The Future and REAL Challenges of Real Estate David Lee Director, Sim Kee Boon Institute for Financial Economics Professor of Quantitative Finance (Practice) Singapore Management University
The Future Let us just focus on residential properties
Total Number of Residences Year Total Private Non Landed Landed Non Landed Detached Semidetached Terrace Apartments Condominium Total HDB Total units 1990 58,157 18,226 39,931 2,349 6,267 9,610 18,473 21,458 623,821 681,978 2000 185,503 65,467 120,036 10,097 20,119 35,251 56,122 63,914 846,649 1,032,152 2010 250,451 69,569 180,882 10,283 21,174 38,112 65,087 115,795 898,532 1,148,983 2011 268,768 70,145 198,623 10,504 21,291 38,350 70,057 128,566 914,102 1,182,870 2012 277,620 70,388 207,232 10,567 21,370 38,451 71,256 135,976 922,493 1,200,113 2013 289,370 71,049 218,321 10,638 21,538 38,873 73,950 144,371 936,093 1,225,463 Private residences account for 23.6% of 1.23 million units of housing stock in Singapore. What is the ratio of persons to one unit?
3.1 Citizens per Residence or 4.3 Persons per Residence 400,000 to 600,000 non-residents require separate housing The ratio is likely to be 3.7 persons per residence. But the population is ageing.
With A Lot of Old Folks, We May Need More Units and Smaller Residences
Declining Old-Age-Support Ratio Points to Demand for Smaller Units From 5.9 to 2.1!
More Singles Points to Demand for Smaller Units No money to get married or marriage is not cool?
The Future Lower Household Ratio? More demand for smaller units? Less demand for landed properties? More splitting of landed properties? Population of 6.9 million in year 2050, Household size of 2.7, demand of housing is 2.5 million units, an increase of more than 100% from 1.22 million units If household size is 3, demand of housing is 2.3 million units, an increase of 1 million units
Challenge No 1 Singapore is a Country in a Financial City
House Price Cycles for 19 OECD Countries, 1970-2007 Upturns Downturns Most recent upturn prior to 2007 Duration 26 quarters or 6.5 years 17 quarters or 4.25 years 59 quarters or 14.75 years Amplitude 39.2% 20.4% 116.6% Singapore s House Price Cycles, 1975-2012 Upturns Downturns 1986-1996 Upturn Duration 18 quarters or 4.5 years 8 quarters or 2 years 40 quarters or 10.0 years Amplitude 150.4% 26.7% 441.5% There is no comparison with matured economies that have many cities and agriculture land. Singapore is The Financial City with large booms and small busts!
House Price Indices Singapore House Price Index in financial cities with high population inflow should logically be much dearer than a country with huge land bank with lower density. But prices in highly populated HK and Singapore remain relatively subdued in comparison.
Housing Bubbles Bubble (peak) Upturn Downturn Duration Amplitude Duration Amplitude Japan (1991) 16 years 447.6% 14 years -65.2% Singapore (1996 Q2) 40 quarters 441.5% 10 quarters -44.8% Hong Kong (1997 Q3) 52 quarters* 903.0%* 24 quarters -65.0% USA late (2006 Q2) 43 quarters 195.5% 13 quarters -32.5% Spain (2008 Q1) 48 quarters 202.4% 16 quarters** -20.2%** Bubble or not, real estate is always a worthwhile investment all over the world! The challenge is how to deal with late entrants into the market and their perception of high prices?
Challenge No 2 It is All your Eggs Plus Borrowed Eggs in a Basket!
Do Singaporeans spend too much on housing? Phang Sock Yong Singapore Management University Closed door discussion 10 May 2013 Institute of Policy Studies Lee Kuan Yew School of Public Policy National University of Singapore 14
Risk-Adjusted Return Ratio (real) 1990-1999 Average Real Return* Standard Deviation Risk-Adjusted Return Ratio Private housing 10.1 22.7 0.45 HDB resale 13.3 25.7 0.52 STI 10.3 35.7 0.29 The last column is the return per unit risk that you take. 2000-2012 Private housing 1.9 10.9 0.18 HDB resale 3.0 7.1 0.42 STI 3.9 30.5 0.13 * Based on price index only You will look like a fool if you don t sell everything else and put your money in Public Housing. You will look even more foolish if you don t take advantage of the government grants and leverage three times with cheap loans to get 39.9% (13.3x3) and 9% (3.0x3) returns. You will never be able to borrow as much and as cheaply if you are not investing in HDB!
Ever Increasing Housing and Construction Loan to GDP It has increased from 20% 20 years ago to 69.7% today!
Banks Are Dependent Too Loans increased from $5.7billion in 1983 to 257billion in 2013 with deposits increased from $26.3billion to $537.6billion. Take note that we have become a wealth management centre and capital outflow can be rapid and voluminous during crises.
Consequences of House Ownership Policy Interest rates are kept low via exchange rate policy Households, especially among the younger population, are leveraged for a focus investment philosophy in real estate Banks have high loan to deposit ratio Construction and Mortgage Loan to GDP ratio remains high and vulnerable to rapid capital withdrawal in a time compressed world Natural Put Option: Can the Government afford to let the market fall?
Challenge No 3 It is a Complex World with No Guidance from Standard Economic Models
Housing shortage = Gross Population/3.6 Total Housing Stock Those who read the market correctly profited handsomely! 110,985 136,816 140,924 142,175 49,479-3,174 238-6,911 5,174 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011-38,732-41,448-25,752 Cyclical: Auto-correct with increase in supply? Depends Over or under supply is an emergent property from a complex system with adaptive agents. There is no easy way to forecast demand because you need to know the supply which in turns depends on demand and so on. Meantime, as the rules change, all participating agents are adapting their own behaviour to maximise their own objective 20 function.
Building Up Land bank and Influencing Expectations Was it higher prices that led to higher supply of units or higher supply of new land parcels that led to higher prices? Notice that supply of land parcels may indeed be fueling competitive bidding behaviour for developers and therefore reinforcing higher price expectations and demand from end buyers.
Challenge No 4 We Need to Throw Sand on an Icy Road to Prevent Skidding
Evaluating the Effectiveness of Cooling Measures on Property Prices: An Exploration of Alternative Econometric Techniques David Lee, Sock-Yong Phang, Kok-Fai Phoon and Karol Wee Singapore Management University 2013 Asian Meeting of the Econometric Society Singapore, 2-4 Aug 2013
6/1/1975 6/1/1977 6/1/1979 6/1/1981 6/1/1983 6/1/1985 6/1/1987 6/1/1989 6/1/1991 6/1/1993 6/1/1995 6/1/1997 6/1/1999 6/1/2001 6/1/2003 6/1/2005 6/1/2007 6/1/2009 6/1/2011 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -20.00% Property Index Returns The decline is usually short and relatively mild while the increase is always persistent and larger in magnitude. Date 77Q1-81Q2 81Q3-82Q1 82Q2-84Q1 84Q2-86Q2 86Q3-96Q2 96Q3-98Q4 Up/Down U1 D1 U2 D2 U3 D3 Quarters 18 3 7 10 40 10 Returns % 264-6 14-33 412-44 Date 99Q1-00Q2 00Q3-04Q1 04Q2-08Q2 08Q3-09Q2 09Q3-12Q4 13Q1-?? Up/Down U4 D4 U5 D5 U6 D6 Quarters 6 15 17 4 14? Returns % 33-18 58-23 37?
6/1/1975 6/1/1977 6/1/1979 6/1/1981 6/1/1983 6/1/1985 6/1/1987 6/1/1989 6/1/1991 6/1/1993 6/1/1995 6/1/1997 6/1/1999 6/1/2001 6/1/2003 6/1/2005 6/1/2007 6/1/2009 6/1/2011 30.00% 25.00% 20.00% 15.00% 10.00% 5.00% 0.00% -5.00% -10.00% -15.00% -20.00% Property Index Returns The feeling of nakedness or if you were short in physical residential properties was on average 6X more painful, and lasted 2X longer than going long! Regime Up Down Average Quarters 17.6 8.4 Average Returns 156.2 24.8
Measures Since 1981 Interventions 20 measures 6 pro cyclical 14 counter cyclical 3 before May 1996 11 after July 2005 Interventions in the property market, Q1/1981 Q2/2013 Negative Interventions Positive Interventions Source: David Lee, Sock-Yong Phang, Kok-Fai Phoon and Karol Wee, SMU, URA, Savills Research & Consultancy
Summary of Empirical Results The intervention in May 1996 with a cocktail of measures proved to be the most effective Any of these measures if used independently has very little effect on prices Market could be in long term disequilibrium of excess demand HDB prices is a key driver for private property prices giving rise to significant upgrader effect But the immediate real effects have been felt in other areas such as volume of transaction, quantum of per unit transaction, per unit size and marketing strategy If you cannot build fast enough to cater to the demand and you don t want the prices to increase, you have to use potent cocktail of prudential policies (throwing the sand to prevent skidding) to protect those at the edge of over extending themselves TDSR was implemented in mid 2013 and the impact was felt immediately (Total Debt Service Ratio if you cannot borrow, you cannot buy)
Future Shortage What if there is a persistent shortage? No renewal when the lease runs out Abandon height restriction of buildings More efficient use with higher intensity (increase plot ratio) Build underground air conditioned city with 2-3 times higher cost of construction and maintenance Build above expressways At the expense of quality of life?
Challenge No 5 You Have to Cash Out Someday for Your Retirement
Recommendation: A new type of REIT Establish private REIT consisting of HDB residential and commercial units Proportion of new units developed by the HDB can be sold to this REIT for rental REIT active in rental and lease-back market in HDB sector REIT shares can be sold to Singaporean CPF members in units of SGD1 Appropriate financier and REIT manager governed by regulations with clear social objectives Stable tax free rental income be shared with Singaporean CPF REIT holders 31
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Advantages of Housing REIT more affordable housing options Affordable rental segment Downward pressure on housing investment demand Co-owner in shared equity scheme investment alternative Tax free dividends smaller investment outlays more liquid source of financing for HDB Lease Buy Back Scheme Shared equity scheme Fiscal burden of over-supplying marginally and targeting vacancy rates retirement planning 33
REAL Challenges Is Efficiency the Only Dimension?
REAL Challenges Efficiency versus Quality of Life/Welfare Experience counts: But we have not been there before Just One Example: Old Folks and Nursing Homes Lifts are bad for wheelchair bound Multi storey is anti social Closeness to HDB residents means no singing Open ventilation means wet floors Garden is what old folks need Where do we find 3 times the space? Where do we find the children to take care of the childless old folks? Where are the medical suites? Where are the dialect speaking helpers? Where do we house these helpers? Who is taking care of the mental health of the helpers? What happens if there is a fire?
Singapore Has Always Gotten its Economics Right! How can it be that it is not a news item when an elderly homeless person dies of exposure, but it is news when the stock market loses two points? This is a case of exclusion. - Pope Francis s Evangelii Gaudium, Nov 2013 What is an inclusive society? It is one where everybody benefits from the progress of the nation We have to help our elderly live well, and provide stronger support for Singaporeans with disabilities they all have a part in our nation s progress and must share in its fruits. PM Lee Hsien Loong, Budget 2012
Palgrave Macmillan, UK, 2013
Recent Housing Research Phang Sock Yong, Financial Stability and Social Housing Policy. Invited speaker at China s Social Housing International Symposium, organized by the China Development Research Foundation, Beijing, August 7, 2012. Phang Sock Yong, Housing Finance Systems: Market Failures and Government Failures. Palgrave Macmillan, UK, 2013. Phang Sock Yong, An Economics Approach to Government Support of Housing. Invited speaker at International Conference on Housing, April 16-17, 2013, Tashkent, Uzbekistan. Phang Sock Yong, "Do Singaporeans spend too much on real estate?" Keynote at closed-door discussion, 10 May 2013, Institute of Policy Studies, Lee Kuan Yew School of Public Policy, National University of Singapore. (with Phang Sock Yong) Evaluating the effectiveness of cooling measures on property prices: An exploration of alternative econometric techniques. Paper presented at the 2013 Asian Meeting of the Econometric Society, Singapore, 2-4 August 2013. (with Phang Sock Yong) Housing policies in Singapore: Evaluation of recent proposals and recommendations for reform. Paper presented at the Singapore Economic Review Conference 2013, Singapore, 6-8 August 2013. Phang Sock Yong, Singapore s Housing Policies Over Five Decades Frontiers in Development Policy: Workshop on Innovative Development Case Studies, Nov 21-22, 2013, Seoul, World Bank Institute and Korea Development Institute.
Thank you