DPS carrot or catch?
(d) Market shift to Higher end Mid-Range and Luxury Class - D'Leedon pricing / Pine Grove En Bloc.
(e) The next Waterfront City.

Reference # 1 :-
ST Online Nov 26, 2010

Reference # 2 :-
ST Online Nov 26, 2010

Referenec # 4 :-
TODAY , Nov 30, 2010
China's 'bubble about to burst'

Hedge fund manager Mark Hart warns of imminent implosion of world's second-largest economy

by THE DAILY TELEGRAPH

FORT WORTH (TEXAS) - China is in the "late stages of an enormous credit bubble", according to American hedge fund manager Mark Hart, who has made millions predicting the crises in the United States sub-prime market and European debt.

Mr Hart, who runs Corriente Advisors from Fort Worth, Texas, has launched a fund to bet on the imminent implosion of China.

He warns of an "economic fall-out" that will be as "extraordinary as China's economic out-performance over the last decade".

Asking investors for a minimum of US$1 million ($1.32 million) each for its China Opportunity Master Fund, Corriente will use sovereign and corporate credit default swaps, interest rate and foreign exchange options to trade on its expectations of a collapse.

Mr Hart, who launched a record-performing US sub-prime fund as early as 2006 and in 2007, a fund that bets on a European debt crisis, warns investors: "Complacency among market participants regarding China is eerily similar to the complacency exhibited prior to the US sub-prime crisis and European sovereign debt crisis."

Mr Hart says "inappropriately low interest rates and an artificially suppressed exchange rate" have created dangerous bubbles in sectors including:

(a)Raw materials: Correinte says China has consumed only 65 per cent of the cement it has produced in the past five years, after exports. The country is currently producing more steel than the next seven largest producers combined - it now has 200 million tonnes of excess capacity, more that the European Union and Japan's total production so far this year.

(b)Property prices: The average price-to-rent ratio of China's eight key cities is 39.4 times - this figure was 22.8 times in America just before its housing crisis.

Corriente argues: "Lacking alternative investment options, Chinese corporations, households and government entities have invested excess liquidity in the property markets, driving home prices to unsustainable levels."

(c)Banking: As with the credit crisis in the West, the banks' exposure to the infrastructure credit bubbles is not obvious because the debt is held in Local Investment Companies (LIC) - shell entities which borrow from Chinese banks and invest in fixed assets.

Mr Hart reckons that "bad loans will equal 98 per cent of total bank equity if LIC owned, non-cashflow producing assets are recognised as non-performing".

As a final blow, Mr Hart says that the market belief that the Chinese government has "ample resources" to bail out its banks is flawed.

Corriente's analysis of the ratio of China government debt to GDP comes out at 107 per cent - five times higher than official numbers.

The hedge fund says this number uses "conservative assumptions" and the real figure could be as high as 200 per cent.

The result is that, rather than being the key engine for global growth, China is an "enormous tail-risk", Mr Hart says.

7 comments:

  1. In the 1st place, if anyone wants to buy a property, they ought to be sure they can pay for it. Or else, be able to hold on till the cycle peaks again.

    Let the faithful pursue their dreams
    If it does not materialise, well, good morning..
    hope you had a great night out with the stars!

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  2. Does anybody know what is the avg price to rent ratio in SG ?

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  3. Very interesting post. The video (on the end of the US dollar) that you reference is very frightening, especially when I'm working in the US right now. I certainly hope it doesn't happen.

    I actually think that COV is inevitable. The valuation of a house serves as an indicator to potential buyers about the "true" (market would be a more correct term, probably) value of the house. Buyers are free to bid on it.. and the final transacted price minus the valuation price is then the +COV or -COV. Hence, COV will always be present...

    YS.

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  4. @ "Does anybody know what is the avg price to rent ratio in SG ?"

    Singapore :
    Price to Income (GDP Per Cap) Ratio : 29.06
    Price to Rent Ratio : 26 yrs

    Price to Rent Ratio - the higher the yield; the lower the ratio. At present, India, HK, China & Taiwan all significantly higher than SG.

    @Refn #4 "(b)Property prices: The average price-to-rent ratio of China's eight key cities is 39.4 times - this figure was 22.8 times in America just before its housing crisis." - so SG already crossed 22.8.

    It is even better to invest in KL.

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  5. @ "The valuation of a house serves as an indicator to potential buyers about the "true" (market would be a more correct term, probably) value of the house."

    With COV it means valuation is not accurate and not "true" market. Conservatively, even if I want to buy an expensive item, I would simply compare at least 3 prices from the market. Imagine you get a professional valuer to give you an "inaccurate" report ??? And then we have to use own judgment to give a "tip"? Shouldn't the report already reflect market price?

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  6. Yak, good point. I agree that the valuation only serves as a yardstick. Whether this is accurate or not wasn't my point. My main point was that different buyers MUST be allowed to bid different prices on the property as they deem fit. The seller will then choose one of these as the transaction price.

    So if there's a valuation, then the difference between (transaction price, valuation price) is +COV or -COV.

    If there's no valuation, the seller would still have his own belief about the value of the property. And the difference between (transaction price, belief price) is still something similar in nature to "COV", though it wouldn't be actually defined.

    So at the end of the day, COV or a similar beast, whether it's given a proper definition or not, will exist.

    YS.

    P.S.: I've just discovered your blog, and I appreciate the amount of details and insights you share. I'm reading through your archives!

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  7. Hi YS

    Thanks for your interest in this Blog.

    The valuation report in my own opinion should be a very accurate document. It should reflect as close as possible reasonable "market" price leaving little room for "generous" buyers to offer a little premium for things like a lucky house number, to close deal fast, and the like. To me it should have even "factor in" "floor /view" and "location" factors, and not "factor out". 2 willing parties, so be it good. But when it becomes $20~30K, it is a totally different issue.

    The COV is peculiar only to HDB resale flats and this is where a more accurate valutaion report is desirable as it is linked to "affordability" issue. This requires the valuation even to be more onerous.

    You see even in the transaction of private condos; the value for "floor level" is already "factor in" the price of new condos. But say like getting lucky number or pool facing ... it is not. And that was one reason in the 1996 boom, there were professional "Q"er. Some were not even true buyers. People speculating also pay such "Q"er $5~$10K out-of-pocket.

    But now the COV becomes accepted as an "instrument" it is no more like "my future neighbour" has a good view, he paid $20K more...mine is not I am selling $20K cheaper. The situation now is, my neighbour COV is $20K and so you also must pay $20K if you want to buy my property or forget it. The problem accentuates further...the neighbouring blocks all selling with COV $30K, you also must pay $30 if you want to buy, blah, blah and this is the new "market" rate.

    Now you see my point. The market is not so "honest" like you to want to pay just for "premium" factors or to buy a re-sale flat fast.

    The final "stab" comes when MBT tags his BTO price to re-sale "market" prices ... which has actually been allowed to become distorted.

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