Property market fever: What can we do?

These graphs worries me.

SRPI Index:

HDB RPI:

This is a classic property bubble which has gone overboard, with prices spiking above those last seen in the 1997 property boom (as you can see from the HDB RPI). And while the Asian Financial Crisis managed to burst the previous bubble, it seems as though the deep recession that we are coming out from only temporarily halted the increase in overall housing prices.

Furthermore, there is no obvious basis for these price changes, as you can see from the following graphs of the HDB RPI (data from the second quarter of 2003 to 2009), total population (mid-year estimates, abbreviated as POP) and real GDP (abbreviated as RGDP). I have set the 2003 values for both RGDP and POP as a reference point of 100 so as to facilitate comparison and scaling with the RPI (which was at 100.3 for the second quarter of 2003)

Not only has our real GDP outpaced the RPI, there seems to be little correlation with it. You might say that the RPI lags the economy, but I do not think this is very likely to be the real factor.

While population might have been a significant factor behind the price movements in previous years, the recent property boom has entirely been out of proportion of the corresponding population increase.

So, while others are quick to say that the government’s immigration policy is causing the current crisis, I think the data makes it quite clear that speculation, not immigration, is the real cause.

I have always found the government policy of letting HDB prices appreciate in real value over time a bad policy. Firstly, it creates the unhealthy expectation that property is a safe investment in which you will always profit, helping to create the sort of bubbles we are seeing right now. Also, it is not effective in achieving the policy’s aim of fostering a sense of belonging to the country. Money can buy material goods, but it cannot buy true loyalty.

Similarly, I think the government can and should do more to restrain this speculative bubble. Sharp fluctuations in property prices are not healthy signs in any economy. And while increased wealth from a house is good, we need to ask if the increased prices are sustainable. If not, this temporary wealth has little benefit or can even be harmful, as this encourages owners to mortgage their homes for instant money. If housing prices subsequently plummet, these owners may find themselves unable to repay the loan even after selling off their homes, just as what happened with the US subprime crisis.

Given the immense harm speculation in the property market can cause, I think the system should be designed to deter speculation. In particular, we could adopt the MAS strategy of a band system, where the Sing dollar is allowed to fluctuate between a band set by a basket of currencies.

Similarly, we could let the RPI or SRPI fluctuate within an undisclosed band, determined by economic factors like inflation and median household income.  In order to influence and maintain prices within the band, a sizable but self-sustaining fund with a pool of reserve homes (preferably within the HDB) could buy up excess property when prices hit the lower bound, and release homes into the mass market when prices spike above the upper bound.

A major difficulty with this policy would be the fact that the reserve homes would be unused during this period, presumably wasting taxpayer resources. I have two suggestions for these houses:

• Homes for rent to the needy.

Suitable means-tested and homeless candidates can apply for homes for a nominal fee for short periods ( 1 to 6 months). These leases are renewable subject to availability of homes and are conditional on the good maintenance of the home.

• As commercial office space in the heartlands.

Any excess capacity remaining could then be leased out to startups and businesses, with rents determined by auction. Again, the leases are renewable and extremely short so as to facilitate their quick release into the housing market if necessary.

This is not a perfect solution. In particular, with this scheme, extreme price spikes may have the unfortunate effect of  requiring drastic intervention into the housing market, displacing many existing homeless people from their rental homes.

But something needs to be done.

To those whom prefer laissez faire and fear that excessive government intervention could worsen the situation, I think the past year has shown the damage that a burst housing bubble can do to developed economies like the US. In this case, government intervention may be the only way to make sure the free market works properly and fairly for all.

It may sound contradictory, but it is fundamentally true.

We need means to contain speculation, and some form of government action is necessary now.