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!

Why The Average Investor’s Investment Return Is So Low

According to the latest 2014 release of Dalbar’s Quantitative Analysis of Investor Behavior (QAIB), the average investor in a blend of equities and fixed-income mutual funds has garnered only a 2.6% net annualized rate of return for the 10-year time period ending Dec. 31, 2013.

The same average investor hasn’t fared any better over longer time frames.  The 20-year annualized return comes in at 2.5%, while the 30-year annualized rate is just 1.9%. Wow!

The above is just one of the many studies that revealed the plight of Joe investor.  While institutional investors are reaping market returns; individual investors, because of agency and behavioral issues etc, suffer mediocre growth in their assets.  Similar studies in Singapore based on our CPF accounts exposed comparable dilemma.

The Investor’s Gift Exchange Paradox

One fine day, an angel descends from heaven and picks you to offer a gift.

She displays two envelopes in front of her and tells you that the two envelopes both contain money.  However, she cannot tell you how much money is contained within the two sealed envelopes; all she can say is that one envelope contains 10,000 times the amount of money the other envelope contains.  To put that in another way, one envelope contains 1/10,000 of what the other envelope contains.  Which envelope you pick depends entirely upon your luck.

So you close your eyes and pick one of them.  You discover a $100 bill inside the envelope.  Now, the angel makes another offer to you.  “Would you like to exchange your envelope with the $100 bill for the other envelope which I’ve previously offered you but you’ve not chosen?”

Now, some of you might get incredulous.  You might ask, “Wouldn’t the two envelopes be the same?  If I had chosen the other envelope, wouldn’t I now be offered the current envelope?”

However, the answer is not that simple.  First of all, I need you to think like a truly rational, risk-taking investor.  Take a moment to ponder upon the question before you look at the answer.

The answer is that you should exchange the $100 bill for the other envelope.

You must remember that one envelope contains 10,000 times the amount of money that the other envelope contains.  So, the other envelope will contain either a meager 1 cent ($100/10000) or a whopping $1 million ($100X10000).  As an enterprising investor, surely you would risk a 50% chance of losing only nearly all of $100 or a 50% chance of winning the million-dollar jackpot.  In mathematical terms, the expected outcome of the exchange, E(x), is ($1,000,000+$0.01)/2 = $500,000.005.  This is a tremendously good offer by the benevolent angel.

Now, the question – do you see the contradictory paradox in the above passage?

Downloading Forex Prices into Excel Spreadsheet

You can download historical foreign exchange data into a Microsoft Excel spreadsheet using the following XLS.

The spreadsheet provided above is an improvement over the excellent VBA code provided by the website  The following two features are added:

  • Combo boxes for the currency pair to make finding currencies simple and easy.
  • Date pickers for the to and from date ranges.

If you think either the combo boxes or the date pickers are a hassle to deal with and only want one of them, you can go to the developer tab, enable design mode, and delete them.  The VBA code will work just fine without them.

Valuations of the Various Stock Asset Classes

Benjamin Graham of value investing fame wrote in the book The Intelligent Investor, “Current price should not be more than 1.5 times the book value last reported.  However, a multiplier of earnings below 15 could justify a correspondingly higher multiplier of assets.  As a rule of thumb, we suggest that the product of the multiplier times the ratio of price to book value should not exceed 22.5 (This figure corresponds to 15 times earnings and 1.5 times book value.  It would admit an issue selling at only 9 times earnings and 2.5 times asset value, etc.)”

I’m of the opinion that Benjamin’s writings are pretty sage from the perspective of a value investor.  Let’s take a look at the prices of worldwide stocks in the various asset classes based on Mr. Graham’s sayings.  Since Vanguard publishes the two parameters for all of its stocks’ ETF, I shall use this fund company info for this purpose.  As listed on its website:

Asset class P/E P/B P/E * P/B
Global ex-US REIT 10.5 1.1 11.6
Emerging 13.9 1.7 23.6
US Financial 17.5 1.4 24.5
All-world ex US 16.7 1.7 28.4
Small-cap value 21.4 1.8 38.5
All-world ex US small-cap 20.0 2.5 50.0
S&P 500 19.1 2.7 51.6
Small-cap 27.2 2.3 62.6
US IT 21.2 3.9 82.7
US REIT 57.9 2.2 127.4

From the table above, the most glaring contradiction must come from the polar opposite of US and ex-US REIT sectors.  Ex-US REIT is the most value-y while US REIT is priced like it will have tremendous growth ahead (which I don’t think will be likely to materialize).  Perhaps 10 years down the road, we’ll most likely see a profitable delta of ex-US REIT over US REIT, considering the pricing disparity.

Of all the asset classes listed above, only Global ex-US REIT is comfortably within the limits set by Mr. Graham.  Emerging markets and US financial are also close and worth considering to overweigh in one’s portfolio.

Overall, most of the world’s stock markets are overpriced.  Everything is expensive!

Expected Returns of the Straits Times Index ETF

The SPDR STI ETF is a buyable security that is representative of Singapore’s Straits Times Index.  The ETF has low costs and is priced at about 1/1,000 of the index.

In this article, I’ll attempt to estimate the expected returns of this ETF if held over the long term, assuming that the economics and valuations of the stock market in the future do not differ much compared to today.  The followings are the fundamentals of the ETF as of today:

Distribution Yield 2.74%
Price/Cash Flow 9.50
Price/Earnings 13.27
Number of Holdings 30
Price/Book Ratio 1.28
Weighted Average Market Cap SGD $26,991.30 M


At the current P/E ratio of 13.27, the ETF has an average valuation compared to the historical norms.  The estimated net asset value per share is about $3.2 with an expense ratio of 0.3%.

Expected returns (per share) = dividends – expenses + capital appreciation

The dividends per share are 2.74% of $3.2, which is equal $0.088.

The expenses per share are 0.3% of $3.2, which is equal $0.010

Since the price/earnings is 13.27 and price is $3.2, earnings per share equals 3.2/13.27 = $0.241.

After the ETF pays out a dividend of $0.088, it will add to itself a retain-earnings of $0.241-$0.088 = $0.153.  Assuming that the market prices retained-earnings at a ratio of 1.28 (just like today’s P/B ratio), the addition to book value of $0.153 will cause a capital appreciation of $0.153 * 1.28 = $0.196.

As per the equation above, expected returns (per share) = 0.088 – 0.010 + 0.196 = $0.274

Assuming that years down the road, P/E remains at around 13.27 and P/B around 1.28, in percentage terms, the expected annualized return will be 0.274/3.2 = 8.6%!  This is pretty close to the ETF’s performance of 8.39% since its inception in April 2002!

Historical Returns of Singapore Residential Real Estate

hdb private

The Singapore government’s HDB (chart 1) and URA (chart 2) have public and private residential property price records dating back for more than 2 decades.  Let us analyse what the price histories have to say.

The recent record highs in the property markets seem to have peaked in 2013.  The first peaks on the charts are in 1997 for both the HDB and private residential projects.  Since there’re no longest-term trough-to-trough records for both HDB and private, we’ll settle by measuring the peak-to-peak annualized returns.

HDBs peak at 206.6 in 2013 and peak at 136.9 in 1996.  The annualized return will be 2.5%.  For URA’s records for private residential, it peaks at about 215 in 2013 and peaks at about 165 in 1997.  The annualized return will be 1.7%.

It seems that both increases for the prices of public and private housing are pretty low and are not much higher than increases in the consumer price indices.  Thus, I would think that the main benefits of owning properties would be for its rental yields or imputed rents if it’s owner-occupied.  Currently, rentals for a HDB are higher than private residential but markets are fickle, so we do not know what holds for the future.  Anyway, the total returns of capital gains and rentals should be reasonable for such a major asset class.

On a side note, for the private residential, if we compare the trough of 100 in 1999 and trough of 135 in 2009, the annualized return will be 3.0%, which is higher.  This is a consolidation but do take note of the shorter time span of only 10 years which might make it to be not as statistically significant.

I’ve one particular fear with regards to my calculations because of my lack of understanding with regards as to how the charts are drawn.  The indices might be derived by holding variables such as floor size, remaining tenure and location constant.  If that’s the case, the price increases I calculated might be a mirage as HDBs and a lot of private housings are based on 99-year tenure.  Brand new housings should thus take a depreciation hit by about 1.01% every year.  This will make your residence a consumption item instead of an investment!

As a final thought, it’s important to note that properties should not be bought at high valuations as you might be forced to sell it on the wrong side of the cycle whether be it due to a chronic unemployment, major illness, decision to migrate or other reasons.  By the judgement of most authoritative experts, now the property markets are too high – Deputy PM Tharman thinks so, so does Minister Khaw Boon Wan.  The slew of property cooling measures is a manifestation of that train of thought.  It’s best to buy Singapore properties when the markets have cooled down and the government will signal this event by removing at least some of the cooling measures.