Where will property prices be in the next few years? Will property prices plunge 30 – 50% as per the doomsday prophets? Will property prices trundle along sideways, moving up and down within a 10% band? Or will property prices continue its steady climb upwards? Unfortunately, I don’t know, so I can’t tell you. If I knew for sure, I wouldn’t tell you either. So, since I don’t know for sure, I will lay down how I think the different scenarios may play out so you can make your own educated guess. But before we go into the heavy stuff, let’s have some fun with a poll!
Scenario 1: Armaggedon
There’s a guy on the Channelnewsasia forum expounding every day that the world economy is going to hell and that housing prices are going to halve by 2015. He’s waiting for 2015 to go into property, apparently.
For that to happen, the two main criteria would be that rentals need to come down significantly and interest rates need to go up such that rentals cannot cover monthly mortgage payments. It seems a little counter-intuitive that interest rates move up while the economy is so bad that rents are crashing, but there’s really only one explanation for that: The economy is so bad that banks are afraid to lend money out, so interest rates rocket. Possible triggers for this are the disorderly exit of Greece from the Eurozone leading to contagion to Portugal, Ireland, Italy and Spain, implosion of the student loan bubble in the US and/or super hard landing in China.
The good news for Mr Doomsday is that, in this scenario, prices of property may come down significantly, maybe even halved, as he predicted. The bad news, however, is that credit is going to be so tight, he’s going to have to come out with a large amount of cash or pay super high interest. Even if he was able to find a tenant to stay in the property, rent is also unlikely to cover his monthly payments, so he better have cash in reserve and a lot of it, cuz a hole this deep isn’t going to fill itself up in a short time. However, remember that the government has a lot of cooling measures that they can reverse if the situation is as bad as this.
Scenario 2: Steady rise
With so many cooling measures pushed out by the government, it’s rather a sure bet that prices aren’t going to spike anytime soon. However, a steady rise of 5% per year isn’t inconceivable given the right conditions.
The “right” conditions for a continued rise in property prices would consist of low interest rates, renewed economic growth in the region and stabilising world economy. These conditions allow for affordable mortgage payments and continued foreign investor demand. At the same time, regional growth will lead to more expats coming here, so rentals should be well-supported as well. Somewhat counter-intuitively and in contrast, a booming world economy may not be so good since there are likely to be other asset classes that give better returns, and also interest rates are likely to rise, affecting affordability.
This scenario is great for current investors as they would be able to reap good capital gains and better rental return. Not so good for those still waiting to enter the market, since prices would have appreciated significantly. If they’re not willing to go in now, they’re sure not going to be happy going into the market in this future!
Scenario 3: Chugging along
In what may be the most likely scenario, more of the same may persist in the next few years, a combination of good and bad news, with periods of serenity and turmoil in the market as Europe and the US tries to recover from their malaise, but not really going anywhere. Regional economies also slows down, affected by the problems in the developed West.
The low interest rate environment in such a scenario will keep housing affordable, but uncertainty in the markets may hinder investor demand. Foreign investor demand may also be muted with the slowdown in their home countries. If the problems persist, there may be fewer expats coming in, leading to weakness in the rental market as well. This leads to a gradual decline in housing prices but not a crash due to continued affordability from low mortgage payments.
The alternative scenario, as described above, is a booming world economy. With the rounds of QE and other easing measures that have been implemented so far, if the world economy starts to pick up, inflation will soon take hold. When that happens, central banks will have to raise interest rates rather quickly. The increase in interest may lead to investors not being able to afford mortgage payments as there will be a lag before rents catch up. This leads to a gradual rise in housing prices, but high mortgage payments will dampen affordability. A relatively large number of upcoming supply will also put some downward pressure on prices. If the boom continues long enough, it will lead to the next property bull cycle as people find new places to invest their new-found wealth.
In either case, property prices are not expected to move very much, probably within plus or minus 10% range over 3 – 5 years. In this scenario, I would be indifferent to investing in property in general versus other income-generating asset classes. However, depending on the situation, it may also be a good time to look out for bargains for the next bull cycle or to sell out to conserve ammo for the next dip.
So, in conclusion, according to what you believe is going to happen in the world in the next few years, different things may happen. Personally, I’m more inclined towards somewhere between the 2nd and 3rd scenario, with prices rising for another couple of years (S2) before giving way to stagnation due to increasing interest costs (S3). I guess I’m just an optimist… In any case, let’s come back to this post in 2015 to see if my
guess prediction comes true. We’ll use the All Residential property price index released by URA as a benchmark for comparison. The figure for 1Q 2012 is 206.