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Sunday, 22 February 2009

Property prices, how much lower can it get?

I read with interest an article published today on Sunday Times, 22nd February 2009, Keen to cash in on mortgage sales? Quoting from the article,

'... potential buyers are "coming in floods", asking to be on her company's list or calling about properties on offer. ... but it is very difficult for us to strike a deal because the buyers are putting in very low offers. They want to go only for a killing...'

looks like the current economic crisis have lured out these buyers, waiting to pounce on distressed fire sales. Though prices had came down recently from the peak, I do wonder whether these prices are reasonably cheap, even under a fire sale?

A picture tells a thousand words

A picture tells a thousand words, so 4 pictures should tell an even better story:

*2008's GDP growth and GDP are taken from advance estimates.

src: The data for Singapore GDP comes from; STI index from; HDB resale price index from; private property price index from

I compile 4 graphs into one above, trying my best to align them in the same time line I could. The graphs are, from top down, Singapore GDP and growth, STI index, HDB resale price index and private property price index.

Indicated on the graphs are 4 red lines, each indicating the 4 significant events affecting Singapore's economy, namely Asia Financial Crisis, Dot Com bubble burst, September 11th terrorist attack in the US and SARS crisis.

From the graphs, I found the following:
  1. Property prices (both private & HDB) are much higher now than during each of the 4 crisis.
  2. GDP growth is badly hit during each of the 4 crisis and Singapore entered into recession (-ve growth) during 2 of the them, Asia financial crisis and SARS.
  3. V-shaped GDP growth recovery seems to mark the bottom of the property prices, around beginning of 1999 and during the period from 1Q02 to 1Q05.
  4. No conclusion to be drawn for relationship between property prices peak and GDP growth.

Reasons to wait further

If it is true that the current economic crisis is worst since 1930s great depression and even worse than Asia Financial Crisis (this time the crisis affects not only Asia but US and Europe as well), then I don't really see how the prices at current level are justified in any way.

In simple reasoning, the fire started in US, then spread to Europe. They contributed most of the demand for goods and services produced or outsourced to emerging economies, particularly in Asia. With US and Europe in trouble, the vast factories in emerging economies producing goods for export became idle or redundant. The MNC branches in these economies either scale down their operations (restructuring leading to retrenchments) or simply closed down.

For Singapore, I believe (no data to support my opinion, just reasoning) most of the housing rental demands are driven my foreign talents, expatriates or just simple foreign workers including permanent residents. It does not make sense for them to buy properties if they meant to leave Singapore eventually. Thus it becomes lucrative to purchase properties, especially private condominiums and renting them out. During the last few years, the rentals had been shooting for the moon and I remember seeing on TV some expats complaining about the rents are getting more and more unreasonably high.

Similar to any other economies, when companies restructure, it is a natural consequence that many laid off are foreign labour. Their departure will meant downward pressure on rents. Property prices will follow suit when the severely reduced rents no longer make holding these assets at high mortage payments sustainable.


Graphically and logically, property prices have a long way to go before the price is deemed reasonable. Property is a game of patience and tolerance. The owners of crazy sky high buys will try to hold as long as they could while the fire sale type buyers would have the capacity to wait too, they are not desperate to get a roof over they heads, I presume.


Sunday, 8 February 2009

Global Interest Rates and Foreign Currencies

Almost every month, there are news of some central banks in some corner of the earth slashing their interest rates to fight the ongoing credit and financial crisis. These came along with aggressively generous economic stimulus packages by various governments, drawn from reserves or borrowed from future generations. Theoretically, the potential amount of money flooding the market is sufficient to create a tsunami, devaluing their currencies and loosening credit. But I see no sign of any minute rise in tide across the horizon.

Global Interest Rate Trend

The above chart shows the Interest Rates of some key central banks. The aggressive slashing of the interest rates can be seen quite clearly and if extrapolating the trend make any sense, all are headings towards 0%, following the lead of Bank of Japan (BOJ) and US Federal Reserve (FED).

Signs of bottoming?

It seems to me that various currencies (against SGD) have more or less bottom out not because things had gotten better. Some governments are still borrowing, some are still printing money quite aggressively. But because most of what can be done are already done. Doing more actually does not have much impact now (other than potentially creating new bubbles for the future). What's left to do really, is to let the market consolidate, weed out the excesses and patiently wait for the dust to settle, i.e. clear the debris and start afresh.

Potential Actions

Without taking into account whether MAS will change its stance on SGD policy in the next deliberation in April, I am considering the number of options I had to take advantage of bottoming currencies.

Foreign Currency Fixed Deposits

A check on UOB foreign currency fixed deposit rates show some expectedly disappointing rates (mirroring the recent aggressive rates cuts above). USD, for example, had no interest on 3 months fixed deposits and NZD only offer 1.83%, a far cry from a year ago. Thus, unless my intention is capital preservation, these fixed deposits are still not appealing at all.

Equities quoted in foreign currencies

A check with SGX shows up a list of equities trading in foregin currencies, e.g. USD, HKD and AUD. Most of these equities are quoted in USD, a number in HKD and AUD. HKD is still pegged to USD and the equities quoted in AUD are mostly (unappealing to me) property developers. Thus what remained interesting are those quoted in USD.

A few interesting ones are Chemoil Energy Limited, Lyxor Commodity CRB Fund and Pacific Shipping Trust. Chemoil Energy is an integrated supplier of marine fuel products. It is currently trading slightly below book value and about 5.2 times rolling P/E. It could bounce back when the marine sector recovers. However, at about 4.3 times debt-to-equity ratio, it remains to be seen whether it can survive the ongoing credit crunch.

Lyxor Commodity CRB Fund tracks a basket of future contract on commodities, especially energy, metals and agricultural products. Assuming demand on commodities will eventually recover, there should be sufficient upside if one is willing to take a long term view on this.

The most interesting one is none other than Pacific Shipping Trust. Without any short term refinancing risk and no asset-to-loan covenant to worry about, Pacific Shipping Trust should be able to ride out the current storm quite comfortably. Perhaps the only treat to its dividend distribution is one or more of its charterers going bust. Its relatively high dividend payout per quarter of about 0.9 cents USD (about 24% yield) should be quite sustainable despite having to pay off an amortizing loan due to its long term leases.


Most major economic power houses in the developed west are in recession and the export-oriented emerging economies are beginning to struggle despite building up massive reserves after the Asia Financial Crisis. The aggressive interest rate cut by so many central banks almost all at the same time and seemingly racing toward zero simply meant a collective weakening of their currencies. But currencies are relative in nature. Thus, I believe their value vs SGD have neared or reach a bottom. Other than riding on severely battered equities for the huge potential upside when the business cycle eventually recovers along with the general economy, why not give it a an additional boost of forex leverage.

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