Is Asia entering a time when asset bubbles might be forming? It might seem unbelievable. After all, it was barely just over a year ago when the financial crisis in US hit and spread to the rest of the world. But look at the property prices in Singapore and you wouldn’t know we just came from a recession. Home prices have surged, as have demand. 10,000 private residential units were sold in the first seven months of 2009, and this is more than double that of the 4300 sold for the whole of last year.
Prices of HDB flats have surged as well. Prices of resale HDB flats have hit record highs in 3Q2009, with the index at 145.2 in the 3Q2009. Prices of private homes also surged, going up 15.8% in the third quarter alone.
Part of the reason was that Asia, including Singapore was in a different part of the property cycle when the US financial crisis hit last year. US had been coming off a property bull run, one fuelled by cheap home loans and made especially widespread due to the easy availability of subprime loans. So, the crash there was sharp and the US property market may take some time to recover. Yet for Asia, there wasn’t a subprime loan fueled property bubble. In contrast, Asia was still recovering gradually from the property highs of the nineties. Hence, was barely in the early stages of a property bull run before the US financial crisis hit.
Now, with governments all over the world keeping interest rates at rock bottom, the lending costs of buying property are at a low. It doesn’t help that with so much money being printed by governments to stimulate the economy, people are nervous about possible hyperinflation and in light, property would seem even more attractive because it has historically always been resilient to inflation.
Indeed, the three things likely to be resilient to inflation are commodities, property, and stocks. Stocks because companies sell goods and services, so if there is high inflation, they can raise prices as well! For commodities, well, even if inflation is rampant, people need to eat, companies need their raw materials to build their goods. Hence, commodities are resilient to inflation. Finally, for property, everyone needs and wants a roof over their heads. So, good property will always have value which appreciates even as things get more expensive.
However, are we experiencing an asset bubble already? My answer would be “Not yet.” This is crucial. We may be at the early stages of an asset bubble forming, and if no action is taken, there will be a huge bubble, which when it bursts, is going to be very painful, just like all bubbles are painful when they burst (anyone still remember the technology bubble in 1999?). But if Asian governments, including Singapore’s can take early enough action to make sure it doesn’t spin out of control, then we may yet avoid experiencing an asset bubble.
This doesn’t mean property prices shouldn’t rise. Over the long term, all prices generally go up. Governments agree that low to moderate inflation is fine, its high inflation they don’t want. But in a bubble situation, prices do not reflect fundamentals or demand at all. Everyone is just jumping in because they want to make a quick buck and everyone thinks they can get out in time before the party ends.
Asia’s stronger economic growth and general land scarcity means that property will always be in demand. But there is a reasonable price to pay for anything, and during bubbles, prices are pushed up well beyond reasonable levels. We are not in an asset bubble yet. But the ingredients are all there. Low interest rates, ample supply of money in the system, a recovering economy, increased demand, limited supply. Whether we end up like US will depend a lot on how our government can manage the current surge in property prices. In the meantime, if you already have property, let it ride the current surge. But if you don’t, then don’t chase after the property market. The higher property prices surge in the short term, the greater the danger of a bubble forming. And if government steps in now to rein in the excess as a pre-emptive measure, that would also put some brakes on the surging property market. So either way, there is no necessity to chase after the property market.
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