Thursday, 10 February 2011

The Property Bubble & Investment Trap Part XV - A New Spring with More Interest Rate Hikes?

The People's Bank of China (PBOC) 's rate hike on the last day of the long Lunar New Year holiday in China, just before the reverse flow of Chun Yun started, did not come as a surprise to many. The PBOC would raise the one-year deposit and lending rates by 25 basis points each, taking them to 3.0 percent and 6.06 percent respectively.

The bank raised rates for the first time in nearly three years last October as part of efforts to rein in inflation and property prices. The move was followed by another rise in late December. Inflation hit 4.6 percent year-on-year in December, down from 5.1 percent in November, which was the fastest rate in more than two years. And the full-year rate was 3.3 percent, exceeding Beijing's three percent target. Leaders have set the 2011 ceiling at four percent.

Market-watchers did not expect the latest move to have a huge impact on markets. "The rate hike hits market sentiment, but is unlikely to spark heavy selling on stocks as such tightening moves have been expected for some time", an analyst said. Afterall, the China stock market; unlike other Asian emerging markets, is still trying to lift off from level ground. And this could also possibly be where the newly minted "currency" from QEII will flow into Asia. The added risks are that QEII is not expected to solve the "UNEMPLOYMENT" woes of the US, as fresh waves of political uncertainly rock Egypt and the like economies where the income divide and proverty gap continues to aggravate.

Quite at odds with the China stock market is that its property market is said to be at its last phase of a Bubble before a possible burst next year (2012) according to Gillem Tulloch, Managing Director of Forensic Asia Ltd, in a recent interview with the Wall Street Journal's MarketWatch.

Mr. Tulloch said China's state-run banks will come under pressure to significantly rein in lending, leaving the economy short of more than 11 trillion yuan in credit. The Chinese banking system would fail to generate sufficient credit to sustain further increases in property prices. Credit needs to grow at double-digit rates to sustain property price gains, said Mr. Tulloch, adding that the lending boom is a sign of a market swept up in bubble dynamics.

You may recall that I also wrote on a few occasions in this Blog about a possible "2012 bust and 2015 boom" for the Singapore property market. In Part XI, I asked "will the next severe correction or burst of our bubble then come with the burst of The China Bubble around 2012 ~2013?". I also mention to watch the China market as the external driver. [See my posting on New Year Eve Dec 31, 2010 - External Drivers - Watching China in 2011].

Just like as soon as after China's previous interest rate hike in October 2010, Singapore's MTI & MAS is fast to announce that the S$ will be allowed to appreciate further in order to combat rising inflation. Our MAS practises a "monetary rate policy" through currency appreciation rather than by "interest rate policy" by adjusting interest rate as practised in China and other developed economies. In the current global climate, a higher monetary rate is good for international business but locally, the lower SIBOR rate defeated the point of having higher monetary rates. So in Mid October last year, the lowering of SINBOR rate favours the banks in the short-term but disadvantages those who overleveraged and over-committed on long term mortgages in the longer run, especially when interest rate starts to rise as in China. Political posturing is no longer about good governance alone. Welfare, benefits, a better way of life and free money have become major considerations to the voter on the street. Good governance seems a secondary consideration.

Judging from the recent launches of BTO flats, the market sentiments are certainly changing. MBT's rhetorics now cannot be wrong when he urged HDB owners aspiring to upgrade to private property to wait, as the General Election draws nearer, unlike his constant assertion that HDB flats are still affordable.  "Housing prices are rather high now… if you wait for a while, you might find more affordable properties," Mr Mah was quoted as saying, citing the expectation of rising interest rates and an increase in the supply of private properties as factors in curbing property prices.

In view of the lack lustre property market, property agents are taking longer CNY vacations and developers are sending out SMS from the 5th Day of CNY to invite potential buyers for show-flats viewing. Meanwhile the URA is reviewing rules to ensure that showflats look like the apartments that eventually get built to ensure that buyers get what they pay for.

And you may also want to visit this posting by a property agent, "Private property market in Singapore to crash in late 2011?", though a general reading on the "superheated state of property price" in Singapore, the impact of the recent control measures as the GE gets nearer.

Reacting to public discontent with the rising cost of public housing, PM Lee used his Chinese New Year speech to address the number one issue of dissatisfaction amongst Singaporeans. In what promises to be an election year for the PAP, Lee reassured to "keep housing affordable to Singaporeans, especially public housing."

In a recent survey it was shown that “the bottom 20 per cent of households suffered disproportionately from higher housing prices.” It was these households that the government measures to cool the market were aimed at.

However, one group, the middle class, is being increasingly squeezed by rising property prices, earning too much to qualify for HDB housing, but priced out of the private property market. Those who already own a property but still servicing their mortgage would most probably likely be still struggling to pay off their old mortgage loan as a result of lower CPF rates and income ceiling cap on CPF during the previous economic downturn.

Recent euphoria in the EC market seems to suggest younger buyers are either ignorant or had forgotten the "suffering" of their older peers in times of back economic performance. Both PM Lee and the MND ministers' warning have probably come too late for these ignorant buyers while the Govt was cautious to want to protect the property value in an Election year by arguing that  “in a prospering economy home owners should see their properties appreciating in value over the long term.”

One should understand the mechanics of our property market versus the mechanics of politics to invest wisely in our property market. Just 6 months ago, MM Lee had said "There is probably no bubble in Singapore's property market,...". The occasion was a dinner hosted by the Association of Banks in Singapore.

"The sharp price rises that have been seen are 'part of the total liquidity in the whole world system', said Mr Lee, noting that interest rates are low, and foreigners still see properties as affordable.

'Even if we cap our excess, people in Hong Kong, Indonesia, will say, compared to what I have to pay, Singapore is cheap, let's buy it,' he added.

Perhaps, local middle earners should ask "why are our own wages stagnated if compared to these foreigners" or "why are these foreigners able to make so much more money easily then us"! If not, where have our incomes been diluted?

Two months later in end August 2010, MBT was "caught off guard" as the MND Minister announced a new round of control measures. Yet he was not very convinced then, and  more stricter "incremental" measures had to be taken again only in mid January 2011.

MM Lee said then, "These are the precautions we can take, but it does not stop the Indonesians or the Thais or the Malaysian Chinese or the Filipino Chinese from coming here and saying, 'Compared to what I have to pay in my country, this is cheap." The bankers must be pleased by his statement then, but look at what it had done in 2 months.   He was responding to a question by a Standard Chartered banker who had asked about whether he was worried about property prices here.

The banker had also tacked on a second question: 'Can we expect elections anytime soon?'

To that, Mr Lee replied: 'I am not the Prime Minister, I don't decide. And anyway it's got nothing to do with a property boom.'

If an Election has nothing to do with a property boom accordingly to MM Lee, a "BUST" certainly does, as judging from PM Lee's concern during his recent new year speech.

Property prices are now just like this Rabbit tossed in mid-air. Can it hop higher or will it sustain a big fall ?
Anybody can just excuse himself from getting "caught off-guard" but I certainly would empathise with those who are caught off-guard now due to these politicians' speeches and policies if they had invested without digesting but believeing such "hearsay" information.
And if you are still unclear or not convinced what "hearsay" might be all about, you may want to visit this web-site to see what this FT agent committed,
"I've been helping people find the homes they want for a few years now. It is about providing a service, not skimming a fat commission. That is how I work..."
And guess whom he had quoted on 29 June 2010 ! [Do pay this FT agent a visit at his website.]
It does not matter that one has a CEA No. and that MBT had "cut-and-paste" policies from HK to register and regulate real-estate agents here in Singapore.
Anyway, let's "spring" ahead by watching the external drivers diligently, while enjoying more of such hearsay political posturing in an Election year.
References :-

China property bubble to burst next year

Private property market in Singapore to crash in late 2011?

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