Over-optimism and over-pessimism

 September 24, 2010

Remember the global financial crisis? Remember that panicky period when financial systems around the world seemed to be on the verge of a collapse? Remember how economists were falling over themselves to predict how bad a recession or depression we could be in?

Well, as things turned out, their doomsday scenarios did not play out. The concerted efforts of governments worldwide to inject billions of dollars to stimulate growth and support banks helped to restore the confidence in the financial system that provided a base for economic recovery.

The rebound in Singapore has been startling. The feel-good factor was further fuelled by the completion of the two integrated resorts early this year. Sentiment was so strong that even two rounds of Government intervention to cool the property market have not dented confidence.

The property market was in a state of over-optimism and we saw increasingly “marginal buyers” entering the fray. I met some of these “marginal buyers”, among them a group of eight newly-minted graduates seriously contemplating forming a club deal for a $1 million property.

Then, there was another buyer, who having previously treated “investment” and “property” as two separate ends of the universe, suddenly decided that it was time to put all his hard-saved retirement fund as a downpayment to “invest in property” at a point when prices had hit a historical high.

Why did they all want to buy a property: “To invest for rental yield and hopefully, only hopefully, get some capital appreciation along the way.”

And to the question whether they were comfortable with the downside risk – “Erm, yes, but I should be able to sell for a profit before then, right?”

TAKE A LONG TERM VIEW

That was before Aug 30 – the day the Government announced its third and latest slew of measures to cool the market.

Now, the market could enter a period of “wait and see” and there is a danger of a period of “over-pessimism”, similar to the mood in early 2000s. At that time, prospective buyers were outnumbered by agents at showflats and no matter how low the asking prices, few bothered to call for a viewing.

But before we let pessimism set in, remember that Singapore has progressed significantly since 2000. Look at the new Central Business District at Marina Bay, the new malls at Orchard Road, the new MRT lines and Singapore’s top ranking as a place to live or work in numerous worldwide surveys.

Also, the Youth Olympic Games and the Formula 1 race have put Singapore on the television screens of billions worldwide.

Because of these efforts over the past decade, we now have the happy problems of as many as a million tourists a month and too many foreigners wanting to make a living here.

While I do not particularly like being squeezed in MRT trains or waiting for the third train, I appreciate the fact that being in a country where high value-adding foreigners want to live and work is a good thing, economically. The recovery in the job-creation cycle suggests Singapore remains attractive to foreigners, while the pro-immigration policy is critical to maintain the health of the rental market and thus, prices.

At this juncture, while it makes sense to be more cautious and selective, prospective buyers should also take the opportunity to do more homework.

The wisdom of buying what you can afford is as relevant now as ever. As Singapore’s urban landscape becomes more built up, differentiating factors should become even more critical factors.

I would look for properties with inherent positive attributes like being near transport nodes such as MRT or bus interchanges, good schools, shopping centres, near parks and water bodies or other amenities that enhances lifestyle.

And lastly, take a longer-term view of your property purchases – after all Singapore is well-positioned to ride the next wave of economic growth in Asia.

By Tan Kok Keong, head of the Research and Consultancy Department at Orange Tee.