We’ve always heard of the stock market being the leading indicator of the economy, which in turn becomes the leading indicator for the property market. How true is that?
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I tried to search online for charts that show the supposed correlation between the three indices but could not find any. So, we decided to do our own (see below). This is so that we can answer the question “Is now the time to buy property?” from a more objective and macro perspective. We’ve seen a surge in buying interests since Phase 2 reopening in Singapore from 19 Jun, due to a pent-up demand. But with a looming recession, is this trend justified?
There are two ways to answer this question – from a personal “needs” perspective and that from a more macro “investment” perspective.
At a personal level, there are many reasons for wanting to move or buy a house. First, with covid-19 pandemic, more people may have come to realize the need for space. As more households crammed into a confined space, they could certainly use an extra room for WFM (work from home) conference meeting, or setting it up as a room for WBL (web-based learning) for their kids. Next, there’s the perennial need in Singapore to move nearer to schools, in-laws, or work places. And how about right-sizing the house from private property to HDB or to smaller units in order to unlock the cash value or to reduce one’s mortgage obligations in more trying times.
When there’s a need to buy and sell a property at the same time, there is less concern on the issue of timing. Because you buy high but also sell high. Or you can also buy low but sell low (which is preferred as you end up with a smaller mortgage). Hence, there’s no such thing as “the right time” when it comes to meeting a housing need. The purpose of this article is not so much centred on this group of property buyers. Incidentally, what’s more perturbed for this group of buyers is the 12% ABSD (additional buyer’s stamp duty) for locals on a 2nd property if they choose to buy first. Even though some do get it reimbursed later for matrimonial homes, it’s still a sizeable portion of costs to fork out upfront which cannot be financed. What about those who fall outside of “matrimonial homes” and could not get this remission? It is not always ideal to sell first and buy later when it comes to buying for owner-occupation. That’s why, doing our part for the industry, we have written in to MAS to feedback on the need to alleviate financial burdens in a post-covid world and abolish ABSD for up to a 2nd property for Singaporeans. We hope there will be some good news eventually.
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At a more macro level, if buying a property can wait and it’s not to relieve an immediate need, then there may be serious implications if one gets the timing wrong. In recollection, there are those who bought at the peak of the property market in 1996 and found themselves selling at a loss even after 10 years. Then there are those who bought at the absolute low points of 2009Q2 and saw a 400% return on investment (most would sell out with a minimum 80% capital appreciation which translates into 400% ROI using leverage of LTV 80% back then) at T.O.P. When it comes to investment properties, timing can decide how much capital upside one could realize at the end.
So, let’s take a look at the correlation between stock market, GDP and property prices.
In order to put all three indices on the same chart, we need to scale STI index down by a factor of 10 (STI level of 2590 is represented as 259.0 on this chart). Scaling it down will not change the underlying correlation factors or patterns. STI data is taken from Yahoo Finance monthly data where the closing level on the last trading day of the quarter is shown. GDP figures, expressed in billions, is extracted from DOS (Dept of Statistics) Singapore website. We use the same “GDP in chain (2015) dollars” used by MTI (Ministry of Trade & Industry) when they announced Singapore’s GDP in the 2nd quarter shrunk by the worst ever 13.2% year on year (vs 2019Q2). PPI or property price index is downloaded from URA statistics where it’s further broken down into the 3 regions of Core Central Region (CCR), Rest of Central Region (RCR), or the outskirts of Outside Central Region (OCR). The PPI index is at a base of 100 in 2009Q1.
What can we conclude from here? First, there’s stronger correlation only during market downturns where all three indices turned south but by varying degrees. The hypothesis of stock market being a leading indicator to GDP holds true somewhat, evident from its decline which started in the last quarter of 2007 with GDP declining almost a year later in 2008Q4. But property prices (PPI) peaked out by mid-2008 and started declining even before GDP went south. In the subsequent recovery, both stock market and GDP reversed up in 2009Q1 while property prices bottomed out slightly later by the following quarter.
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In the current crisis of 2020, once again you we see STI dropping in Q1 with GDP registering the steepest fall in the subsequent quarter. Given that Covid-19 was an unprecedented crisis that led to a sudden and total collapse in demand (in fact many economis were shut down overnight), it’s not surprising that there wasn’t much of a lag time for GDP in response to the stock market correction. However, the Singapore government’s response to covid-19 crisis was also unprecedented with close to $100 billion of relief measures which has helped to sustain jobs and the economy. In my opinion, this might explain the likely longer-than-usual lag time for distress to show up in the property market this time round. In fact, high-end properties (PPI-CCR) even bucked the trend to show an increase this year. The decline in city-fringe properties (PPI-RCR) started in 2019Q4 even before covid hit us. Mass market property prices are still holding up well.
Outside of market downturns, we can see how property prices peaked in 201Q3 when TDSR (total debt servicing ratio) was first introduced in Singapore. In fact, property prices went in opposite direction to GDP growth for the next few years due largely to the subsequent 10 rounds of property cooling measures. It was not until the 2017 enbloc fever (supply contraction and land price escalation) that it finally began picking up once more – exactly 10 years after the last enbloc craze of 2007.
In summary, there’s some truth to stock market being the leading indicator to GDP and property prices, though the lag time varies. What’s clear here is that property, being an illiquid asset, will likely always remain a laggard. And the more so with the “artificial life support” provided in this crisis.
I will leave you to ponder on the likely paths of the three indices from here. A lot depends on the GDP trajectory – is external demand (which in turn affects domestic demand) for our goods & services going to return to pre-crisis level? And how fast this takes. Will we see a U-shaped or a prolonged L-shaped rebound? And if it should continue to trend downwards for the next few quarters, there’s no prize in guessing which way property prices will eventually move as more sellers enter the market to offload quickly immovable assets. Buyers need to be aware of the risks involved.
My best advice here, if there’s no pressing need to move – stay on the sidelines and monitor the market for another 6 to 12 months.
It’s about who’s holding the ball when the music stops. And developers with huge stocks are surely more than eager to throw all their balls out. There’s no loss staying on the sidelines for a while longer, and pounce if 2021 turns out to be like another 2009.
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