By Gerald Tay (guest contributor)
So much is going on in the global economy that I find very interesting and disturbing at the same time. We’ve seen incredible changes in governments, economies, stock markets, currency and real estate.
I am not making a forecast that a crash is going to occur
My best guess is there are unavoidable, short to long-term economic forces that are about to deal a devastating blow to our real estate market, economy and society. I am not bullish on Singapore’s real estate market in the near or long term. Looking back at the lessons of the past, it had been oversupply, speculative buying, lack of affordability, and lack of sustainable investment that have really deflated the market.
I am still 100 percent pro real estate no matter how “bearish” you think I am. But it would be irresponsible to wildly claim that there are no clouds on the horizon near and far, when building cranes are casting very visible shadows on the market. I believe there are currently three danger signs in the market.
Danger Sign #1 – Per Capita GDP Contraction
The industry might lie, but the numbers don’t deceive. Below is a historical real per capita GDP growth rate for Singapore’s aging society. Notice the obvious growth decline over the decades.
1961 – 1965: 4.52%
1966 – 1970: 10.71%
1971 – 1975: 7.58%
1976 – 1980: 7.2%
1981 – 1985: 4.26%
1986 – 1990: 6.35%
1991 – 1995: 5.46%
1996 – 2000: 3.12%
2001 – 2005: 3.67%
2006 – 2010: 2.93%
(Source: World Bank and Singapore’s Economic Development)
The most recent number for 2016 GDP growth rate was 1.8%. What do you think your property values might be moving forward if you bought into the peak of the market?
Danger Sign #2 – Rise of the US Economy… And (Likely) Slowdown of Asian Economies
The US economic trends are the opposite of Singapore’s and Asia’s economy – and so is their real estate markets. Mortgage rates in the US are currently at an all-time low, around 4.5%p.a.
The US economy continues to improve, so much so we now know the FED is projecting to raise interest rates three times instead of twice in 2017. It’s going to take quite a while before interest rates revert back to their previous norms – and some years before we see another 2008 type of bubble.
As the US economy continues its uptrend, Asian economies like Singapore will continue its downtrend. The Singapore property market will likely fall further as the US real estate market improves. “Gurus” who opine that it is currently a good time to enter the Singapore property market because prices are down 11% from peak are either in serious denial, lying or misinformed.
Danger Sign #3 – Diminishing Longer Term Prospects
All investments consist of two components: risk and reward. But all real estate investment books and “experts” and “authorities” I know of consist of only one component: Reward. Risk? What’s that?
The current weak housing market is not a cyclical issue. It is one impacted by long-term changes in global economic issues, such as an aging population. It has little room left for accelerated growth. The mantra “real estate values always go up” has therefore become a fundamentally flawed belief for the changing markets of the future.
A recent McKinsey Economic Report by world central banks and economists suggest “diminishing returns” will be the new norm for at least the next two to three decades.
For Singapore’s real estate market, I’m not inferring a local market-crash or bubble-bursting scenario. The real danger comes not from within our shores, but from a turbulent world outside. Our government cannot prevent an external crisis from happening and a fast-evolving geopolitical – it can only seek to minimize the harm with good policies.
As expected of a mature economy, economic growth rates will be lower. In the past decade, Singapore’s annual real GDP per capita growth has slowed to about 3% to 3.5%. We can assume a rather a more optimistic real property growth of 3% and slower real growth rate of 0.5% to 2% from the recovery of a major recession. This is quite a reversal from the bygone golden years of 6 to 8% annual growth.
A slow economy and moderate real estate price growth is likely to be the new normal going forward and it may not be such a bad thing.
Should You Sell or Hold?
“Due to the lack of positive economic news, we are expecting that prices will generally continue their decline. However, buyers may capitalise on this continued window of falling prices to snag some attractive deals,” said Eugene Lim, Key Executive Officer of ERA Realty Network, who expects private home prices to drop by 3 to 3.5 percent this year.
If property prices are on an uptrend, they sell you the idea of not missing out on “future gains.” If property prices are on a downtrend, they sell you the idea of not missing out on “discounts.”
Beware of the hubris of those in charge
There are no “attractive deals” in a market when every important indicator points DOWNWARDS – falling rents, falling prices, a potentially devastating recession on the horizon, and rising interest rates.
As a savvy asset-buyer, you only want to buy into a recession since prices always revert back to their fundamental values. Leave the measly discounts (and the balloting) and cheapskate marketing ploys for penny wise, pound foolish buyers.
SELL or HOLD are the only actions for property owners and buyers today. There’s no “but” or “if” unless you want to be kicked in the butt when things go further south.
What Should You Do Now?
From 1960 to 2013, there were eight major economic crises in the Singapore market. This means recessions occur roughly once every 6.6 years. Our present economic expansion has lasted far longer than seven years. The last recession ended in June 2009, about seven and half years ago. Even though certain indicators look amazing today, if history is any guide, we are due for another economic downturn.
Economic theories, such as works by economist Hyman Minsky, explain that the longer an expansion continues, the more likely a recession becomes. Whatever the reasons that expansions end, Singapore has rarely had an expansion that lasted longer than seven years in the last 50 years. There was only one exceptional period from 1986 to 1996.
The economy is like a game of musical chairs at a party. Everyone has a wonderful time until the music stops and then everyone wants to sit down simultaneously. Then suddenly the euphoria becomes a panic, and the boom becomes a slump.
No individual has the power to stop a recession. However, by planning you can mitigate the impact an economic downturn has on you and your family. Right now most people are enjoying good economic times. They will not last forever. Save some money now. Pay down credit card debt and other loans. Give yourself a financial cushion that will protect you in the event of an economic downturn.
Make some plans now for the next downturn. Even if I am wrong, the worst thing that will happen is that you will have less debt and more money saved. Is that so bad?
By guest contributor Gerald Tay, who is the founder and coach at CREI Academy Group Pte Ltd, an organization dedicated to empowering retail property investors with smarter investing philosophy and strategies. He is a full-time investor with over 13 years of solid experience in building his wealth through Property Investment and is financially wealthy today.