Calling a spade a spade

It appears to be a word shunned by the authorities worldwide, to be avoided or used sparingly, usually when its effectiveness in a message is spent.

When the International Monetary Fund (IMF) released its 2010 Global Financial Stability report warning of problems in many of Asia’s property markets, the closest it got to characterising the markets as bubbles was when it described them as overheating and that “by some measures, valuations are stretched”.

On the other hand, the business world has no qualms in calling a spade a spade.

Dr Marc Faber aka Dr Doom did not mince his words when he warned recently that China’s economy may crash within a year.

The IMF is clearly worried about the possible contagion effects regional property markets may have on each other.

The world body has also noted that the proportion of real estate loans to total bank lending in Singapore was close to 80 per cent in Q4 2009. This is the highest for the quarter among the markets highlighted in the report.

The report states that in some markets – notably, China, Hong Kong, Singapore and Korea – price-to-rent ratios are “elevated”. It warns that the region’s booming real estate markets may pose risks to financial stability and that banks are “increasingly vulnerable” to a price correction.

However, recently released Q1 2010 real estate figures appear to suggest that in Singapore’s case, our price-to-rent ratios may be under control.

Our private property index rose moderately by 5.6 per cent compared to the two preceding quarters. Unless this can be shaved down further, it is still high. At this rate, we should see a rise of 22.4 per cent by year’s end.

How do we tell when a pace is too strong?

Although subjective we can arrive at a consensus. Let us say you need a property for your own use a year from now. Will you buy it today if you know prices will rise by 6 per cent after 12 months?

A comfortable pace is one which will not cause the majority of buyers to buy today when they need it only a year later.

But what caught my attention among the statistics released was the 4.3 per cent rise in rentals.

Price increases, no matter how strong, pose little risk if rentals rise at about the same rate. Sadly for investors, a closer examination revealed that there was an unusually high number of demolitions in Q4 2009.

Altogether 1,441 units were removed from the housing stock. This compares with an average of 266 taken out each quarter for the preceding four quarters.

This number was even higher than the 1,400 new units completed in the same quarter which means housing stock actually shrank by a net 41 units.

By comparison, the market registered an average net increase of about 3,000 units each quarter for the previous four quarters.

Hence the intense pressure for rents to rise.

But is this rise sustainable? While the net effect may be the same, a rental rise due to higher demand is very different from one due to a shrinking supply. The effect of the latter is one-off and may not be repeated.

Source: Today, 8 May 2010