How long can this bull cycle last?

THE property market’s ascent is welcome news to anyone who has lived through the boom and painful bust cycle of the 1990s. The relief would be acute for those who endured the black hole that a mortgaged property in negative equity would have put them. How long can this bull cycle last? For now, the signs are encouraging.

Plans to turn Singapore into a tourist capital, most visibly headlined by the billion dollar integrated resorts projects; coupled with the ongoing push to become a hub for private wealth management, higher education and various other initiatives are set to unleash structural changes that provide a solid underpinning for property values. These changes include new jobs and new expatriate residents who will be looking for homes. After all, Singapore’s home prices and rents, even with the recent spike, still lag those of developed markets.

The financial backdrop is also conducive. A thriving economy, relatively low interest rates and a buoyant stock market are conspiring to make risk taking seem a pretty easy proposition. The appetite for leverage, in particular, is growing, and recent data on home loans attest to this. In March, housing loans grew 3.6 per cent, the strongest pace in a year. The Credit Bureau’s preliminary data show a trend towards larger loans and banks report a rise in the number applying for second or third mortgages. For those who have invested and still are investing in property, the going looks good. Rising rents can easily cover loan instalments, and a reasonable holding period can produce profits in the triple digits. But those who think that ‘this time is different’ could rue their words. There are clearly a number of risks that could mar the Goldilocks scenario, even if these seem remote for now. Rising interest rates and job uncertainty can easily cause a heavily geared balance sheet to come undone.

Risk management is key, particularly for those who do not have the resources to hold the properties in the event of a downturn. A substantial number is likely to have bought uncompleted properties on deferred payment schemes and will be looking for a profitable exit. Timing will be critical, and yet timing is something even veteran fund managers get wrong. This is particularly so for individuals who tend to develop attachments to their investments.

The onus is then on individuals to exercise restraint. In this context, the recent move by the government to improve the transparency of the property market will be critical, as individuals count on publicly available data for their decisions. At the moment, developers often highlight record prices of homes sold, when average prices could present a far different picture. Details are currently being worked out by the Urban Redevelopment Authority.

Meanwhile, individuals would do well to remember that cycles are alive and recurring, even if the good times seem extended. Throwing prudence to the wind risks a recurrence of the black hole of negative equity, a prospect that is surely to be avoided.

EDITORIAL

Source: The Business Times, May 31, 2007