PRIVATE PROPERTY PRICES IN SINGAPORE - GUESSTIMATES

quote: "Success is a thought process"

Merrill Lynch & Co., Inc. Sells Collateralized Debt Obligations For Lone Star-The New York Times
Tuesday, 29 Jul 2008 07:20am EDT
The New York Times reported that Merrill Lynch & Co., Inc. has sold Lone Star almost all of its troublesome collateralized debt obligations, once valued at nearly $31 billion, for the fire-sale price of $0.22 on the dollar. (Source Google finance/Reuters)

Collaterised Debt Obligations are debt that are mixed with Sub-prime debt and packaged and sold as grade AAA debt/bonds. Obviously these bonds (CDOs) are not as safe as they seemed. I am puzzled by why Merrill Lynch sells their CDOs at S$0.22 to the S$1 dollar. Why such fire sale? It could indicate that they know something that we don't, it's much worst than we think it is.

Which is which?
Merrill thinks CDOs are worth 0.22 for the dollar
Blackrock thinks Sub-prime, Alt-A and some prime debt are worth 0.68 for the dollar.

If we use Blackrock as a benchmark, they have bought at a discounted 32% rate for US property loans which are backed by "in-troubled" property assets, then Singapore's case is no where as worse.

1. Property Supply and demand in Singapore is still fairly balanced (supply is still tight, equilibrium will likely be reached in 2011).
2. There is a lot of liquidity in the market, measured by M3 money supply.
3. The cost of financing a property has been reduced, marked by reduced Sibor, SOR rate.
4. While the economy is expected to slow down quite a bit due to the bleak US economic outlook, it is no where near dire.
5. The major banks are all well capitalized.

If someone holds me at gun-point to make a prediction, I would say private property prices will drop no more than 20% from current 2008 Q3 levels.

Your thoughts?

Singapore Property Price Trend

quote: "Success is a thought process"

Where is Singapore's Private Property prices headed? In order to make accurate guesses, many variables must be used to gauge the past and therefore determine/guess the future.

Let us take a look at the Singapore's M1 Money Supply.


Chart adapted from Monetary Authority of Singapore MAS time-series data.

According to Investopedia, M1 money supply is, "A category of the money supply that includes all physical money such as coins and currency; it also includes demand deposits, which are checking accounts, and Negotiable Order of Withdrawal (NOW) Accounts.

This is used as a measurement for economists trying to quantify the amount of money in circulation. The M1 is a very liquid measure of the money supply, as it contains cash and assets that can quickly be converted to currency."

In order words, M1 is a measure of how much money is in circulation. And overly quick acceleration of M1 money supply could stoke inflation if the amount of goods and services do not match the pace of the increase in money supply.

Let's take a look at the Singapore Private Property Price Index.

(Source: Singstat.gov.sg)

There do not seem to be much correlation between M1 supply and Property prices. So let's move on to look at the growth rate of M1 money supply. But what explains the huge increase in M1 supply? M1 stimulates the GDP though it is debatable whether there is a lag and how long the lag is.


Chart adapted from Monetary Authority of Singapore time-series data.

By looking at the above chart, it seems that M1 more or less track GDP, except that there is a run-away increase in M1. I am not quite sure what is the break-down or exact source of this increase. I am speculating that it is net inflow of investments from the 2 casinos (integrated resorts). But there is also one other factor, Singapore resident growth (Singapore Citizens plus Permanent residents) has always been rather flat, but if we take a look at the Total population growth (total population is Singapore residents + foreigners on employment passes and working permits), the year where it shrinks, the M1 supply is negative. Subsequent years where Total population has accelerated (largely through foreign employment pass growth), the M1 supply has largely accelerated. There seems to be some correlation.

Between 2005 and 2007, there is a dip in M1 supply, this I speculate could be due to it's conversion into Non-liquid assets, meaning during this time, this money could have gone into Properties and other asset classes which are non as liquid. (because M1 is a measure of liquid assets) By around 2007, the M1 money supply has continued to grow and accelerate. Around this time, the share market has tanked, property prices are showing slow down, and perhaps to an extend consequently, the M1 money supply continue to accelerate.


Adapted from data obtained from Singstat

If we look at the interest rates, it seems to track more closely to the GDP rates. Interbank rates are currently in the 1 to 2 % range. Previously when we see interest rate at this low is during the 2003 recession. This time, the interbank rates seemed to have tracked lower even before the GDP has reduced significantly with projections of GDP of 4 to 5%. This is also while inflation is at >8%. A strong possibility is that there is government intervention in the interbank 1 month, 3 month markets.

What this low interbank rate means is that it will be easier to support the cheap financing of properties and thereby reducing the number of distressed property owners dumping their units into the open market. The continue strong growth of the M1 money supply could perhaps be Casino's (IR) stand-by reserves which has not yet been converted to non-liquid assets or other capital investments.

Even if the M1 money growth rate is zero now, there is still some over S$70 billion in M1 supply. Not all of this currency is required for active transactional use. As long as this money doesn't flow outside of the country, it could still find it's way into non-liquid assets as long as there is a genuine demand.



Household formation in Singapore is about 25,000 a year. Nett immigration continues to be high.

With the onset of about over 30,000 units of private residential (non-landed) properties to be launched between now and 2011, with current stock levels at about 260,000 units at around 5.2% vacancy rate. By the time the total stock reaches 290,000 units, the demand would have more or less leveled. My guess is vacancy rate at around 7%, more or less at equilibrium.

So yes, USA is slowing down and will impact Singapore's GDP. But there is still ample M1 money supply in Singapore as well as a current property shortage.

My guess is that the prices will soften due to the drop in consumer confidence, leading to people hoarding money. While those with properties will hang-on to their properties largely helped by lower financing costs. Yes, I think the property prices will trend lower, perhaps easily by 20%, but I do not think it will be a doomsday prediction of 30 to 40% drop.

As long as there is ample money supply, Supply-demand equilibrium (Looks likely) and an improvement in business sentiment and outlook, you will suddenly see another rally. But don't expect that to be too soon. Maybe 1 to 3 years, it's anybody's guess.