How Far will the Current Property Bear Market Go?

First of all, I would like to wish in advance everyone a happy Lunar New Year.

As all my readers who invest in property or are going to know, the recent property bull market has peaked amid governmental cooling measures and HDB’s mass building activities and the market is on its way down.  By most measures, it’s been down for around 10% and nowhere of a bottom is in sight.  The natural question is whether it’ll rebound and if not, how much further down will it go?

My crystal ball in this aspect is unfortunately hazy.  Experience shows that predicting the directions (worst, the magnitude of a single direction) of the property/stock/bond/commodity markets is a fool’s errand and usually does not have a good ending.  However, I feel like I need to embark on this thankless job and do my crystal ball gazing nevertheless.  So, I shall shamelessly fire away!

All those who have lived in Singapore for decades know that Singapore has a tradition of providing affordable housings via the HDB route except around 1997 and recently.  The ramping up of the prices of property has caused the ruling party dearly in the last election and might do further damage on the next if it’s not being handled properly by the cabinet.

The current consensus among the media and market professionals is that there’s still room for the prices to fall.  Witness the recent quiet resale markets where those wanting to buy wait on the sideline for the prices to fall further!  I agree with the consensus given the stream of newly built BTO flats on the pipelines and the fact that the cooling measures are still in place.  I dare even speculate that prices will fall till they’re affordable by most common measures by the public given that the PAP government would clearly want to score this all important housing political point.

So how low a price would it be to be considered affordable by reasonable standards?  I would like to take the reference point from 2006 when the HDB prices reached a bottom (74.9 for the resale price index).  At the 2014 price level of 137.0, HDB has risen by 82.9% over 8 years.  The prices have clearly overreached themselves and are uncalled for.

If an 82.9% rise is unreasonable, what rise will be reasonable?  There’re 2 figures thrown around frequently, one is the inflation rate, the other is the higher income increment rate.  Personally, I would think that properties should more reasonably increase by the higher income increment rates.  There are 2 reasons, firstly, the dwellers in properties usually work around the area where they buy the properties; thus, the prices of properties will reflect the job opportunities of the surrounding areas.  The income derived from the work will then be used to pay for the down payment and mortgage of the properties.  The valuations of the properties are therefore a reflection of how hip the nearby job markets are.

The second reason why properties will track the income is because the surrounding amenities will improve over the years.  If properties were to track consumer price levels, it will mean that the improving surrounding amenities will get cheaper in real terms!  I feel that income is a better measure of the level of the surrounding amenities as the fiscal revenues used to build these facilities are derived from the economy which is tightly tied to the income level of the residents.

In 2014, the median income from work is 3770 and in 2006, the median income is 2449 based on MOM statistics.  Thus, if housing in early 2015 is as affordable as in 2006, the prices of properties should rise by around 53.9% over the 2006 period.

If we assume that the 2006 property prices are the norm, prices should fall by a further 1.539/1.829 – 1 ~= 16%.

Of course, speculating how much prices will fall could be more/less depending on the base period you choose.  If we select 2007 as the base year, the projected fall in prices will be even greater as income in 2007 increases much faster than price over the preceding year.

Considering how noisy the prices of property markets are, the chances of my prediction gone wrong are much higher than right.  So caveat emptor!

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