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!

United States Net Worth Ranking

I’ve created a US net worth ranking system.  It calculates the percentile net worth among the US adult population.

The data points are derived from the Credit Suisse Global Wealth 2016 report.  Basically, the cut-off data points for the top 5.5%, 7.4%, 36.8%, 43.1%, 50.0%, 65.4% are culled off from the report to generate the actual percentile.  The intermediate points, except those in the top 5.5%, are all derived via linear interpolations.  The calculation assumes that all have a non-negative net worth so some values above the top 65.4% might be out of tune.

For those who are technically savvy, this script is written entirely in Javascript.  As such, no net worth info is transmitted via the Internet.  All the processing is done locally on your machine.

To use it, just enter your net worth in USD and click the submit button.  A percentile figure will be shown below the text box.  If the figure is 10%, you’re at the richest 10% of the world adult population.

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.

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!

US Stock Market Valuation

I do not invest in the US market right now, but I do look at the fundamentals of US as a value investor.  One of the parameters I often refer to is the P/E ratio.

The P/E ratio for the trailing 12-month earnings right now is 19.86.  If we take the historical average of 15 as being fairly valued, the US market is 32% overvalued over its historical norm.

If we look at Shiller P/E ratio which takes 10-year average earnings, the figure is 26.5.  The historical average of Shiller P/E is about 16.  That would mean by that standard, the market is now 66% overvalued.

While the P/E ratios have considerable forward-looking predictive value, markets are also pretty noisy in nature.  It’s unknown when the current bull market in US stocks will end.

A bit of a financial history, the dot-com bubble peaked in 2000, the real-estate bubble peaked in 2007.  So peak-to-peak it lasted 7 years.  7 years have lapsed since the previous peak in 2007.  The question is – is the US market at a peak right now?  Only God knows.

As a counter argument against the above, yields on bonds right now are also at record lows.  Since bonds compete against stocks for capital, that will mean that stock prices are not as unattractive as they look.  Given the lack of alternative outlets, stocks should rightfully trade at a premium to historical prices.  As to how much of a premium it should justifiably trade, let us evaluate.  At a P/E ratio of 19.86, that would mean an earning yield of 1/19.86 = 5.0% for stock.  The 30-year treasury bond now yields 3.1%.  Is that earning delta reasonable?  You’ll have to be the judge.  Of course, if bond yields revert to its historical average (which is higher), it’ll exert downward pressure on the stock prices.

Do tread carefully in this field.

A Tale of 2 Cities

HKnSGgdp1960 HKnSGgdp2012


Look at the above 4 charts which are particularly telling about the rivalry between the twin cities of Hong Kong and Singapore over the period that stretches from 1960 till 2012.

Over this period of time, both have improved economically by leaps and bounds but at different rates relatively speaking.  In 1960, Singapore’s economy was only 49.2% of its bigger Chinese-majority sibling.  However, by 2012, Singapore’s output was larger at 104.3% of its Asian counterpart.

Population wise, Singapore is 53.5% of the more populous Hong Kong.  By 2012, it’s grown to 74.2% of its neighbor.  If we do the math, relatively speaking, Singapore is 1.529 times more prosperous over Hong Kong in 2012 than in 1960.

The growth rates of Singapore over Hong Kong are impressive – wither laissez-faire economy over free-market managed economy?