Tuesday, August 19, 2008
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The fundamental case for property investing in the early 1990s was predicated on the rise of Singapore domestic demand. With economic stability and increased purchasing power built up over preceding years, it was time for asset enhancement in the 1990s. Young Singaporeans were being urged to marry and population control and immigration policies were being revised, adding to the demand for housing. Households were becoming increasingly double-income, increasing the purchasing power for big-ticket items. CPF balances were rising in-step with incomes, providing the financing means for purchasing expensive private property.
The sentimental case for property investing had been built up over the years. Since independence, the government had been promoting home ownership as a crucial tenet of nation building, and a huge majority of Singaporeans (~80-90%) owned the apartments they stayed in (mainly HDB). Hence increasingly over the years, property was seen as a good investment as prices were well-supported by the abovementioned government stand towards home ownership, the scarcity nature of Singapore property (the supply side), and perceived continued economic growth and stability (the demand side). Demand also trended towards more expensive private housing as people strove to upgrade their lifestyles. Many fellow Singaporeans will remember the Singapore dream built on the material five Cs: career/cash, credit cards, car, condominium, country club membership. Hence snob appeal and social aspirations accounted for an additional component of property demand meant for consumption.
Property as a comparative investing instrument was superior to other asset classes. There were few avenues for the less-educated to put their money: bonds had never been an Asian mass-market instrument, there was mass distrust of stocks due to their volatility (the market had shot up in 1993 and then dived back down in 1994), and money deposit rates were low. This also meant that housing loan rates were low (6% or less) and hence money was cheap. The unique standing of property as the only main investment instrument that could draw on the bulk of CPF funds enhanced its appeal; people tended not to think of it as "real money".
Given the above factors, property purchasing for consumption and investment soon turned into speculative buying. Stories of people buying an apartment for $500,000 and selling it for $700,000 a year later were part of the popular folklore. One apt description was that "people are buying property like groceries". This, of course, refers to the particular segment of property sales known as sub-sales, where people buy a property and then sell it off even before completion --- the most direct measure of speculative activity. At the height of the mania in the mid-1990s, there were the much-publicised midnight queues preceding condominium launches and the peaking of the highly reliable contrarian index known as the "market/coffeeshop auntie/uncle - buying, selling and recommending property" indicator.
All segments of the residential market were booming, including newbuilds, resales, public (HDB) and private housing (condominiums). From 1986 to 1996, the private residential price index rose by about 440%. About two-thirds of this gain was in the early 1990s up to 1996. See below for a graphical representation. There was a big merry-go-round as sellers became buyers of other properties, whose sellers then sourced for new residences. Over 1992-2002, 58% of the 3-million population changed homes. Among private homeowners, it was almost 70%. This created an upward spiral of property prices that was exacerbated by the speculative elements.
In 1996 the government introduced regulations to cool property speculation, which included heavy taxes on profits made from property sold within three years of purchase --- a measure targeted at property speculators. It had to end somewhere. Rocketing property prices were increasing the costs of living, driving some citizens out of Singapore and decreasing its long-term business competitiveness. The private residential property market prices collapsed; the end of the bull market was confirmed by the 1997-98 Asian financial crisis that destroyed foreign demand drivers from the ASEAN region. With the exception of a minor mini-rally in 2000, private housing prices had dropped 30-40% by 2003, since they peaked in 2Q96. The HDB resales market was better although it was never to reach the heights of 1996, primarily because the government was careful about its impact on ordinary, less well-off Singaporeans.
Still, the damage had been done. The term "negative equity" is used to describe a situation where the difference of the investment's market value and the debt incurred in financing it is negative --- a predicament that many Singaporeans have been stuck in. The plunge in residential-property prices also had an impact on private consumption - fewer owners were able to withdraw equity from their homes to borrow against the increase in value to finance other consumption. As a result of heavy investments in property, Singaporeans are asset-rich and cash-poor, even counting their CPF retirement money. It is an example of how investments based on solid fundamentals can turn into speculative buying egged on by peer pressure to "make money while it lasts"; when the primary driver is sentiment and liquidity rather than fundamentals, it can be prone to sudden drying of liquidity that causes prices to plunge. In this case, the reversing of government policy towards controlling asset inflation just happened to be the catalyst that caused the U-turning of residential property prices. Even if it had not taken place, the hit would still have been suffered in the 1997 Asian financial crisis. It was a disaster to happen, and as always, it was one that was precipitated by human envy and greed, in my view.
Posted by Anonymous in the Singapore Property Forum
May also want to read:
History of Singapore Property 1960 to 2008
Buy or Not Buy: How to decide amid mixed market signals
When to Buy, When Not to by
Property Price Index Graph Plotter & Online Property Valuation
Your Property Investment Determines Your Financial Success in Your Life
HDB Resales: West Sees Highest Price Increase
Property Boom in the 90s: Why did Singaporeans become asset-rich and cash-poor
Nowadays, not a day passes without the papers reporting bullish news of prospective property deals; some argue that the residential property market is in the beginning of a new secular boom that could spread to the lower-end housing markets while others are significantly more cautious and cynical. In both camps the comparison is inevitably done with the property bull market of the early 1990s, when this asset class reached speculative heights and ultimately became a bubble that was pricked by consecutive blows of government regulatory measures and regional political trouble.The fundamental case for property investing in the early 1990s was predicated on the rise of Singapore domestic demand. With economic stability and increased purchasing power built up over preceding years, it was time for asset enhancement in the 1990s. Young Singaporeans were being urged to marry and population control and immigration policies were being revised, adding to the demand for housing. Households were becoming increasingly double-income, increasing the purchasing power for big-ticket items. CPF balances were rising in-step with incomes, providing the financing means for purchasing expensive private property.
The sentimental case for property investing had been built up over the years. Since independence, the government had been promoting home ownership as a crucial tenet of nation building, and a huge majority of Singaporeans (~80-90%) owned the apartments they stayed in (mainly HDB). Hence increasingly over the years, property was seen as a good investment as prices were well-supported by the abovementioned government stand towards home ownership, the scarcity nature of Singapore property (the supply side), and perceived continued economic growth and stability (the demand side). Demand also trended towards more expensive private housing as people strove to upgrade their lifestyles. Many fellow Singaporeans will remember the Singapore dream built on the material five Cs: career/cash, credit cards, car, condominium, country club membership. Hence snob appeal and social aspirations accounted for an additional component of property demand meant for consumption.
Property as a comparative investing instrument was superior to other asset classes. There were few avenues for the less-educated to put their money: bonds had never been an Asian mass-market instrument, there was mass distrust of stocks due to their volatility (the market had shot up in 1993 and then dived back down in 1994), and money deposit rates were low. This also meant that housing loan rates were low (6% or less) and hence money was cheap. The unique standing of property as the only main investment instrument that could draw on the bulk of CPF funds enhanced its appeal; people tended not to think of it as "real money".
Given the above factors, property purchasing for consumption and investment soon turned into speculative buying. Stories of people buying an apartment for $500,000 and selling it for $700,000 a year later were part of the popular folklore. One apt description was that "people are buying property like groceries". This, of course, refers to the particular segment of property sales known as sub-sales, where people buy a property and then sell it off even before completion --- the most direct measure of speculative activity. At the height of the mania in the mid-1990s, there were the much-publicised midnight queues preceding condominium launches and the peaking of the highly reliable contrarian index known as the "market/coffeeshop auntie/uncle - buying, selling and recommending property" indicator.
All segments of the residential market were booming, including newbuilds, resales, public (HDB) and private housing (condominiums). From 1986 to 1996, the private residential price index rose by about 440%. About two-thirds of this gain was in the early 1990s up to 1996. See below for a graphical representation. There was a big merry-go-round as sellers became buyers of other properties, whose sellers then sourced for new residences. Over 1992-2002, 58% of the 3-million population changed homes. Among private homeowners, it was almost 70%. This created an upward spiral of property prices that was exacerbated by the speculative elements.
In 1996 the government introduced regulations to cool property speculation, which included heavy taxes on profits made from property sold within three years of purchase --- a measure targeted at property speculators. It had to end somewhere. Rocketing property prices were increasing the costs of living, driving some citizens out of Singapore and decreasing its long-term business competitiveness. The private residential property market prices collapsed; the end of the bull market was confirmed by the 1997-98 Asian financial crisis that destroyed foreign demand drivers from the ASEAN region. With the exception of a minor mini-rally in 2000, private housing prices had dropped 30-40% by 2003, since they peaked in 2Q96. The HDB resales market was better although it was never to reach the heights of 1996, primarily because the government was careful about its impact on ordinary, less well-off Singaporeans.
Still, the damage had been done. The term "negative equity" is used to describe a situation where the difference of the investment's market value and the debt incurred in financing it is negative --- a predicament that many Singaporeans have been stuck in. The plunge in residential-property prices also had an impact on private consumption - fewer owners were able to withdraw equity from their homes to borrow against the increase in value to finance other consumption. As a result of heavy investments in property, Singaporeans are asset-rich and cash-poor, even counting their CPF retirement money. It is an example of how investments based on solid fundamentals can turn into speculative buying egged on by peer pressure to "make money while it lasts"; when the primary driver is sentiment and liquidity rather than fundamentals, it can be prone to sudden drying of liquidity that causes prices to plunge. In this case, the reversing of government policy towards controlling asset inflation just happened to be the catalyst that caused the U-turning of residential property prices. Even if it had not taken place, the hit would still have been suffered in the 1997 Asian financial crisis. It was a disaster to happen, and as always, it was one that was precipitated by human envy and greed, in my view.
Posted by Anonymous in the Singapore Property Forum
May also want to read:
History of Singapore Property 1960 to 2008
Buy or Not Buy: How to decide amid mixed market signals
When to Buy, When Not to by
Property Price Index Graph Plotter & Online Property Valuation
Your Property Investment Determines Your Financial Success in Your Life
HDB Resales: West Sees Highest Price Increase
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9 comments:
Excellent piece of analysis.
One conclusion is that the Government should consider be more involved in regulating the private property market ensuring an orderly and sustainable property market in Singapore. We are a City only and cannot compare to New York, London,Hongkong, Tokyo or Sydney. These cities in USA, UK, China, Japan and Australia are rich in land. We are limited in space and land. We cannot afford high private property (especially ondominium) prices to be left unchecked and exposed to speculations or in the hands of a few powerful developers. Soon, we priced ourselves out and become expensive place to live in not only for talented foreigners but our fellow citizens will be worst of.
Making Singaporeans asset-rich and cash-poor is also the government's strategy for increasing the stake of Singaporeans in this little dot. Government is therefore ok with speculation pushing up property price, until and unless the speculation gets out of hand and becomes a threat to the stability of our financial instituions.
Agree that the government is allowing the price to goes up(within their mean like control the supply of land). That will help rich individuals and institution stay in Singapore. The way we are going, we can be like Hong Kong in the future. (At least Hong Kong people who cannot afford the expensive life in Singapore can move to China.
The government will notice how every time the property price shoots, the number of young Singaporeans migrating also increases. The young, talented Singaporeans are very mobile. We may be left with the not so talented, poor and old Singaporeans. We cannot go on depending on immigrants from China and India. Their economies will surpass ours in the next decade. The government have to work harder at retaining our local talents first. The ECs and DBSS are government's strategy to meet housing needs of these Singaporeans with higher aspirations. But, they are too expensive and paying for them means sacrificing a lot of other things which define a higher quality of life like time available for family, pursuit of personal interest ... Now, it's all about work, work, work and then, pay off your mortgage, get old and die ..
I've been forced into retirement because of ill-health but I still have to pay for my HDB mortgage. I want to join the HDB buy back scheme but friends say it's a bad deal. Should I sell my HDB flat in the open market or sell to the government ?
I really regret upgrading to a bigger HDB flat at the 90s peak .. otherwise I can retire with no mortgage and no worries..
I wonder just how many Singaporeans have enough money in their CPFs to retire after so much of the CPF is used for paying housing loans?
Both my hubby and I are grads and have been working for the past 2.5 yrs. We are just married but no sign of getting a flat due to sky high prices. It's a frustration that many of our grad friends face too...Even as graduates, we are worrying ALOT and facing issues with cost. I really do wonder how the non-graduates are facing the mounting pressures of living in Singapore.
If well-educated young couples feel squeezed by the sky-high property price, then what about those with little education? Are they destined not to marry, have a family and have children?
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The blogger here has been affectionately named by close allies as "Smart Buyer" but really, he's not smart. Smart Buyer just believes that being prudent is smart. That's the essence of the message of this blog and Smart Buyer hopes it'll benefit other property buyers.
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