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What recession means for properties

Last week, Minister in the Prime Minister’s Office Indranee Rajah told the media that Singapore hasn’t slid into recession yet.

However, bad news keeps pouring in: Our manufacturing and exports contract sharply in August. Factory outlook from PMI falls to 3-year low in September. 2019 GDP growth is revised further down to between zero and 1 percent.

A technical recession (two consecutive quarters of fall in GDP) can be avoided if we do some adjustment on the GDP of this quarter or the previous quarter. Other industries are doing fine if we are not looking at manufacturing and retail that are in deep water. The labour market looks fine when we are not counting underemployed residents and retrenched non-residents leaving Singapore.

Are we already in recession?

All governments are doing what they can to avoid their country falling into recession: Thailand approved a $10 billion stimulus package to boost economy. Hong Kong announced $2.43 billion relief measures. China continued to devalue its currency. More countries are joining the camp of rate cut.

But no country is an island. If recession is global, there is only so much the governments can do.

In recent months, there seems to be an unanimous consensus of an upcoming global recession:

Bank of America said there is a 1-in-3 chance for a recession in the next 12 months.
JPMorgan Chase raised the probability of a recession to 40 to 45 percent.
Morgan Stanley predicted a global recession in three quarters.
A UBS survey showed 55 percent of 360 global family offices with average wealth of $1.2 billion see a recession by 2020.
A poll with 226 economists concluded that 38 percent think there will be a recession during the US election year in 2020.
In fact, some parts of the world are already in recession.

The economies of China and the US have already slowed down by the trade war. Germany’s manufacturing sector is in recession and is spreading to the service sector. Analysts said global tech, manufacturing and industrial sectors are now in recession.

James Rickards explained in his book The Death of Money: The Coming Collapse of the International Monetary System the difference between a cyclical downturn and a structural downturn.

Cyclical downturn is a phase that is remedial with generous government budget and stimulus packages. Structural downturn is embedded and it can last indefinitely unless adjustments in key factors are made.

I am reading James Rickards’ new book Aftermath: Seven Secrets of Wealth Preservation in the Coming Chaos. The author thinks we may have to prepare for slow growth and periodic recessions for decades to come.

What happens to properties in a recession?

During recession, with low buying interest from homebuyers and investors, both prices and volumes of properties will be down.

Take the last global financial crisis as an example. From second quarter of 2008 to second quarter of 2009, the URA Private Residential Property Price Index declined 25 percent. For the whole year in 2008, the number of private residential transactions dropped 66 percent compared with a year ago.

The market correction saw property prices drop from the peak in mid-2008 to the bottom a year later. But the market quickly went back to recovery mode after four quarters.

But this time there is no property boom before the next recession strikes. The current property market has been stagnant after the introduction of nine rounds of cooling measures by the government. Both prices and volumes are far from the level of their last peak in 2013.

When the next financial crisis comes, it is difficult to predict the extent of destruction to the property market – with a recession on top of a slowing down economy and a cooled down property market.

Take the hint from the Asian Financial Crisis in 1997. Before that, the private residential market had already been softened by the government’s anti-speculation measures enforced in May 1996.

Fourteen months later, Singapore was struck by the Asian Financial Crisis. With lack of defence against such a strong attack, private residential property prices plunged 45 percent from the peak of mid-1996 to end-1998.

No one knows how deep and how long the next recession will be, or the extent of its effect on the economy or the property market. Whether we can ride out the storm depends on our holding power and our ability to hang on till the economy recovers and property prices looks up again.

Who are most vulnerable in the next recession?

It is not uncommon to see widespread job losses, failed businesses and bankruptcies during recession.

Employees who are most vulnerable are the newbies and the veterans. The newbies may be newly-graduated with no working experience. They have difficulties landing on a job because companies are not hiring.

The veterans are drawing a high salary compared with their younger counterparts who are capable of doing the same job. They may be near their retirement age and have a higher chance of being offered an early retirement package by their employer.

Another group at high risk of being made redundant is middle-age PMETs – typically with school-going children, a home mortgage and a car loan.

For the vulnerable, buying or upgrading their home is the last thing on their mind. If they are retrenched and cannot find a new job, they may find themselves struggling to service their housing loans.

In June 2013, the Monetary Authority of Singapore introduced the TDSR (Total Debt Servicing Ratio) to limit the borrowing of property buyers according to their ability to service debts. The new guidelines are strict enough to prevent borrowers from over-leveraging in property purchase, financing, refinancing and equity withdrawal.

In the next recession, do we expect less owners being unable to service their home loans? What about those who bought before June 2013?

The problem with continued decline in property prices is that one day the outstanding home loan will be higher than the property’s market value. This is known as a negative equity position. The bank has the right to ask the borrower to top up the difference between the outstanding loan and the market value in cash.

Even if the borrower is forced to sell his home, the amount from the sale is not enough to cover what he owes the bank. If he chooses to default on his mortgage payment, he will tarnish his credit record with a bad credit rating.

It might have been ten years after the subprime crisis. But in 2019, the US still has 2 million homeowners being stuck in a negative equity position.

What are the recession-proof strategies?

Accidents catch us when we are less prepared. Similarly, when everybody is talking about something, most likely it won’t happen.

We hope the worst situation won’t come. But in reality, whether a financial crisis or a global recession will happen is not something under our control. At least what we can do is to be prepared and minimize our losses should it happen.

If you are thinking the same way, I can share with you my two cents on some recession-proof strategies.

1. For owners

Take a good hard look at your personal finance and asset portfolio. Keep aside whatever spare cash as emergency fund.

For aging, low-return or properties bought at the wrong time, cash out while you still can. When there is a prolonged downturn, there will be far more supply than demand, and far fewer buyers than sellers.

2. For home buyers

There is no need to rush in and buy now when prices are still high. You have plenty of time to shop around before the dust settles. Be patient and you can expect to buy at beaten-down prices in a recession.

If you really have to buy now, put down as much deposit as you can. With a minimum loan, you can significantly lower the risk of your property turning into a negative equity in the future.

3. For investors

For years, there is too much liquidity flowing around chasing too few good opportunities. With a looming recession, investors are fleeing to safety.

Firstly, run away from high-profile high-valuation investments, including overpriced properties, funds, stocks, IPOs and cryptocurrencies.

Secondly, bulk up on cash. Cash is a good protection against deflation. Cash is the ace in your hand to go bargain hunting and bottom fishing in a recession.

Keep the right currencies. Singapore dollar is a good one. Our government is financially sound and our currency is strong. During the Asian Financial Crisis, the Singapore dollar proved to be much more resilient compared with our neighbours Malaysia, Thailand, Indonesia, South Korea, and the Philippines.

Keep your cash in a safe place. No bank is 100 percent safe. In Singapore, the insurance coverage for bank deposits for every account holder is $75,000.

Lastly, don’t forget those assets that perform well both during and after a recession. Allocate part of your portfolio to slow or no growth investments such as gold and other commodities.

And don’t put all your eggs in one basket. Because no investment is 100 percent safe.

Good luck.