Singapore Property: Do very well or very badly - Sep 4 , 2000

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INTRODUCTION: In the light of seeming over investment in real estate by Singaporeans, will property values continue to see stellar performance in the years ahead? Would the recommendations coming out of the Inter-ministerial committee on Aging and the initiative arising from changes to the CPF divert resources away from property and thereby condemn it to a relative under performer? We can observe that the life and vibrancy of a city where a critical mass of human talent and infrastructure is concentrated are highly valuable as long as they continue to produce wealth. If Singapore grow from an Asian city to a global one, its property values will rise. How expensive it will be is only a function of its importance as a global node. If Singapore fail to be a global node, it may have difficulty holding down an attractive position as a regional node. These days, the gap between winners and losers are big. For a city that has become a loser, property values will fall and talent will leave the place. There are more cities with ambitions to be global nodes than there is talent to go around. This game has no average performer. The winners take it all. Because property investing is usually illiquid and longer term, the driving forces, the timescale of this scenario we are painting here is relevant to you.	How to Read Maps Maps Investment Maps Business Maps Experts Maps Other Maps Local Interest
(Fig 1) Growing economy and rising income eventually lead to higher property prices and the expanded role of property beyond a roof over one's head and as a form of investment. Recent history has a strong influence on buyers decision making. Because property had performed well in the last few decades many people continue to think so. A reinforcing loop is set up between box 3 and box 4. The friendly attitude towards property purchase means that we are prone to creating property bubbles in Singapore.
(Fig 2) Over investing in property as a proportion of income and other forms of investments has led to a potential pension liability (box 5). Most people have most of their net worth stored in their homes. As they age, and they off load their property for cash in view of their retirement, property values will decline rapidly (box 5a, 6).
(Fig 3) An inter-ministerial committee led by Mah Bow Tan which had among other things looked into this. It had resulted in adjustments to the CPF scheme. We expect many more small adjustments to be made ahead with the net result of shifting away from an over dependence on property as a store of household wealth. (dotted line to box 4). Instead other forms of investments, especially unit trusts are encouraged (box 8). All these will reduce the share of savings going into property. It would appear that the best days for capital appreciation in real estate is behind us. The low investment yields from property is a sign that such assets are over valued. They are bought for capital appreciation and not for income generation. (Not in map) Going forward, it is risky to the economy if property prices heavily discount a rosy picture of the economy into the distant future. This is just a very positive way to describe a property bubble. Such bubbles can be sustained for years to the degree that we become used to it. The low income generating ability from real estate is economically abnormal. It is an evidence of a property bubble. If you look at a general property price chart, it has largely gone in one direction - up. Current property prices do not reflect any potential for price volatility. The government also stand ready to minimize such risks. As the biggest landlord it is able to do so. This is not the case in many western markets. This adds up to a slightly pessimistic outlook for property. But look beyond to the knowledge economy. If Singapore succeed at transforming itself from a regional to a global node, then the picture becomes totally different.
(Fig 4) Ultimately wealth is relative. With the discovery of the "New Economy", the US had distanced itself from everybody, and everyone including Singapore is racing to catch up with the US. Even for China catching up is a matter of survival. It can only be more so for Singapore. In the new economy, winners and losers are like are stars and extras in Hollywood. Winners win big, and losers are not remembered. For Singapore if it slides, it is likely to end up in the dustbin of history. Assuming Singapore can achieve more than US style productivity surges, there would be very good reasons to be optimistic about available resources for investing in property. As a proportion of total wealth, the sums set aside for property may decline. However the wealth pie could be expanding so fast that on the whole, the amount available for property is growing. As an example of what remarkable leaps in productivity could do, just look at agriculture. Malthusian predictions of global hunger had been met with the reality of agricultural surpluses. Non-farm productivity would do the same for manufacturing and services. With this let us look at the portion of the chart above which is colored blue - a scenario of the future. If we manage to squeeze the same type of productivity growth in our economy, confidence and income will rise at an unexpected rate (blue box 2 and 3). The pension liability we had feared and plan against may disappear. Is this possible? Note that less than ten years ago, the world could not imagine how the US could eventually get out of its fiscal mess. Today, it has the luxury to being retiring its fiscal debt.