Note: The author made some wrong assumptions:
1) interest rate will go up in 12-13. Wrong! US interest will not go up, at least not until late 2014.
2) Global funds will not flow into the market.
In 2011, buyers from China were the biggest group of foreign property buyers in Singapore. (Yahoo! file photo)
By Dennis Ng
In 2011, buyers from China were the biggest group of foreign property buyers in Singapore. But if you are counting on foreigners to continue buying properties in Singapore in 2012 and 2013, I am afraid to say that you may be disappointed.
The following factors are worthy of our consideration when studying the prospects of the property market in the next two years.
Factors that determine Singapore's property market
Since interest rates are at a historical low now, it can only go up from here, and not down. In fact, interest rates on home loans can shoot up to 3 per cent to 4 per cent. In my opinion, this could probably take place in 2013 when U.S. interest rates start to climb due to the threat of rising inflation.
In the next two years, more than 30,000 condominium units will be completed. With a huge supply of new condominiums, do you think rental rates would go up or down? So when rental rates indeed go down and interest rates go up, would this make property investments more attractive or less attractive? With rental yield now at 3 per cent to 4 per cent, what would the revised rental yield be when rental rates drop? Would some properties go from yielding positive cashflow, where monthly rental income exceeds monthly housing loan installment, to having a negative cashflow?
In addition, HDB built 8,000 units in 2008. But in 2011 and 2012, HDB is going to build 25,000 units in each year, totaling 50,000 units in the span of two years. With supply of both condominiums and HDB flats expected to surge in the next two years, coupled with an economic slowdown as a result of the next global financial crisis, do you not think that the demand for properties would drop?
Singapore aside, given that the U.S. and Europe, each constituting 23 per cent of the global economy, are likely to experience an economic slowdown in 2012, the rest of the world seems to be headed for another recession. And when that happens, would a global recession, coupled with global sovereign debt problems, especially in the Euro zone and U.S., not trigger a global financial crisis?
By considering all the above using an upside / downside analysis, do you think Singapore's property market presents more upside potential or downside risks? And what will your decision be as to whether you should invest in condominiums now?
We should not just look at Singapore's property market alone
Apart from casting our sights on the local economic situation, we must also track closely the activities in Hong Kong. Why is this so? Well, this is because Singapore and Hong Kong are always closely linked in terms of property market trends and movements.
With respect to this, most market players have the impression that property prices in Singapore are slightly lower than prices in Hong Kong. So if Hong Kong's property prices fall, Singapore's property prices might fall as well.
So, with the latest land sales in Hong Kong fetching prices that are below market expectations, could this be a possible sign that the Hong Kong property market is beginning to go downhill?
As it is, Hong Kong's government—which is boosting the supply of land to try and curb a more than 70 per cent surge in home prices since early 2009—has already sold two sites in August 2011 that missed estimates as home price gains have stalled. This is due to concerns that the economy is sliding into recession. The Hang Seng Index (HSI) also fell 23 per cent from its November 2010 peak to below 18,000 points in September 2011.
According to figures released by the Hong Kong Land Registry, August 2011 home transactions experienced the biggest drop since February 2009. An index tracking home prices, compiled by Centaline, fell in June and July—the first consecutive monthly drop since December 2008.
Vincent Lo, chairman of Shui On Land Ltd., had reportedly said, "The last few weeks, the property market has come down a little and transactions have virtually stopped."
Echoing similar sentiments, Yu Kam-hung, a Hong Kong-based senior managing director for valuation and advisory services in Greater China at CB Richard Ellis Group Inc., said, "Property prices will start to decline soon and we are likely to see that in the rest of the year."
He reportedly added that "Prices will trend down by about 10 per cent in the next two years and I don't rule out the chance that they may fall as much as 20 per cent in the worst case scenario."
Property buyers from China may not continue their buying spree in Singapore. As it is, I am beginning to hear from some Chinese business owners that there is increasing difficulty for them to obtain loans in China. And some of them already know of friends who are starting to have cashflow problems in China. So if China business owners have cashflow problems, do you think they will have the ability or willingness to continue snapping up properties in Singapore in 2012 and 2013? Probably not.
In my opinion, the global financial crisis has already started, but most people just do not feel it yet. In fact, they won't find anything amiss until things become very ugly. When that happens, market sentiments can make a 180 degree flip within a very short time.
Many people, especially the middle-class Singaporeans are still happily buying properties. That said, my millionaire mentors and I are least interested in buying properties, especially condominiums, because the proposition simply failed our rule that upside must be at least double the potential downside.
But it must be said that I could always be wrong. When it comes to investing, we cannot afford to be overly confident. We must be mindful of the possibility of being wrong. So even if property prices rise instead of fall, I would only make less money by not buying more properties now, which is fine by me.
Personally, the number one investment question that I always ask is, "What if I'm wrong, will I be financially okay?" Next, I would do a simple upside / downside analysis and only invest when the upside is at least double the downside.
While these two investment rules may seem too simple to be true for some people, they have indeed helped me make millions of dollars and prevented me from suffering substantial losses thus far.
In this respect, it seems like I am able to see the future not because I have some supernatural abilities, but because I train myself to be logical and rational when analysing information and drawing my own conclusions.
In my books and seminars, I share this thought process that I personally go through, before making any investment. Since this thought process is made based on hard facts, anyone can arrive at the same conclusion by going through this process, unless he or she already has a biased view of the market.
And if you think that instead of investing in condominiums, you would be better off investing in commercial properties, as some seminar trainers are now advocating, do think again. Recently, I spoke with two multi-millionaires who specialise in investing in commercial properties. And they shared with me that the upside / downside is not working in the investors' favor. In fact, they are also not considering buying more commercial properties, but may sell if the price is attractive enough.
I also have a friend who bought a commercial property near Tai Seng MRT station in 2010, where its location is obviously rather convenient. The property's temporary occupation permit (TOP) was in May 2011, but even after a few months, he still has not found a tenant. This is in spite of the theoretical rental yield of about 5 per cent to 6 per cent based on current property prices.
With all above information provided, you should be in a position to decide for yourself the prospect of Singapore's property market. At all times, do remember that hope is not an investment strategy. Every investment can only be taken into consideration after doing your homework. Only after doing your research based on the available information, would you be able to take a calculated risk.
Dennis Ng is director of Leverage Holding and Master Your Finance. This article is posted courtesy of www.Propwise.sg, a Singapore property blog dedicated to helping you understand the real estate market and make better decisions.