Has investor's speculation exploiting the geographic aspects of Singapore caused a real estate bubble to occur? Which methodology can be used to test for real estate bubbles in Singapore or Asia?
ISSUE
How to test for bubble? Does speculation cause bubble?
BUBBLE
Bubble is generally defined as a transient upward movement of price above the fundamental value. The general statement for bubble may be formally given by:
(1) po = p* + p
… where po = observed price, p* fundamental value and p = bubble price. Under this statement, price is a linear combination of p* and p; these two variables are independent.
JOHANSON-LEDOIT-SORNETTE MODEL (JLS)
The JLS model is generally in studying bubble formation (regime introduction) and bubble burst (change in regime). The dynamics of the bubble component of price satisfies stochastic differential equation:
(2) dp/p = m(t)dt + SdW – kdj
where …
p = bubble;
m(t) = drift or trend;
dW = increment of Wiener process: (o, 1);
dj = discontinuous jump where j = 0 before crash and j = 1 after crash; and
k = loss of amplitude associated with crash.
Crash is defined as j = 1. he dynamics of the crash approximates the hazard rat h(t). How to predict crash (bubble burst) is to determine h(t)dt between t and t + dt. Since the “jump “ has not yet happened, it is possible to determine the expected value: Et(dj) = 1 x h(t)dt + 0 + (1 + h(t)dt), or simply …
(3) Et(dt) = h(t)dt
One of the cases of bubble is speculative investors or “noise traders” whose behavior in the market manifests dynamics of hazard rate as:
(4) h(t) =B’(tc – t)m-1 + C’(tc – t)m-1 - cos(w ln(tc – t) – F’)
For non-arbitrage condition Et[dp] of the price is 0 (zero) leading to the following condition:
(5) m(t) = E[(dp/dt)/p]no crash = kh(t)
The log-periodic power law (LPPL) equation may be obtained from equation (4) as:
(6) Ln E[p(t)] = A + B(tc –t)m – C(tc – t) – cos(w ln(tc – t) – F)
where …
B = -kB’ / m
C = -kC’ / sqrt(m2 – w2)
The JLS model can predict when the bubble will occur and terminate (bursting). This predictor is tc. The variable tc is non-random time of the termination of the buuble (regime change); it can be written as:
(7) Tcestimate = tctrue + e
where e = error.
CAUSES
What are the causes of bubble? The possible causes of bubble include (i) heterogeneous beliefs among investors (irrational investors) in the absent of arbitrage, (ii) positive feedback by noise traders or speculators, and (iii) synchronized failure among rational investors.
SINGAPORE REAL ESTATE MARKET
Prove that there are speculative investors (case (ii) above: noise trader) or determine the fundamentals of the real estate value in Singapore (p*) and its observed price (po) or p = po – p* where there is bubble if p > 0. This is pointwise determination, in order to prove bubble, use JLS to account for trend development.
The influx of foreign investors made the situation precipitous with the Foreign (Chinese) investors ready to pay much higher prices, leading to a higher price based market till 2012 but indications are that the city state has not seen any crash as Foreign investors continue to overall prefer other locations incl Hong kong where more choice real estate is available in Asia and China itself apart from interest in UK and US CRE/Residential markets (more in the latter)
you should review macroeconomic data and probably mas (Monetary auth of Singapore) reviews of the market
ISSUE
Real estate valuation.
AMERICAN APPROACH
The American approach in realty valuation for lending and insurance purposes is comprised of three methods: (i) replacement cost, (ii) comparable sales, and (iii) useful life. Whichever method used, as dictated by the market condition and circumstances surrounding the valuation, one overarching principle is that realty is “unique.” Uniqueness means that no single realty is alike; even two pieces of land adjacent to one another are different in some aspects. For example, two building, built with the same materials, designed by the same architect and construct by the same contractor could still be considered two unique properties, i.e. one may face the north and the other may face the south, or west and east. For buyers, especially Asian buyers, these seemingly minor differences may mean a lot when it comes to living in the house or land with the correct “feng shui.” Thus, the 3 valuation methods may be corrected by this cultural aspect of buyer-perception.
STARTING POINT
The starting point should be the tax assessor’s office. The tax assessor’s office would levy tax liability upon the land/property at the value last appraised by the state. This is a starting point because this state assessment is considered an unbiased appraisal. From this point, one can then move to the market approaches discussed below.
REPLACEMENT COST METHOD
This approach asks: what is the cost of replacing the property in its current condition? There are two components here: land and improvement. The improvement may be replaced, but land cannot. The unique element still remains in the land. As for the improvement, it may be determined through simple costing approach: materials + labor + miscellaneous costs such as licensing fees, construction permit, etc.
COMPARABLE REALTY METHOD
This method compels the real estate appraiser to look for “comparable property” sold within a certain distance parameter, i.e. 5 miles radius in the past period. There are three elements that determine the appraisal value: (i) property type, (ii) time, and (iii) location.
The type of property still runs into the problem of “uniqueness” because no two properties may be the same. Settling for “similarity” as the second best would also run the risk of losing objectivity and standard. The second element (time) also may pose a problem. If the price in the real estate market fluctuates wildly, i.e. bubbling effect, the time must be shorten. If the market is sluggish, the time span may be extended further into the past. This market activity also ties to location. Looking for similar or comparable property within a reasonable radius to compare presents another challenge. If there is no such property, say within 5 miles, the appraiser has to extend the radius to greater distance to capture similar property sold within a defined prior period.
USEFUL LIFE MTHOD
This is an accounting approach to property appraisal. It may work for commercial property, but for land and residential property, it might not be appropriate. It may also be used in the insurance industry when appraising the property for insurance valuation and coverage. If the property has a useful life of 30 and is now 20 years old, the remaining useful life is 10 years. This value of 10 years must be adjusted for additional current value appreciation plus the salvage value.
COMBINED METHOD
The above 3 methods may be used. The highest value may be selected as the best method. The rationale for this selection lies in the logic that employable realty should yield the highest utility. Thus utility may be expressed in terms of money value. Therefore, the highest value achieved through the three conventional methods may be deemed as the value that best reflect the current value of the property.
BUBBLE MARKET
If the market is considered in a state of bubbling in valuation, conventional appraisal methods become of little value. The appraisal process must also “go with the flow” until the market stabilizes at a certain point that the conventional appraisal method may be re-introduced.
Residential real estate prices remain every time bubble. However, bubble is unpredictable.
I don't know if singapore in bubble position. but i talked to my friend in singapore, the similar apartment she bought in reasonable location is twice as much as what we pay in AU? I like to know why?
Dear Justine,
Singapore has a scarcity of land and without any natural resources, therefore construction costs are expensive (ie. materials and labors).
The important factors for determination of property prices are:
1.) Property type - Public housing (Flat)*, Private residential landed-property or non-landed property*.
2.) Distinct - distance to the CBD.
3.) Accessibility and travel convenience - for example, walking distance to Mass Rapid Transit (MRT), Light Rail Transit (LRT), Bus interchange, Shopping malls and educational facilities.
4.) *Floor level.
I believe AU does not have land issue and construction costs will be lower compared with Singapore, since the materials and labors easily obtain from within the country itself.
In fact, Singapore's property market similar with Hong Kong. Hope I have clear your doubts.
Singapore residential market is affected by oversupply risk, It is expected that the era of supply shortage to end by 2015, due to a combination of rising completed supply and easing pent-up demand. Unsold inventory has risen since 3Q13 as developers race to launch products ahead of home price weakness. This also reflects declines in demand due to the effects of the seven cooling measures.
http://www.bnppresearch.com/?E=cjafhksvuql
Other aspects to consider:
- Supply & Demand. Has the population dramatically increased, or has residential housing units decreased?
- Has income and wealth increased dramatically?
- Has mortgage underwriting standards changed?
- Has the average home ownership tenure decreased (sign of speculators flipping homes)?
- Has there been a raise in non-owner occupied purchase loans?
- Are there similarities to other home value bubbles (i.e. U.S.)?
Competition for prime assets will intensify further.
New wealth from the emerging economies will intensify competition for prime assets; the investment community will need to think laterally to earn attractive returns. They might have to develop assets in fast-growing but higher risk emerging economies, or specialise in the fast-growing subsectors, such as agriculture, retirement, etc
https://www.pwc.com/sg/en/real-estate/assets/pwc-real-estate-2020-building-the-future.pdf
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