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Sg Property Price Poise to FALL HEAVILY!
- Thread starter makapaaa
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<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published August 16, 2008
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Do a 'stress test', the Grantham way
Legendary bubble identifier's method is useful for property investors here
By TEH HOOI LING
SENIOR CORRESPONDENT
<TABLE class=storyLinks cellSpacing=4 cellPadding=1 width=136 align=right border=0><TBODY><TR class=font10><TD align=right width=20>
</TD><TD>Email this article</TD></TR><TR class=font10><TD align=right width=20>
</TD><TD>Print article </TD></TR><TR class=font10><TD align=right width=20>
</TD><TD>Feedback</TD></TR></TBODY></TABLE>LEGENDARY investor Jeremy Grantham - who correctly and bravely called the dotcom bubble and has been saying US equities have been overvalued since 1999 - blames the mess the world is in today on 'a remarkable unwillingness of the authorities and financial leadership to believe that asset bubbles, however arrived at, always revert to normal'.
<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD></TD></TR></TBODY></TABLE>The first dramatic example of this disbelief in the existence of bubbles was, of course, the Internet and tech bubble, he says. Then, the market was trading at 35 times earnings, compared with 1929 and 1965 highs of 21 times.
The most recent bubble is in the housing market in the US and UK. 'If only financial lenders had understood the full consequences of housing bubbles - that US house prices would decline 25 per cent or more and UK prices 40 per cent or more - they would have acted very differently,' Mr Grantham says.
'(Ex-Federal Reserve chairman Alan) Greenspan and (current chairman Ben) Bernanke would have responded early and often to help shrink the volume of sub-prime mortgages, instead of emphasising - as Bernanke did - the normalcy of the market at its peak and the fact that US house prices had never declined.
'If (US Treasury Secretary) Hank Paulson had counted on a 30 per cent decline, he would have foreseen a calamity for banks and related entities, since he especially must have known about the highly suspicious quality of the instruments. He would have known that Fannie Mae and Freddie Mac, at over 60 times leverage, obviously did not have enough equity for this kind of decline.
'Had he believed, he would have entered his job demanding immediate damage control and that much more equity be raised, rather than suggesting that all was well and contained.
'The bigwig bankers at Merrill, Citi, Lehman, Bear Stearns, et al, could never have behaved the way they did had they understood the size of the likely drop in housing values.'
So how did Mr Grantham identify the housing bubble in the US and UK?
Well, he plotted the ratio of the US median house price to median family income from 1977. After 2003, that ratio rose to two standard deviations above the mean in preceding 20-odd years (see chart).
According to Mr Grantham, a study of similar two-standard deviation (40-year event) bubbles showed that, unfailingly, the bubbles would burst - and that when this happened, prices would overrun on the downside. 'It is interesting to read how surprising the US house price decline has apparently been for many commentators,' he says. 'But in real life, it would have been far more than merely surprising, perhaps even unique, if the prices had not declined.'
Mr Grantham says the reason house prices had never declined before was that, previously, the US housing market was diverse - bubbling in one area while cooling in another. Uniquely this time, the areas varied from red hot to warm, with the average deep in extreme bubble territory. That's a 100-year event - or three standard deviations from long-term trend.
Since 2005, prices have come down. But there's more to go. 'For (US) house prices to reach normal from here, they must either decline 17 per cent immediately or experience four flat years while income catches up, or some combination,' says Mr Grantham. 'However, what we must worry about is the normal tendency for bubbles to overrun on the downside.'
The bigger housing bubble, meanwhile, is in the UK. The ratio of house price to family income has risen to four standard deviations above the long-term trend. According to Mr Grantham, the UK housing event is probably second only to the 1990 Japanese land bubble in the real estate bubble hall of fame.
UK house prices could easily decline 50 per cent, and even at that level they would still be higher than they were in 1997 as a multiple of income, he says. 'If prices go all the way back to trend - and history says that is extremely likely - then the UK financial system will definitely need some serious bailouts and the global ripples will be substantial. Since the UK is a major player in the global banking business, the scale of the writedowns will produce yet another wave of destabilisation.'
So what about Singapore? Up to last year, Singapore property prices were also climbing sharply. Where do they stand now vis-a-vis household income?
In the bottom three charts, I plotted the median condominium price per square metre in Singapore against the average monthly wage of employees, GDP per capita and average household income from work.
All three charts tell the same story - that is, because of sharp price increases since 2005, affordability has dropped slightly. But condo prices, relative to household income, are still below the levels of 1995-96.
For the first two sets of data, the ratio is actually 0.3 of a standard deviation below the mean.
I suspect it would be the same for the third set of data as well. But because I couldn't determine the average household income from work for 1994, 1996 and 1997 - the years when property prices were high - the average of the remaining years ended up lower. Hence, the ratio for 2007 is 0.4 of a standard deviation above the mean. Overall, the numbers should perhaps provide some kind of reassurance to the market, which of late has been weighed down by tremendous doom and gloom.
The caveat, of course, is that data from the Urban Redevelopment Authority (URA) goes back to 1994 only; we don't have the type of data available in the US and the UK, which goes all the way to 1977 and 1963, respectively. Of course, ours is also a relatively young market, compared to the US and UK.
However, if we assume a typical apartment to be about 100 square metres (roughly 1,000 square feet), then one apartment would cost about $1 million. And that's a whopping 12.3 times average household income in 2007.
From the charts of Mr Grantham's global investment management firm GMO, you can see that median US house prices at 3.8 times median family income equated to an almost extreme bubble. For the UK market, prices are now about 5.5 times average family income.
However, different markets have different characteristics. For example, the long-term average of house price over household income in the US is about 2.8 times. And in the UK, it's about 3.5 times. In Singapore, of course, there are cheaper housing options - that is, HDB.
An HDB apartment that costs $300,000 is 3.7 times average household income. And that's more or less in line with the UK's long-term average. A $400,000 HDB apartment would work out to 4.9 times average household income. In an Asian society where the savings rate is high, I reckon that is affordable.
In any case, there is a key takeaway from the way Mr Grantham does his analyses. I guess it is a way to stress-test one's position if one were to have, say, loans or fixed obligations.
In the case of property - especially in a feverish market - try to assume what would happen if prices were to fall 20 or 30 per cent. Or, in the case of company analysis, if turnover were to fall by that quantum. Would one be able to withstand such adverse market conditions? If not, then perhaps it's an indication that one is overstretched, and should think about the margin of safety that some of the great investors, like Benjamin Graham and Warren Buffett, refer to.
As an old maxim goes, it is better to be safe than sorry. Obviously, this realisation has been around for generations. It's just that we tend to get carried away.
</TD></TR></TBODY></TABLE>
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Do a 'stress test', the Grantham way
Legendary bubble identifier's method is useful for property investors here
By TEH HOOI LING
SENIOR CORRESPONDENT
<TABLE class=storyLinks cellSpacing=4 cellPadding=1 width=136 align=right border=0><TBODY><TR class=font10><TD align=right width=20>
</TD><TD>Email this article</TD></TR><TR class=font10><TD align=right width=20></TD><TD>Print article </TD></TR><TR class=font10><TD align=right width=20></TD><TD>Feedback</TD></TR></TBODY></TABLE>LEGENDARY investor Jeremy Grantham - who correctly and bravely called the dotcom bubble and has been saying US equities have been overvalued since 1999 - blames the mess the world is in today on 'a remarkable unwillingness of the authorities and financial leadership to believe that asset bubbles, however arrived at, always revert to normal'.<TABLE class=picBoxL cellSpacing=2 width=100 align=left><TBODY><TR><TD>
</TD></TR><TR class=caption><TD></TD></TR></TBODY></TABLE>The first dramatic example of this disbelief in the existence of bubbles was, of course, the Internet and tech bubble, he says. Then, the market was trading at 35 times earnings, compared with 1929 and 1965 highs of 21 times.The most recent bubble is in the housing market in the US and UK. 'If only financial lenders had understood the full consequences of housing bubbles - that US house prices would decline 25 per cent or more and UK prices 40 per cent or more - they would have acted very differently,' Mr Grantham says.
'(Ex-Federal Reserve chairman Alan) Greenspan and (current chairman Ben) Bernanke would have responded early and often to help shrink the volume of sub-prime mortgages, instead of emphasising - as Bernanke did - the normalcy of the market at its peak and the fact that US house prices had never declined.
'If (US Treasury Secretary) Hank Paulson had counted on a 30 per cent decline, he would have foreseen a calamity for banks and related entities, since he especially must have known about the highly suspicious quality of the instruments. He would have known that Fannie Mae and Freddie Mac, at over 60 times leverage, obviously did not have enough equity for this kind of decline.
'Had he believed, he would have entered his job demanding immediate damage control and that much more equity be raised, rather than suggesting that all was well and contained.
'The bigwig bankers at Merrill, Citi, Lehman, Bear Stearns, et al, could never have behaved the way they did had they understood the size of the likely drop in housing values.'
So how did Mr Grantham identify the housing bubble in the US and UK?
Well, he plotted the ratio of the US median house price to median family income from 1977. After 2003, that ratio rose to two standard deviations above the mean in preceding 20-odd years (see chart).
According to Mr Grantham, a study of similar two-standard deviation (40-year event) bubbles showed that, unfailingly, the bubbles would burst - and that when this happened, prices would overrun on the downside. 'It is interesting to read how surprising the US house price decline has apparently been for many commentators,' he says. 'But in real life, it would have been far more than merely surprising, perhaps even unique, if the prices had not declined.'
Mr Grantham says the reason house prices had never declined before was that, previously, the US housing market was diverse - bubbling in one area while cooling in another. Uniquely this time, the areas varied from red hot to warm, with the average deep in extreme bubble territory. That's a 100-year event - or three standard deviations from long-term trend.
Since 2005, prices have come down. But there's more to go. 'For (US) house prices to reach normal from here, they must either decline 17 per cent immediately or experience four flat years while income catches up, or some combination,' says Mr Grantham. 'However, what we must worry about is the normal tendency for bubbles to overrun on the downside.'
The bigger housing bubble, meanwhile, is in the UK. The ratio of house price to family income has risen to four standard deviations above the long-term trend. According to Mr Grantham, the UK housing event is probably second only to the 1990 Japanese land bubble in the real estate bubble hall of fame.
UK house prices could easily decline 50 per cent, and even at that level they would still be higher than they were in 1997 as a multiple of income, he says. 'If prices go all the way back to trend - and history says that is extremely likely - then the UK financial system will definitely need some serious bailouts and the global ripples will be substantial. Since the UK is a major player in the global banking business, the scale of the writedowns will produce yet another wave of destabilisation.'
So what about Singapore? Up to last year, Singapore property prices were also climbing sharply. Where do they stand now vis-a-vis household income?
In the bottom three charts, I plotted the median condominium price per square metre in Singapore against the average monthly wage of employees, GDP per capita and average household income from work.
All three charts tell the same story - that is, because of sharp price increases since 2005, affordability has dropped slightly. But condo prices, relative to household income, are still below the levels of 1995-96.
For the first two sets of data, the ratio is actually 0.3 of a standard deviation below the mean.
I suspect it would be the same for the third set of data as well. But because I couldn't determine the average household income from work for 1994, 1996 and 1997 - the years when property prices were high - the average of the remaining years ended up lower. Hence, the ratio for 2007 is 0.4 of a standard deviation above the mean. Overall, the numbers should perhaps provide some kind of reassurance to the market, which of late has been weighed down by tremendous doom and gloom.
The caveat, of course, is that data from the Urban Redevelopment Authority (URA) goes back to 1994 only; we don't have the type of data available in the US and the UK, which goes all the way to 1977 and 1963, respectively. Of course, ours is also a relatively young market, compared to the US and UK.
However, if we assume a typical apartment to be about 100 square metres (roughly 1,000 square feet), then one apartment would cost about $1 million. And that's a whopping 12.3 times average household income in 2007.
From the charts of Mr Grantham's global investment management firm GMO, you can see that median US house prices at 3.8 times median family income equated to an almost extreme bubble. For the UK market, prices are now about 5.5 times average family income.
However, different markets have different characteristics. For example, the long-term average of house price over household income in the US is about 2.8 times. And in the UK, it's about 3.5 times. In Singapore, of course, there are cheaper housing options - that is, HDB.
An HDB apartment that costs $300,000 is 3.7 times average household income. And that's more or less in line with the UK's long-term average. A $400,000 HDB apartment would work out to 4.9 times average household income. In an Asian society where the savings rate is high, I reckon that is affordable.
In any case, there is a key takeaway from the way Mr Grantham does his analyses. I guess it is a way to stress-test one's position if one were to have, say, loans or fixed obligations.
In the case of property - especially in a feverish market - try to assume what would happen if prices were to fall 20 or 30 per cent. Or, in the case of company analysis, if turnover were to fall by that quantum. Would one be able to withstand such adverse market conditions? If not, then perhaps it's an indication that one is overstretched, and should think about the margin of safety that some of the great investors, like Benjamin Graham and Warren Buffett, refer to.
As an old maxim goes, it is better to be safe than sorry. Obviously, this realisation has been around for generations. It's just that we tend to get carried away.
</TD></TR></TBODY></TABLE>
The writer has most likely overestimated Singapore property’s affordability. New HDB units under the DBSS scheme are priced average S$500 psf or S$600k for 1200 sqf. With a house income cap of S$8k/month or S$96k/year, it would imply a price/income multiple of some 6x.
I do not subscribe the notion that HDB prices will keep rising because PRs will keep buying. Owner-occupiers are the most price sensitive.
PRs have been buying HDBs because it made more sense to own a house in view of the ever rising rentals. Now as the Singapore economy slows, PRs (as well as Singaporeans) feeling less secure about their jobs, certainly are less likely to make huge financial commitments. Moreover as the new residential supply comes online in 2009-2011, rentals will definitely fall (simple demand-supply).
SPH jounalist only know how to copy other people work.
She forget that the new reality is that interests rates are low and will remain low. How can she bring out data from the 1970 and 1980 when interests rates was running at 20 percent and say that that is normal compare to the present times where interests is 5 percent ? If you bring in the costs of money then property prices in the USA is now half as expensive as the 1980 and 1990s. It is why I loaded up on property stocks and banks in the USA and making good money.
She forget that the new reality is that interests rates are low and will remain low. How can she bring out data from the 1970 and 1980 when interests rates was running at 20 percent and say that that is normal compare to the present times where interests is 5 percent ? If you bring in the costs of money then property prices in the USA is now half as expensive as the 1980 and 1990s. It is why I loaded up on property stocks and banks in the USA and making good money.
hmm...yeap if there is a prolong down cycle then it will hit everyone.
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Singapore property will not crash b'cos our land supply is finite. Soon we'll have 6.5m population, 2 IRs openning, F1 and the development of Iskandar Shah Industrial Park in JB will create another super boom for vibrant Singapore.
Unlike America, we don't have Fannie May & Freddie Mac and sub-prime crisis to deal with. For those who are looking to purchasing a property, now is the time to jump in. In S'pore property buying can never be wrong.
Finally, S'porean female table-tennis player will win for us at least an Olympics silver medal is an indication of better things to come.
Unlike America, we don't have Fannie May & Freddie Mac and sub-prime crisis to deal with. For those who are looking to purchasing a property, now is the time to jump in. In S'pore property buying can never be wrong.
Finally, S'porean female table-tennis player will win for us at least an Olympics silver medal is an indication of better things to come.
<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published August 16, 2008
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Do a 'stress test', the Grantham way
Legendary bubble identifier's method is useful for property investors here
Singapore property will not crash b'cos our land supply is finite. Soon we'll have 6.5m population, 2 IRs openning, F1 and the development of Iskandar Shah Industrial Park in JB will create another super boom for vibrant Singapore.
Unlike America, we don't have Fannie May & Freddie Mac and sub-prime crisis to deal with. For those who are looking to purchasing a property, now is the time to jump in. In S'pore property buying can never be wrong.
Finally, S'porean female table-tennis player will win for us at least an Olympics silver medal is an indication of better things to come.
<TABLE cellSpacing=0 cellPadding=0 width=452 border=0><TBODY><TR><TD vAlign=top width=452 colSpan=2>Published August 16, 2008
</TD></TR><TR><TD vAlign=top width=452 colSpan=2>Do a 'stress test', the Grantham way
Legendary bubble identifier's method is useful for property investors here
Hallo, those bitches are PRC mei mei. wake up plsss
No offence, but your spin is getting stale. These lines were sprouted by property agents for a long time and I presume you are probably either one or someone with some residential properties to sell. I will rebut your points accordingly and let’s have a healthy debate on this topic.
F1 and IRs – these projects mainly benefit the hospitality and tourism industry in Singapore, and are clearly over hyped. Iskandar project will only benefit JB like Shenzhen/HK relationship. In any case, nobody knows whether Iskandar will even take off in the first place (go ask any Malaysians).
Winning an Olympic medal is a sign of better things to come??? Michael Phelps just got his 7th gold medal. So is the US subprime going to be over soon??
Now I would pose these two questions for you to ponder:
Singapore’s GDP has been revised downwards to estimated 4-5%. Can you advise the historical correlation between GDP growth and residential property prices?
Can you advise the pending surplus residential supply situation Singapore is facing? Statistics can be found on URA webite - http://www.ura.gov.sg/pr/text/2008/pr08-79.html
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Which sectors to look at next? Can share some insight?
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When the 2 IRs open for biz, our honorable PM, LHL already said in his NDR speech 60,000 jobs will be created. Let's assume 20% expatriate executives are employed, we'll have 12,000 home seekers.
For Iskandar Shah development, senior executives of foreign investors are already filling up our five-star hotels.
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