Where is the Property Market heading? The Stock Market can offer clues.
Updated: Jun 15, 2020
The global economy is expected to contract drastically in 2020
Globally, the number of Covid-19 positive diagnosis has been steadily increasing and now stand at 6.9 million with over 400,000 deaths (WHO report 8th June 2020)
The US S&P500 has recovered rapidly from the March lows and Nasdaq set a record high on the 8th of June 2020.
Straits Times Index (STI) is up 22% from the March 2020 lows
Property Transactions have nosedived but there are bright spots and opportunities
Everyone who is not living under a rock knows it. With the world in the midst of a raging pandemic, the global economy is facing its worst economic downturn in recent memory.
According to the International Monetary Fund’s report in April 2020, the COVID-19 pandemic will inflict high and rising human costs worldwide. As a result, the global economy is projected to contract sharply by 3 per cent in 2020; much worse than during the 2008–09 financial crisis. In the United States, the unemployment rate is at over 13% and there has been a 26% increase in Corporate Bankruptcies in April 2020 year-on-year.
Domestically, Singapore’s Gross Domestic Product (GDP) is also expected to shrink by over 7% according to The Straits Times.
And yet, amidst the current and impending economic devastation, what we are seeing is the amazing recovery in the stock markets from the March 2020 lows.
In fact, some regional indexes such as South Korea’s KOSPI surged as much as 49.45% as at 8th June 2020. Since touching their 52-week low in March, other markets have rebounded rapidly as well.
So, in all this doom and gloom, there has also been a great and rapid creation of wealth amidst all this uncertainty and value destruction.
The question is Why?
1) Government Response
Governments around the world have unleashed unprecedented fiscal and monetary support for their economies to cushion the economic fallout from the pandemic. Germany, for example, has set aside over S$2 Trillion (60% of GDP) to counter the expected negative economic impact.
Consisting a slew of tax rebates and incentives to stimulate the economy, these generous stimulus packages not only help to stabilise the financial markets and provide assurance to workers and businesses but also to improve investors’ sentiment to a large extent.
2) Historical experience
As a comparison, during the 2008-09 Global Financial Crisis, the United States provided a $787 billion Stimulus Package which is more than 3 times lesser than what has been announced for their current measures. Again, financial markets at that time reacted positive and that planted the seeds for the multi-year bull run.
Therefore, a crisis is not unfamiliar ground for stock market participants and investors. Governments tend to act decisively when a major crisis happens and this will be reflected positively in the financial markets.
In fact, there is a saying in investment circles: “Never Waste a Good Crisis”.
Furthermore, due to the rapid and knee-jerk reaction of the sell-off, there will be stocks that are fundamentally sound but find themselves falling in tandem with the general market. Buyers would recognised this fact and buy into these undervalued stocks leading to a price recovery as well.
3) Stock Markets are forward-looking
Stock markets are by nature forward-looking and a forward indicator of the economy. It is looking past the near-term impact to the recovery and rebound ahead. Based on past crisis experience, such economic shocks tend to last for 3 quarters, and we could very well be in the final quarter.
Indeed, many countries have now started to pull back lockdown restrictions, not because the battle against the virus has been comprehensively won, but because economic conditions are becoming a pressing issue that is weighing heavily on their citizens' livelihood. While it may not be business as usual, a restart will allow industries to start production and job creation.
In addition, the race for a Covid-19 vaccine is ongoing with at least 130 candidates being developed globally. So, it seems that it is a question of when and not if that this would eventually occur.
What are the Key Risk?
We should, of course, keep our eyes open and be aware of the possible dangers ahead. 2 main things can derail the recovery.
1) Second Wave
The stock market has had a good run since the lows of March 2020.
How sustainably markets perform going forward will depend on how countries successfully exit from their lockdowns. Past pandemics have shown that a second wave of infections can occur and may be worst than the first.
South Korea and China have seen new cases emerge after reopening and in fact, Iran is facing a second wave of infections, hitting a daily record high of over 3500 cases on June 4th, after a steady decrease of cases in late April.
One key comfort is that countries are better prepared now should this occur and governments are also prepared to inject in more stimulus measures if need be.
The ongoing trade war between the USA and China took a back seat in the early days of the crisis but now appears to be taking centre stage again with the Hong Kong protest, conspiracy on the origins of the virus and other distractions thrown in the mix.
With about 5 months to the US Presidential election, the expectation of increased offensive rhetoric from the Trump administration should be expected. Any escalation of trade measures will hurt both economies in this early stage of recovery so it may be a case of more bark than bite for now.
How about the Property Market?
This being a property centric blog, you may be wondering why I am spending so much time talking about the stock market. It is not because I was previously a stockbroker for over 8 years and I am still very interested in the financial markets, but because as mentioned earlier, the stock market is a leading indicator for the health of the economy.
We can actually derive clues on how the property market will perform from the financial markets.
Taking the 2008-09 Global Financial Crisis as an example, we can see the STI index starting to recover in Q1 of 2009 as per figure 1.
However, looking at Figure 2, it is also in Q1 of 2009 that we see the biggest drop in GDP and a continued decrease in the Overall Property Price Index (PPI). The GDP and PPI only started to recover in earnest in Q3 2009.
Therefore 2009 Q1 saw the worst GDP figure and the Financial Markets started to turnaround. It took another 3-6 months for recovery in property prices and GDP numbers to come into effect.
The current recovery in stock prices started in late March 2020, and it has been almost 3 months since that date.
Are we also looking at a great window of opportunity for property purchases now? It does appear to be so.
Christine Sun, Head of Research at Orangetee, held a Webinar titled “Investing in Crisis, Profit Analysis” last month where she delves deeper into property price movements based on historical data and examples. I strongly recommend watching it. Just message me and I will be happy to share the recording with you.
"But property prices don’t seem to have come off"
Yes, they have.
According to data from the Urban Redevelopment Authority (URA), the overall price index of private homes slipped 1 per cent quarter-on-quarter in the first quarter of 2020, after rising for three consecutive quarters.
However, this decline is still not as severe compared to initial price falls observed in past crises. The Asian Financial Crisis saw a 1st quarter decline of 1.9% and the Global Financial Crisis saw a 2.4% drop over 3 months.
Current property cooling measures such as the TDSR (Total Debt Servicing Ratio) and Mortgage Servicing Ratio (MSR) has had the desired effect of instilling financial prudence in buyers by capping a borrower’s gross monthly income used to service their housing loans.
Therefore, there has not been many mortgage defaults nor are we facing a situation of urgent property sales or ‘Fire Sales”.
It is no surprise that property transaction volumes have nosedived during this current circuit breaker period with home viewings disallowed and showflats all but closed. However, interestingly the activity in the primary markets have been gaining pace. These are units that are sold directly by the property developers. In fact, I wrote a separate blog post on this.
The following shows the most popular new launch projects according to sales volume during the circuit breaker period from 7th April to 24th May. This momentum has carried through to June as well.
It should also be noted that with travel restrictions in place, many of these units were purchase by local residents.
The fact that Singapore has been consistently ranked as among the top countries in terms of safety and efficiency in managing the pandemic situation will bode well for foreigners looking for another place to call home and we should see an uptick in transaction numbers with the lifting of restrictions and foreigners retuning to the local property market.
"So where are the good property deals?”
As mentioned earlier, the previous property measures by the government have helped greatly to ensure that buyers are not overly leverage and face a situation of having to urgently sell their properties at ‘knock-down’ prices.
Property Developers, on the other hand, have been offering discounts.
And this has proven to have the desired effect of spurring sales, even during the Circuit Breaker period.
From the developers’ perspective, reasons to offer discounts will include meeting the timeline to sell all units within a certain time frame to avoid ABSD charges, creating demand and therefore confidence in their projects during this time and concerns from the increased cost from the construction delays or additional safety measures.
Mass market new launch projects such as Treasure at Tampines, Riverfront Residences and Parc Clematis are currently offering outright discounts of between $3000 to $100,000. Even high-end projects like 8 Saint Thomas in district 9 and South Beach Residences are offering deferred payment schemes to move units.
For a comprehensive list of discounts and pricing details, do drop me a message and I’ll happy to share the latest with you.
What should you do now?
Will this crisis pass? I believe that pragmatism has taken over fear. While certain restrictions may become the new normal, at least unit a viable vaccine has been found, certain fundamental needs like jobs and housing will still need to be fulfilled. The rally in the stock markets appear to be pricing in the recovery and if you look at evidence from previous cycles the recovery in property prices will follow as well.
If you are on a lookout for a property, now might be the time to act.