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Editorial

Published May 7, 2009

Will property recover faster than expected?


MARKET turning points are very hard to spot. A recent example was the March 9 market bottom. Then, the world seemed a bleak place: we were in for a prolonged depression; banks were going to fail; many companies were going bankrupt and millions were going to lose their jobs and stay unemployed for years. That period also coincided with a spate of bad news from the Chinese companies listed in Singapore - the so-called S-chips. The cash wasn't in the banks. The founders were losing control over their companies because they'd pledged their shares to financial institutions. Profit was overstated, and the companies' status as going concerns was in question. One by one, the S-chips were getting suspended.

Under the never-ending onslaught of bad news, many investors threw in the towel and cashed out. By February, cash sitting on the sidelines was at its highest in more than 10 years. Government statistics showed that the amount of deposits of non-bank customers with domestic banking units and deposits with finance companies was equivalent to 99 per cent of the aggregate market value of all the stocks listed on the Singapore Exchange (SGX). The previous peak was in 2002, when the cash/market cap ratio was 91 per cent.

History has shown that such a high level of cash holdings portends strong upside in the equities market. The rebound did eventually come - almost out of the blue - and took many by surprise. The recovery - fuelled by sightings of 'green shoots' in the economy - has lasted eight weeks and equity prices have gained more than 40 per cent. But through it all, many analysts and fund managers still doubt the sustainability of the recovery.

So what do we make of the projections of most property consultants that private residential property will slump by 25-35 per cent this year? The forecasts suggest more downside for the rest of the year given that prices fell 'only' 14.1 per cent in the first quarter. But like the pundits in the stock market, there is a possibility that these consultants too will miss the market turning point. For one, the stock market leads the property market by 4-8 months. If the stock market remains buoyant, then there is a probability that the property market too will stabilise. And, as noted earlier, there is a lot of cash waiting to get into the market.

Already, there are signs that US real estate - the source of the current global financial crisis - is recovering. According to The New York Times, Sacramento (among the first US cities to fall victim to the real estate collapse) has seen investors and first-time buyers out in force competing for bargain-price foreclosures. Sales are up 45 per cent from last year, and the vast backlog of inventory has diminished. Progress is also visible in other hard-hit areas.

If so, one shouldn't be too quick to dismiss the hope that the US property slump, just like the stockmarket slump, may end sooner than the doomsters think.