What booms will eventually bust

By Colin Tan, head of research and consultancy at Chesterton Suntec International.

When the property market is on a roll, it is easy to forget that property prices move in cycles – that is, prices can and will eventually correct. I know of no mature economy which has seen an uninterrupted and sustained upward cycle. Cycles are part and parcel of the function of the modern economy.

In the early days, the evidence suggested that the Singapore private housing market had a cycle – from boom to bust – of about six to seven years.

For a healthy and growing economy like Singapore’s, these cycles oscillate around an upward sloping long-term trend line – that is, each boom and bust is higher than the previous high and low points.

However, with the onset of globalisation and the opening up of the Singapore economy to the world, our cycles appear to be growing alarmingly shorter and more pronounced after each boom and bust.

The more pronounced and shorter the cycles, the more speculators and investors it will attract because there is big money to be made in double-quick time.

The official price index showed that our most recent down-cycle lasted only four quarters. Our current up-cycle has just completed its fourth quarter. The sharp rebound that began in the second half of last year was peppered with two sets of cooling measures, which some say, helped to extend the life of the current up-cycle.

How much longer will this extension last?

The private housing market these days behaves more and more like the stock market, given the predominance of investors over owner occupiers. Shoebox apartments are akin to penny stocks or warrants, more to speculate with than to live in.

It is quite clear that there is now a “buzz” about the Singapore economy which Prime Minister Lee Hsien Loong said was missing before. Foreign visitors tell me they feel it too, an excitement about the city which they did not experience on their previous trips.

This explains why our properties look extremely attractive to outsiders. Even foreign insiders, Permanent Residents who have lived in Singapore for more than 10 to 15 years and who have not invested in Singapore property in a big way before, are not hesitating to spend lots of cash – and I mean cash – for properties which catch their fancy.

Yes, the homes these people are looking at are all good, solid properties. But even for such properties, there is a fair price. Not one which is only fair 10 years down the road. What good is property as a hedge against inflation when you are already grossly overpaying for it?

But I cannot blame them. If not them, others are more than willing to cough up the cash.

Notwithstanding my red flags, I will also admit that the market will only correct when it is ready to do so. Before that, no amount of logical reasoning can convince the market to behave otherwise. Like a fever, it needs to run its course.

Some have commented that even if prices were to correct, they will never return to the levels five years ago. Normally, I would agree. But these are not normal times. Interest rates have been abnormally low for the longest sustained period ever. I would not be surprised even if prices were to descend to below those previous levels.

The market is surely building itself up to possibly the greatest crescendo in Singapore’s short property history. We are setting records – buying and supplying more than we have ever done before in the past twelve months.

Most investors tell me they are long-term players and they have the resources to hold onto their properties. What do they actually mean?

It was not so long ago that the Government was trying just to get every Singaporean household to own their homes.

Have we progressed so far and so fast that many households are now able to buy their second or third properties? Do these investors mean they can fully pay for all their properties to maturity?

Or do they mean they can comfortably service their loans for up to two or three years under current conditions. What happens when these conditions change? Are they taking low interest rates as a given?