Saturday, June 27, 2009

Nobody is thinking in the Herd

We write this 100th MOS post in late June when the Asian property markets are on the verge of boiling over. Today, showrooms are crowded and property viewing is weekend sport. Queues have also started to form overnight, and agents are working in overdrive again.

Whilst the economic fundamentals in many Asian countries such as Singapore and China are better than that in the US, the recent rush back into the residential property market suggests too much misplaced optimism.

The inventory in markets such as Shanghai are low, but the same cannot be said for cities like Singapore and Malaysia where, in the case of the former, close to 10,000 new units could well be made available in the next two years. And in certain Malaysian states like Johor, the supply overhang has been a historical challenge.

Indeed, the low savings rate and rock bottom mortgage rates (such as sub 2% for the latter in HK) brought about by the easy monetary conditions globally has unleashed money into alternative asset classes such as residential properties. But these investors search for yield without paying sufficient regard to the possibility that rentals could fall in oversupplied cities. Also, the other oft-cited argument that physical property is an inflation hedge is only partially true. One usually forgets that the effectiveness of the hedge actually depends on the lease structures in place and inflation actually pushes out the nominal discount rate. Furthermore, the terrible recession today has caused an output gap of 7% and prices are unlikely to run away until this gaping gap is closed out possibly, at the earliest, at the start of the next decade.

So, we find it apt to leave readers with a quote from English economist and logician, William Stanley Jevons (1835 - 1882) - "As a general rule, it is foolish to do just what other people are doing, because there are almost sure to be too many people doing the same thing."