This write-up was reproduced with permission from Ray’s Estate Clinic, written by Founder, Raymond Chng. Please refer to the end of the article for more information on Raymond.
We are currently in unprecedented times (as of writing in April 2020). Covid-19 is upon us as a global pandemic which will go down in history books as the gravest health crisis mankind ever faced in this century.
Over the past few weeks, I had the fortune to converse and interview numerous Seniors (our Merdeka & Pioneer Generation) whom I knew for some time already. The wiser generation I interviewed range from former C-suite executives, Directors of MNCs and Business owners on their insights about this crisis. Many said that even in previous financial crises and during SARS, planes could still fly and we did not have to ground most of the planes. However, due to large scale travel restrictions, we see countless aeroplanes parked at Changi Airport, when parking spaces are either usually empty, or most planes are docked at the aerobridge.
The global disruptions did not only cause a significant slowdown in tourism, it also affected the majority of Small Medium Enterprises (SMEs), which include Food and Beverage (F&B), Travel Agencies and numerous other businesses. It can be described as there is a consumption (or demand) shock, because most of us have to stay home.
In the aftermath, a severely damage the economy will consequently have massive job losses, which are to be expected. The unemployment numbers in USA had already spiked sharply. There is an estimated 16 million people unemployed in the US and there will be many more around the world. In Singapore, we may be considered fortunate as the Government came up with economic stimulus packages to save or preserve jobs, it is likely that we will not be spared the unemployment onslaught.
Despite being an optimist, I would also consciously remind myself to be a realist. We hope for that best, but also recognize the reality that is apparently in front of us. To this point, it is very plausible that we may be facing a Depression, which many of us have not seen or ever experienced as the last was in 1929. For some of the younger generation, we missed the Great Recession, like the one in 2008. Either way, the outlook is not rosy and it prompted me to research more, where the findings will be discussed later in this article.
This article has 3 sections. In order to create a roadmap for crisis management, we look back at history for clues, and therefore the first section looks at what happened in past crises. In the second section, we analyze the current situation and project plausible scenarios. Finally, after understanding the current situation we are in, we look at how to benefit from the coming Depression, or Recession.
A) What happened during the 2008, 2000 and 1997 Crises?
Global Financial Crisis (2008)
In this section, we will analyze prices of Singapore Stock Market and Private Property Markets to look for price relationships. We analyze the Private Property Market because we believe it is most indicative of the Residential Property Investment market.
Image 1: Singapore Private Property Price Index, Source: URA, Edited by: RaysEstateClinic
During the 2008 US Subprime Mortgage Crisis also known as the Global Financial Crisis (GFC), private property prices in Singapore fell by 24.9%.
Image 2: Straits Times Index period 2008, Source: Tradingview.com, Edited by: RaysEstateClinic
The Singapore Stock market (STI) fell by 58.2% in the same period.
Dotcom Bubble + SARS (2000-2003)
Image 3: Singapore Private Property Price Index, Source: URA, Edited by: RaysEstateClinic
During the 2000 Dotcom bubble and SARS outbreak which happened back to back, private property prices in Singapore fell by about 20%.
Image 4: Straits Times Index period 2000, Source: Tradingview.com, Edited by: RaysEstateClinic
The Singapore Stock market (STI) fell by 51.2% in the same period.
Asian Financial Crisis (1997)
During the 1997 Asian Financial Crisis, the private property market fell by 44.9% (as seen in image 3 above).
Image 5: Straits Times Index period 1997, Source: Tradingview.com, Edited by: RaysEstateClinic
The Singapore Stock market (STI) fell by 64.9% in the same period.
Review of the past 3 major crisis performance
Image 6: Analysis of crisis performance, Source: Bloomberg, Various sources, Compiled by: RaysEstateClinic
While reviewing the past 3 major crisis in Singapore, I wanted to find out how the Singapore stock market and private property market would move. In the image above, the performance of the stock market (Straits Times Index or STI) and private property market (SGP) were both analyzed.
The results showed an interesting relationship between both markets. The Singapore property market moved 39%, 43% and 69% of the STI movement while the average performance ratio of the past 3 crisis is 50%.
In other words, what this would mean is if the Singapore stock market drops by 50% in the crisis, then the Singapore private property market is likely to drop by about 25%.
Now that we have an idea how both the Singapore stock and private property markets performed during each crisis, let us review what the Singapore Government did during each crisis.
Review of Singapore Government Stimulus in past crisis
Image 7: Government Interventions in private residential market, Source: Photo Image from Book – Singapore’s Real Estate 50 Years of Transformation by Seek Ngee Huat, Sing Tien Foo & Yu Shi Ming.
The Singapore government has tools to stimulate and cool the markets when necessary. We are currently (as time of writing) still in an Anti-cyclical (cooling) phase where property cooling measures have been in place over the last 7 years. There has been some questions on whether we will see Pro-cyclical (stimulus) measures soon, so let us look at the Pro-cyclical measures or stimulus that the Singapore government had in place during both the 1997 Asian Financial Crisis and during SARS.
Image 8: The government’s property market stimulus measures, Source: Singapore’s Real Estate 50 Years of Transformation by Seek Ngee Huat, Sing Tien Foo & Yu Shi Ming.
In both the Asian Financial Crisis and the Dotcom & SARS Crisis, the government’s stimulus packages include control of land sales, property tax and property completion period (PCP) for developers.
These measures introduced were part of is a multi-pronged approach that was proposed by the Property Market Consultative Committee’s Report released on 6 February 1986. The strategies cover three aspects, namely
a) Controlling Supply
b) Stimulating Demand
c) Improving market confidence
The above is our summary from the “Singapore’s Real Estate 50 Years of Transformation” Book. Readers who would like to find out more can consider reading up further as we will not discuss the contents book here.
After reviewing the stimuli introduced by the government for these two crises, we can be confident that stimulus measures do not produce immediate results. In other words, Property prices will remain weak for some time before recovering because market sentiment and confidence has already been damaged.
Now that you know what happened in the past, let us look at what is likely to happen over the next few years.
B) What could happen in 2020 and beyond?
Review of current Singapore Residential Property Market
A good process for finding out what could happen, is to first look at where we are in the current market cycle, we will explore that in this section.
HDB Resale Market
Image 9: HDB Pricing Index, Source: HDB, Edited by: RaysEstateClinic
From 2013, HDB Resale prices have been on a downtrend. Just recently, the government increased the income ceiling for HDB buyers as well as increased CPF housing grants available for HDB resale buyers. The HDB market seems to be bottoming.
Looking back further, it is interesting to note that during the 2008 Global Financial Crisis, HDB prices did not fall much.
Image 10: HDB Resale Volume 2007 to 2019, Source: Data.gov.sg
HDB resale transaction volumes have remained stable from 2011 to date. What is interesting is HDB resale transaction volumes had a huge jump in 2008 and 2009. One possible reason is that during a crisis, property owners who were over leveraged and/or their business in trouble actually had to sell their private condo or landed and move to a HDB flat.
Personal Views on the HDB market
With the current Pro-HDB resale policies, HDB resale market is likely to remain resilient. Crisis or not, we need a home and HDB is an essential basic need for most Singaporeans young and old. To add on, if we do go into an economic depression or a great recession, then the likelihood of people buying a HDB increases because of both the evergreen demand of a HDB flat from home buyers and potential additional HDB demand from people who need to downsize to raise cash. This is an opportunity for HDB owners which we will explore in the next section of this article.
Private Non-Landed Residential Market (Condo)
Image 11: Private Property Price Index, Source: URA, Edited by: RaysEstateClinic
Private Residential Property Price Index had trended down by 11.6% since the 2013 cooling measures (TDSR). After bottoming in 2017, prices have reached the previous 2013 peak (indicated at the Resistance 1 line or R1).
It seems that pre Covid-19, private property buyers have been buying properties mainly for the purpose of capital gain. The same buyers seem to have the idea that property investment is low risk and is almost a sure win. Our view is that this is a dangerous mindset. Real Estate is naturally a leveraged asset (most of us take loans), so if prices do fall, losses will be amplified. On the other hand, properties can be a good investment if one purchases a good value, recession resilient property.
Readers who have read our views about the New to Resale property price gap at all-time highs (Some new property price psf are 60% higher than surrounding resale properties) will know that many properties today are overvalued, in particular some new properties.
If a property buyer is looking for capital gains, the probability that the buyer will see capital gains is much lower in today’s market.
With Covid-19 disrupting the global economy in full force, the probability of huge job losses is close to 100%. With job losses and poor business environment comes potentially higher defaults in mortgage payments. Fortunately, this is unlikely to happen in 2020 as Singapore banks will allow deferment of payments till the end of 2020. The question is what happens after 2020?
Even if the banks extend the mortgage payment deferments beyond 2020, that does not mean that these distressed property owners will not want to sell their properties to raise cash for their spending and/or business cashflows. The ability for businesses to maintain cashflows in crisis is an important indicator for mortgage defaults and fire sales in a crisis.
Based on the backdrop of current high property price valuations, high likelihood of massive job cuts in a number of industries and coming shifts in market sentiment, we believe this is the time to be patient and be a bargain hunter.
From the chart above, Support 1 and 2 (S1 and S2), are lines of potential support for the private property market index. In conjunction to the most probable environmental scenario, we believe that a 10% move back down to S1 is the 2017 low is highly likely.
After prices reach S1 (-10%), the next support at S2 appears to be really strong. The expectation of prices going down to S2 (-40% total) is relatively low at the moment, but we recognize that it is not impossible. In 1997, when the crisis was “closer to home”, property prices dropped by almost 45%.
What might be more probable, is the Private property market index see a price drop somewhere around 20% before recovering. If we correlate that the property market index would move about 50% of the move that our Singapore stock market moves, 20% dip in property markets is realistic.
The next consideration is about Quantitative Easing (QE) Infinity which the US government is implementing. Since 2008, QE1 to QE3 had flooded the financial markets with cheap money, and attributed to our asset price inflation in Singapore. In contrast, there were not massive job losses when QE1 to 3 was in force. We are now facing a depression-like unemployment situation, consequently, the effects of QE infinity may be significantly discounted.
We have looked at what has happened in the last few crises in Singapore but the crisis we are currently facing may not be exactly the same. The last economic depression was in 1929, and many of us including our parents were not alive then. If the global economy goes severely into a depression (the worst case scenario), then any of the above analysis would probably dwarf what will happen. This is the time to be really careful and understand that history does not always repeat itself but it usually rhymes.
Private Landed Residential Market
Image 12: Private Landed Property Price Index, Source: URA, Edited by: RaysEstateClinic
Landed property is the scarcest segment (4%) of the property market, and this segment has had a very good run. If Singapore’s economy goes into a prolonged recession or a depression, the landed market will likely be most affected.
The general market believes that landed property owners should have the resources to continue payment or should have a lot of savings. This may not be true, because majority of landed property owners are sophisticated investors and may have borrowed money to invest in stocks and their businesses. Majority are retirees, who may have taken up equity loans to reinvest in REITS and blue-chip stocks. That is why before recessions, we start to see more bungalows on the market for sale.
Adding to that, we have an aging population in Singapore and our assumption is based upon the majority of landed property owners are above 55 years old because of the quantum and financial resources needed to own a landed property. This group of property owners may be looking to sell their asset to fund their retirement over the next 10 years, particularly if their other assets are no longer performing. While based on our interactions the largest group of new property buyers, the millennials, have a preference for condominiums. If this is true, there may eventually be a supply & demand imbalance for the landed property market.
To look at potentially where prices could go to, we draw support and trendlines in attempt to look for potential downside targets. In the chart, you can see support lines potentially at S1 (which is the 2017 low) and S2 (trend line support since 2005), which is about -12.5% and -28% respectively.
Will cooling measures be lifted?
Going forward, if property prices go into a free fall, I believe that the Singapore government will stimulate the property market. Just like in the past, it is likely that the developers first help the developers and curb supply (reducing land sales), before stimulating demand (increasing Loan-to-Value ratio or reducing ABSD). If history repeats itself, we can expect that the markets will not immediately move up after cooling measures are lifted.
We believe that the government would increase LTV ratio from the current 75% to pre-cooling measure 80% and potentially even up to 90%. This would likely increase the number of buyers that were previously priced out of the market due to higher down payments.
Another option the government could implement would be to reduce ABSD and to allow foreigners to come in freely to pick up prime properties just like what happened in 2010. Usually, after a deep crisis, our government would attempt to bring in more Foreign Direct Investments (FDI) and with more FDIs potentially comes more foreign property buyers and larger numbers of foreign expats to soak up supply of residential properties for sale and rent.
Again, although cooling measures may eventually be lifted, the government may do so only when lifting the measures will not cause a knee jerk spike in the property market.
C) What can you do to benefit from a Depression or Recession?
In a recession, there are two groups of people
1. People who can immediately capitalize on the crisis – These are people who were already positioned and prepared for a crisis. They will be able to improve their lifestyles as well as profit from the crisis.
2. People who need some time to capitalize on the crisis opportunities – These are people who want liquidity and would like to raise cash on hand.
Whichever group you are in, we will discuss some possible strategies that you can consider.
1. Strategies to capitalize on the crisis
A) For HDB owners
HDB owners can consider taking the opportunity to start their 4P template (Plan, Prepare, Position, Profit) to enhance their assets by moving to a private property.
Assuming that HDB prices remain resilient, HDB owners will be not be selling at a big loss. On the contrary, HDB owners can now purchase a private property at a better price than before a crisis.
Let’s imagine an example:
Remember that in our earlier analysis, HDB prices did not move down as much as Private Properties, and with the current stimulus for HDB flats, prices are unlikely to decrease much.
John has an HDB flat that reached MOP, with a market value of $820k before Covid-19 and wanted to buy a Condo that was $2mil. Currently, he can sell for $800k (lowest) and the same Condo is now valued at $1.8mil, which is $200k less than before Covid-19.
Assuming he sells his HDB at a lower price of $800k and buys the Condo at $1.8mil. John would have a savings of $180k for his Condo purchase. In this example, the savings is substantial, $180k can be used to re-invest into other investments, purchase a car or even used for higher quality renovation.
B) For Condo Owners
Whether you have made money or are still in red (losses), as a Condo owner, you have options too.
How some of the savvy property owners whom I spoke to benefited from the 1997 and 2000 crisis was that they sold of their Condo(s) and purchased Landed properties during the crisis when the property prices fell.
Let us assume that private property prices will decrease by 10% on average during a crisis. If you currently own a property that is around $1.6 million (was $1.8mil before Covid-19) and would like to move to a larger property that was worth $3mil. Due to affordability issues, higher quantum Condo at $3mil may have less buyers in times of crisis, and prices could fall more than a lower quantum Condo.
If we are patient, you may be able to purchase a $3mil property at $2.6mil ($400k savings) or less. If you are able to sell your Condo for $1.6mil (was $1.8mil before) and buy another unit at $2.6mil (was $3mil before), there is an overall savings of $200k. Even if you include transaction costs of sale and purchase, the savings will be worth it. If you and your property consultant can improve your Condo’s selling price while negotiating harder on your purchase, your savings could be higher than the $200k figure. These are scenarios that has actually played out (with different numbers) during previous crisis.
This could also be the perfect time for aspiring Landed property buyer to look patiently for a good deal. If history repeats itself, then Landed property sellers will be more willing to negotiate during this time.
c) For Landed Owners
Landed property owners have different options to capitalize on a crisis. It certainly depends which type of landed property you own. Landed owners who wish to continue to stay in a Landed property can consider either to move to a larger home or move into a prime Landed district (if this is your family’s plan).
There are Landed owners that decided to liquidate their Landed property and buy a few Condos located in Prime districts, as during this time, prime properties are usually affected most. For example, a fire sale condo could be 30% below current market value. A $5 million prime district 9 property could be purchased now at $3.5 million. While if you own a good located landed property in Serangoon Vicinity, a Corner-Terrace or Semi-Detached unit can still be sold for about $3.2mil to $3.5mil, depending how early in the crisis you manage to sell off your property. If and when the market cycle comes back, the prime district 9 property will likely move towards its previous price of $5mil while if you were to hold your landed property, the appreciation could be capped at $4mil for example.
2. Strategies to improve cash flow and liquidity
a) Right size from Private property to a HDB flat
For business owners that are affected by Covid-19 and need to re-structure their finances during a crisis can consider selling their Private property and move into a HDB flat to raise cash and focus on their business.
Ultimately, if your business can weather the crisis, you can always buy back your private property later.
This concept is not new, in previous crisis, a few business owners whom we had the privilege to speak to mentioned they did this so as to cash out some spare cash from their private property. Few years later, when their business is back on track, they sold their HDB and moved back to a Private Property.
Here is an example of how you can use your private property to cash out gains:
If Felix owns a 3-bedroom unit worth $1.5mil now and have been paying his mortgage for about 15 years. Felix should have a balance loan of less than $500k. After selling his unit, he should have about $1mil Cash + CPF, which should be mainly cash. For this example, we assume that he will have $1mil of cash. He can consider squeezing into a 3 room HDB flat (2 bedroom) that cost about $350k and will still have $650k liquid cash as working capital for his business.
b) Rent out your current home and re-rent lower
During a crisis, it does not hurt to collect some “pocket money”, that is exactly what this strategy is for if you decide not to sell your property.
Simply put, if you own a 3-bedroom unit that can now be rented for $4000 per month. You could consider re-renting a 4 room HDB flat (3 bedroom) for $2000 per month. This gives you a $2000 additional funds per month which can actually be used to offset your monthly mortgage instead of having to pay your mortgage from your own savings or monthly income.
If your property is fully paid, then this strategy certainly helps with cash flow because you get $2000 income which can be used for monthly expenses as required without selling your property.
c) Get an Equity Term Loan (For private property owners only)
When you take an equity term loan, you use the equity of your property as collateral. So if your property has increased in value over time, a home equity loan may be the best way to borrow some money at a low interest rate (while it is so low). This is one way for a private property owner to raise cash for their business working capital. Find out more about Equity Term Loan here.
D) Closing Thoughts
How we prepare and what we do in a crisis determines our financial position after the crisis. Some will come out the other side with more wealth, while some may be scarred. There is only a small window period to do your research, plan and prepare for what is to come.
If this crisis is similar to the 2008 crisis, then we will experience a V shape recovery, and all will be well in about 6 to 12 months.
If this crisis is similar to the 1929 depression, then this crisis will be like no other in our lifetimes and we will need to be extremely careful in managing our wealth during this period.
Whatever this crisis brings, we will continue to provide updates and insights that will help us make better Real Estate decisions.
About the Author
Ray’s Estate Clinic (REC), founded by Raymond Chng, is a platform for Investors’ and homeowners to have a Property Portfolio Health Check by utilizing data analytics, ensuring that their portfolio remains healthy providing optimized returns.
“Health is Wealth” is what Raymond believes in, and it is not related only to your own body’s health, but it also refers to one’s financial health. Having a Property Portfolio that is not performing does not help improve an investor’s wealth. Hence, converting non-performing assets into optimized performing assets is essential to portfolio’s health improvement.
Raymond can be reached at firstname.lastname@example.org. Do visit his blog HERE for more information.
Please refer to Raymond’s blog for the disclaimer HERE
Also, please refer to my disclaimer HERE