By guest contributor Gerald Tay
Yes, it’s Operation Screw all over again. They never learn from the past do they? The same mistakes are repeating all over again. The geniuses at the Federal Reserve have concocted a bold new plan to revive the U.S. economy – print a bunch of money, loan it to Americans at super low interest rates so they can speculate on rising real estate prices, extract the appreciated equity and spend it on consumer goods.
The last time the Fed tried to create a housing bubble to stimulate the economy, it ended in a global disaster. Throughout history, governments have destroyed economies by destroying currencies. Only this time it will be a major currency crisis in the making, with a huge sovereign debt crisis already underway, and more tears and misery globally.
Peter Schiff, one of the few economists who correctly predicted the 2008 financial crisis and worldwide best-selling author of How an Economy Grows and Why It Crashes says, “This is a date that will indeed live in infamy, because this is the date that the Federal Reserve went all in on Quantitative Easing (QE). Rather than reviving the economy, the Fed has just sealed its fate and has driven the final nail in the coffin of the U.S. dollar and with it, the entire U.S. economy.”
Peter points out that in actuality, this decision from the Federal Reserve, their great “solution” to USA economic woes, is to… Inflate another housing bubble! Because that worked so well the last time… The Fed is going to buy $40 billion worth of mortgage-backed securities every month in an attempt to bring down mortgage interest rates, because they want to “spur the housing market”. Why?
The Wealth Effect and Rising (Inflated) Property Prices in Singapore
Governments around the world, including Singapore, know rising property prices can be one of the most useful political tools to entice happy voters. When property prices go up, home owners feel ‘wealthier’ and will therefore spend more money (mostly on things they don’t need). Singapore’s property prices have appreciated tremendously since 2009 from private homes to HDBs, due to a combination of QE1, QE2 and China’s Trillion Dollar Stimulus Program.
Because of this ‘illusionary’ wealth created in many homes, many went out on a spending spree, upgrading their Toyotas to BMWs (BMW beats Toyota sales for the first time), upgrading from HDB to private homes (with an increasing proportion of local buyers accounting for private transactions), and even to willingly fork out $1 million for a HDB flat.
However, there is a fatal flaw here. These people are in fact spending money they have not earned and are borrowing at deceptively low interest rates. Consumers are taking on too much debt and wrecking their personal balance sheets.
The governments believe that if they can get home prices to rise, then people will realise they can make money buying houses, and more people will buy houses because they are going up in price, which will encourage more land sales, more property taxes, more taxes through more consumer spending, more happy voters to secure their political seats, and of course rich government coffers.
What will QE Do to Ordinary Singaporean Folks?
Unsurprisingly, gold, silver, oil, commodities and agriculture is going to go up. In other words, inflation will likely be higher than what it already is today. If you are an employee working for a fixed salary, you’re screwed. If you’re hoping to retire with your CPF money, you’re screwed. If you are a saver, you are screwed. If you own bonds, you are screwed. If you’ve a savings account, you’re screwed. And of course, if you own Dollars, you’re screwed.
What will QE Do to the Singapore Property Market?
This ridiculous display of incessant money printing will spell higher inflation for our property market. Singapore is one of the destinations people look to as a safe haven. Property prices will continue to climb, more land sales will be expected from the government and property developers will take advantage of this influx of hot funds to sell over-inflated properties to ignorant buyers. Of course, it is too early to ascertain the impact QE3 may have (if any) on the Singapore property market. Last December’s Additional Buyer’s Stamp Duty (ABSD) measure has so far been effective in curbing asset inflation in the property market sector .
A Bigger Property Bubble?
No government wants a massive asset bubble bursting in their own backyard. It certainly does not win political favours with voters. Governments only want more consumer spending, higher GDP growth for foreign investments and more job creation. In other words, the more debt consumers borrow, the more the economy will grow. Credit is the lifeblood of any economy. The government does not want to see you in a financial crisis, They only want you to borrow more on low interest rates and take on more debt. However, things often go the other way like during the 2008 financial crisis, the 1997 Asian financial crisis and the many other crises that have been around throughout history.
The Singapore government could well introduce new measures or tweak existing ones to prevent a bubble from forming. But they are also trying to toe a fine line, being mindful of the fact that when you tighten too much you never know how it will unravel.
So Will Singapore Property Prices Remain Resilient?
I do not know about you but my investments certainly never rely on ‘experts’ who keep talking about how resilient our property market is. These experts seem to do better selling snake’s oil than trying to ‘fortune tell’ the market’s direction.
In December 2007, a well-known real estate analyst wrote in the Straits Times, “Although sentiment in the residential sector has been hit by concerns over the US sub-prime market, the office sector is expected to remain resilient. Investment sentiment is expected to remain positive in 2008, given continued economic growth.”
In January of 2008, a very well-known CEO of a large property agency said, “Prices of residential property in the outer regions are still lagging behind the previous peak recorded in 1996.” He said there is more room for growth for private homes in the Outside Central Region and forecasted that the private residential property sector for 2008 will continue to perform well. “Thus, the price index for 2008 is predicted to grow in the region of 15 to 18 per cent,” he added. We all know what came next.
Risks to the Singapore Property Market
Like it or not, being a highly dependent export economy, no matter what property measures are introduced, our inflated property prices will always be shocked by global events. Risks to the global economy are rife: a potential global slowdown, the risk of spill-over from Europe’s sovereign crisis, the looming raft of tax increases and spending cuts set to kick in at end of the year unless US congress acts, potential wars in Iran, China and Japan, and of course any dreaded black swan events that may happen. All could shock the economy and send it back into a recession even worse than the 2008 financial crisis.
What Does This Mean To You As An Investor?
Smart investors always buy properties on immediate cash flow that generates returns higher than current inflation rates. Amateurs will ‘try’ the market, hoping and waiting for capital gains to happen. With QE3 and even with the four years Seller Stamp Duty, there will still be many foolish investors buying on hope of capital appreciation.
Low interest rates make me rich because I buy an asset, borrow for 30 years, rent by the month and put cash flow into my pockets. Unfortunately, low interest rates make most people poor because they borrow and spend ‘future money’ they do not have, and hope their ‘asset’ makes them money through capital appreciation.
Avoid buying new sales or properties that do not generate cash flow immediately. This is your only defence against the many uncertainties plaguing the global economy today. The property market is too volatile to speculate on capital gains.
By guest contributor Gerald Tay, CEO and Chief Trainer at CREi Academy Group.