Signs of a property bubble forming

September 28, 2009 at 2:51 pm Leave a comment

From a blog named “Diary of a singaporean mind”

Aztech, a mid-size electronics manufacturing company listed on the SGX, announced yesterday that it will diversify into property development. The electronics manufacturing sector is a tough one to survive in, margins are always falling and you got to keep on innovating and competing to stay afloat. Investing its funds in some development work to create the next iPod or try to be the next Cisco is always tough because there is no guarantee of success and there are hundreds of Chinese firms waiting to copy their products. Instead of doing the hardwork, Aztech figured it can make some easy money developing property. The Singaporean apetite for property seems insatiable. Aztech gives this reason for entering the property business:Aztech believes there will be long-term sustainable demand for its new business given the projected population increase

Aztech is not the only company that believes this. The others are bookstore chain Popular Holdings, wet market operator Heeton Holdings and jeweller Aspial.

This story just gives me flashback of so many other stories. A month ago I chatted with a barber who was cutting my hair. His barber shop was newly opened and he already had 3 other shops in the eastern part of Singapore. He told me about his exit strategy if he can’t get enough customers for the new shop to overcome the high rent- he could sublet part of the shop or return to shop if he can’t make money. He went on to tell me that making money by cutting hair is hard work – he would have to cut their hair of 400 people per month just to pay the rent. The big easy money is made selling shops. He made more money selling his 1st shop which he bought for $40K and sold for $800K than he made all the heads of hair he ever cut.

So why do all the hardwork of cutting hair, making electronics widgets and designing jewelry when you can just sell property and make money? Won’t the demand and price of property keep going up as the population expands? The money for purchasing residential property ultimately comes from the household income of the family that purchases it. How high prices can go depends on how much loan they are willing to take and their ability to service that loan. Sustainable price increase occurs in tandem with the rise in income. Price of property cannot rise faster than household income in the long run- it is not sustainable because families have to keep piling up more debt and this stops when they can’t service it or when people start defaulting on their loans. Rising property prices also deter foreigners from coming here as they would have to keep cough out a large fraction of their income to pay for rent or service their housing loans.

We all want to be the smart ones owning property that rise in value as the wave of foreign immigrants come to push the prices up to the stratosphere. This is the big easy money that companies like Aztech dream about. ..forget about the hardwork of innovating and manufacturing. This dream has a flip side. Remember Dubai? When its economy weakened and many property loans became negative equity, foreigners simply walked out and left – leaving the banks and real estate companies saddled with billions in bad debts[Link]. Cars, also bought on loan, were abandoned at the airport….credit card bills left unpaid. I think there is an important lesson here for Singapore.

My comments: En-bloc seem to be coming back, with HDB prices on the tear and all the hype about IR, a property bubble is definitely in the making.

Entry filed under: Watch your step. Tags: .

Raffles Education in trouble A Sincere Mistake

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