Revisiting The Property Bubble & Investment Trap Part 2 - It is back to basics again

Those who have visited this blog recently after the Presidential Election should have noted my focus back on the watch of the external economic "drivers". Those who are not familiar with what the word "driver" means would probably have to re-visit and search in my postings in the first series on "The Property Bubble & Investment Trap". Yes, I am not talking about same "driver" analogy WP's MP LTK was talking during GE 2011. They are what could be driving the volatile financial market recently, especially the last one week.

As I write this posting, I had watched the S$ vs RMB exchange dropping from S$1 : RMB 5.36 to as low as S$1 : RMB 4.86 today. With all the attention now shifted back to the Euro-zone, we had seen in the past weeks US$ vs S$ rising from US$1 : S$1.21 to above US$1 : S$1.31. The volatite market is certainly worrying. If this persist, our construction workers from China are going to shake their heads. The smart ones would have remitted a substantial portion of their savings back home to China.

Many investors on expensive properties in Singapore are notably from China. If they are relying on monthly rental income as remittances, they be very keen to know ... Will this trend continue? What will the MAS do?

Just as I was wondering about the global financial picture, I came across this article, "Safe havens in Singapore property" by a pretty well known property analyst. While I may not have totally agree with some of his views on other topics in certain of my previous postings, I like what he said in this article, on the following points.

Leaving his points about S&P and fundamentals about stocks and REITs aside, I will pick out some interesting points he said or mentioned in his article:-

(a) "For most global investors, it is back to basics again ...".

This is particularly so, after what we had all have seen with the Lehman Bros Crisis.

(b) "The thin ray of positive light coming from the U.S. is for interest rates to remain low over the next two years, hopefully on the back of a U.S. recovery. Let's not forget that troubles in Europe and Japan may delay the U.S. recovery by some more."

I had mentioned somewhere in my previous postings, that property prices might move sidewards due to the world recession from 2009 and probably drag on for sometime longer due to the Earthquake, Tsunami and Nuclear Crisis in Japan and then the re-emergence of the Euro-zone debt crisis.

(c) "... they stated that the Federal Reserve's pledge to keep U.S. interest rates at record lows until mid-2013 will benefit REITs through low interest costs which can possibly widen profit margins."

If you look at this mid-2013 date, you would also realised that I had cited it in several of my postings in the first series. More specifically, my prediction of a major correction / possible crash of our property market in 2012 ~ 2013. You may re-visit my article, "The Property Bubble & Investment Trap Part XI - Currency war may fuel bubbles - Impact on Mid Range & Luxury Class Properties" posted on 24 Oct 2010. Other analysts had also mentioned the same about 2013. So, is 2013 or even earlier a year to watch?

One year has past since my article, and the past 2 QE. PM Lee had also bought time and taken a year to implement the revision of "income ceiling" for BTO flats & ECs - what I termed the $10K salary dilemma.

Is the sudden rocking of the financial market a pre-cursor for QE3? Or is it the start of another real nightmare or the "perfect storm" for our property market and also who ever has been given the mandate to safe-guard our reserves? Hang Seng Index had just dropped over 900 points and oil prices dropped 4%...and the whole world financial markets are rocking ...

(d) "... what might be considered "safe haven properties" in physical real estate?" ...

1. Freehold or 999-year leasehold properties
2. Trading at more than 10 per cent discount relative to other projects within walking distance
3. Comes with a good quality tenancy contract of at least 3 per cent of gross rental yield

With the prices rising faster in the outskirts of Singapore, and prices of older freehold properties in districts 9, 10, 11 being stagnant, my choice targets are centered around properties in the core central region (CCR).

Wow, short-term yield is only 3% for "safe haven" properties. If that is the case, why should you be buying ECs (especially if they are new launches) still at ridiculous prices rather than such "safe haven"  properties, when there is a possibility that the EC prices may correct by 20~25% from current high, whether or not "control measures" are still in place, unless FH ones in these key districts are too expensive for you as an average middle income earner. The analyst's advice maybe be for the richer "long-term" investors, but do watch the external economic "drivers" and interpret his advice correctly if you are not in the extraordinary richer class.

(3) "And given the low interest rates over the next two or more years, investors can consider taking on some borrowings to boost the cash-on-cash returns. However, leaning on the side of conservatism and allowing some space for errors, an investor can borrow at between 50-70 per cent of the property value and still sleep soundly even if the downpour should become a thunderstorm."

Why did he put a cautionary note to his whole advice if it is really that "safe heven"? Now, you would probably see why I had re-posted recently certain good advices from Tan Kin Lian's blog postings, as well as other bloggers here in this blog. It is not because I had supported him in his recent PE campaign and wish to help him recover his standing after the PE. It is simply that I share his insights and thinking that things must return "to the basics again". At least, this would give some hope for a cure, for the average middle income earners, who still believe in investing in properties, having seen through the rough waters since the Lehman crisis.

Now, you will see why I had advised to use "single" income as a gauge, even if you can make $10,000 a month. Now you will see why Tan Kin Lian say if you use "dual income" do factor it to about 70% of the combined income. Our analyst above said, go as low as 50%; even if it is "safe haven". So when you are talking about ECs which is just LH 99 years, do think twice.

Finally, there is a "driver" to watch in China & US as 2012 will certainly be a year for change of political leadership in China and possibly in the US too. Will President Obama finally "CHANGE" the US economy or will the US economy finally "CHANGE" him? I believe it would be about "going back to the basics" for him too and the US economy and world financial system, if not for other politicians and political systems worldwide.