By Getty Goh (guest contributor)
In Jun 2011, I wrote a blog titled, “Outlook for the next few months”. In the article, I wrote about the how I used the Ascendant Assets Index or AAI for short, a proprietary index, to help me determine how the Singapore private property market was doing.
To recap, the basic premises of the AAI are (1) there is a lead-lag relationship between the stock and property market and (2) we are able to tell how the property market is performing by analysing the correlation between the stock and property market. For example, in bullish (or bearish) market conditions, we would expect the correlation between the stock and property market to be high as prices are increasing (or decreasing) in tandem. On the other hand, we would expect the correlation between the stock and property markets to be low during turning points as stock prices, being more liquid, would diverge from the less responsive property prices.
In the Jun 2011 article, I wrote that “it is noteworthy that the AAI has dropped from over 90% to under 80%. Over the next few quarters, we expect the AAI to drop further. When the AAI falls below the 50% mark (represented by the dotted line), it signals a turning point as the stock market will be almost completed out of sync with the property market. It signals an overall change in underlying market sentiments and the property market would be expected to decline shortly after.” See Figure 1 for the graph.
Figure 1: Ascendant Assets Indicator (2011Q1)
4 months on, what does the AAI look like now? The graph is shown in Figure 2.
Figure 2: Ascendant Assets Indicator (2011Q3*)
As expected, the AAI has dropped, thus indicating a change in market sentiments. I will not touch on the math behind the AAI as it is beyond the scope of this article. However, by simple observation, do you notice that the URA PPPI index in the yellow zone after each green zone is always contracting (see the red boxes in Figure 3)? Looking at trends that have occurred during the last 2 downturns, is it not reasonable to expect the URA PPPI to behave in a similar way as before?
Figure 3: Ascendant Assets Indicator (2011Q3*)
I recognise that the present loss in market confidence is brought about by the Europe debt crisis and it can potentially be adverted by strong co-ordinated financial response from the countries in the European Union. However, given the market uncertainty, stricter lending conditions as well as the host of anti-speculation measure currently in place, it will not come as a surprise if a dip actually occurs as early as 2011Q4.
As it is, the rate of growth for URA PPPI has been on the decline for the last few quarters. From anecdotal evidence, I also find that property owners are starting to ask for more reasonable prices and have become more open to price negotiation. Moreover recruitment for economically sensitive sectors like banking has slowed. While you may disagree, to me, all these signs suggest that a property market downturn is gradually upon us.
As the investment saying goes,” Investors have never made a loss by taking profit.” Unless you are prepared to hold on to your property for the next few years, it may just be prudent for you to take whatever profit you can right now before the property bear market comes around. For all you know, it may just be around the corner.
By guest contributor Getty Goh, Director of Ascendant Assets, a real estate research and investment consultancy firm.