Saturday, May 21, 2011
I was watching at Robert Shiller's video on housing bubbles around the world. What strike me is the similarities in price rise and the subsequent bust among western countries. There were a few countries such as France where the govt intervened early to prevent a housing bubble that avoided much of the pain later. However, many other govts did not have the foresight and allowed the banks, developers and speculators to party on until the bubble burst and took the banking system down with it.
Late last year I met a housing agent who was promoting a new condo at the bus interchange. I was quite shock at the $1200 psf price for a condo quite far from the city. The agent said that housing prices will not drop in Singapore because more foreigners are coming. While it is true that the population expansion has lead to higher demand for housing, if you look at the chart on the right, housing prices also rose sharply in Australia and Hong Kong where there is no significant increase in population size and the govt there did not open the immigration floodgates. A second reason could be figured out from ex-Minister Mah's last set of cooling measures that include restriction on how much corporations can borrow to invest in property. Foreign speculators, both individuals and corporations looking for assets to buy in a low interest rate environment, added to the demand. There is a belief that cash rich Chinese restricted by China's property curbs, went to Hong Kong to buy causing prices there to shoot to the moon and some of the buying spilled into the Singapore housing market.
While there may be many factors associated with the current rise in property prices, there is only one factor that can hold up prices in the long term - rise in median income. Tharman has said that his goal is to increase median income by 30% in 10 years. Even if he miraculously achieve this goal in 5 years, the median income rise cannot support the current housing prices. The recent cooling measures have slowed the price increase and flatten prices in certain categories of housing. While it is hard to pin-point the peak of the market, there are downside risks that one should worry about. The high housing price has caused Singapore's competitiveness to fall as cost of living rose. The global economy does look too healthy with sovereign debt problems threatening to erupt into a new crisis ...and even if there is no severe economic crisis, inflation worries have led to govts tightening up and slowing growth.
Under the PAP govt, housing has become interlinked to retirement and a fall in housing prices will have an impact on Singaporena's ability to retire. Once prices rise too quickly, history shows there are few elegant painless solutions. We can learn fromn an earlier property bubble in 1996. The govt/MAS intervened too late and when the Asian crisis came along, the prices had a long way down to fall and that led widespread problems in the economy - at that time, Alan Greenspan still had many tricks in his bag to get the global economy out of the woods...3 rapid interest rate cuts and the global economy was back on its feet in 1999. However, we may not be so lucky the next time housing prices come down. As the cooling measures contain further gains in housing prices, this could be a market just waiting for something to happen. ....according some experts the debt levels due to property has already risen to dangerous levels:
Remember a while ago, Tharman went on CNA in a political forum with Gerald Giam and Vincent Wijeysingha plus other opposition members. When asked about the high housing cost, he said it still looked okay because the average debt servicing ratio of 28% of income is sustainable. However, if you watch the above video clip, this 28% is due purely to the articifially low interest rates we are seeing today and when interest rate rise this ratio will shoot up quickly. ...and problems can get very big very quickly.
Posting Time 9:44 AM
Posted by Lucky Tan