Averting a property bubble

[Behappyalways]

If there is a drastic fall in property price, govt will reconsider the 7 cooling measures....stamp duties might be reduced or abolished, loan amount might be increased and etc....the more cooling measures they enact, the more tools/ways they can use when the situation is reversed....just like a dam.....it can blocked/reduced water flow but when raised it can increased water flow....

on the other hand when interest rate increases and interest payment amount surges, those who borrowed excessively might have no choice but to sell their house.....

government is controlling home prices.

In the news today there's an article that says population is going to reach 7 million in 2030 means any drastic fall in property prices will create short term opportunities you will see a stampede of FT coming in to buy to support the prices.

Maybe one day prices will be so freaking high that your children and most singaporeans will not be able to afford and may even have to rent from FT and PR.

[touzi]

When Singaporeans start to leave this island in droves will probably be the time when foreigners stop coming here.

By 2030 I would have retired. I hope by then there will still be enough people paying tax so that I can enjoy some healthcare subsidy. I don't really care if the tax payers are not born here. However I would prefer gahmen to catch them young so that by the time they start to pay tax, they would have integrated into our society. Unfortunately to catch them young, you have to catch their parents ( and maybe even grandparents ) now ! So until someone can convince me that there is a better solution, I am prepared to put up with the discomfort of having so many "strangers" in my own country. Obviously this is just me, others may have more options.

[corporatefatcat]

Malinvestment
http://wiki.mises.org/wiki/Malinvestment

Food for thought: is Austrian absolute free market capitalism the problem in the past 10 years or govt intervention? IMHO absolute free market capitalism is as utopian as communism. There is certain logic and self interest enlightenment in compassionate capitalism.

I was not advocating a utopian laissez faire society (although that would be nice).
I am just stating how malinvestment occurs when the interest rate/price signal is distorted through artificially suppressing it.
So... yes the problem we had in the past 10 years was largely due to Fed/Government intervention through these distortions.

And by compassionate capitalism I hope you don't mean this:
http://25.media.tumblr.com/5c2449ac531dd...o1_500.jpg

[specuvestor]

No... compassionate capitalism is not about welfare state. People confuse socialism to welfare state with populist roots. Strictly speaking governments have to believe there is value in socialism in which collective decision making for a collective pool of resources for the greater good makes sense, otherwise they are mocking themselves. Just like it is ludicrous that central bankers claim to be Austrian economists Compassionate capitalism is to use capitalism as a TOOL, not an end to itself, so that the majority can move to middle class and not stay in a poverty trap, which in turn will benefit the society as a whole, including the rich. Interesting, disregarding the nomenclature, that's what the Chinese govt since Deng believes too.

The problem in past 10 years started with the repeal of Glass Steagall. And then we have the unbridled market adjustment ie invisible hand ideology advocated by Greenspan, not so dissimilar to Austrian. The problem is that at the end it seems that this invisible hand is controlled by a bunch in wall street. With outsized risk/ reward, leveraged betting became the norm as people betting they will not be holding the ball when the music stops.

Frankly I don't believe nobody knew it was coming. Just like Singapore property market now... Most people know the end would come but everybody is listening to the music. When the music ends, interest rates will collapse regardless whether you are Austrian or not as demand collapses. The difference is Austrian thinks the great depression is a good thing. I think making millions suffer and die is probably not a good thing. And in a monetary system, the banks are the conduits. So if the Austrian view is to let banks collapse, I am not sure how monetary mechanism can be transmitted, unless of course we abandon monetarism and go back to bartering. That's why glass steagal is the right policy to protect "old school" commercial banks from the "flamboyance" of "high" finance.

HK is a good example of laissez faire society that the tycoons control policies in the end because capitalism is one $ one vote. Their govt is hand tied in their property policies due to tycoons' self interest. Personally i wouldn't want to be living in HK now, with the highest property prices in the world. Unbridled capitalism is as dangerous as communism. Animal Farm will still happen if the capitalists controls the institutions of power, instead of the people, which we are seeing signs of in the US. People in wall street are still unrepentant and so many still think capitalism is the key to solving the problems, and hence the bankers and policy makers are not held accountable.

[corydorus]

I did a quick calculation, a higher interest rate is unlikely to result in the bubble bursting. There maybe few who fallen behind but is just worth a newspaper read. Will need other factor which clips the cash flow such as recession that is serious enough to make people out of job.

[Muck]

Grateful if you could share your quick calculation.

[corydorus]

I was just computing from my today blogging and realized that the damage is not that bad.

Do your own sum as i am not an expert but just sharing my thought.

Cory Blog on Interest Rates on Housing

Using an example of 1M condo so a HDB impact should be much smaller.

At 1.5% rate, monthly payment : $3,860
At 3% rate, monthly payment : $4,437 (up 14.9%)
At 5% rate, monthly payment : $5,280 (up 32%)


Cory

[specuvestor]

Cory your numbers should look different if you use 30 years, which is probably the norm that people max it.

In your website why is the effective compound rate different from the interest rate? They should be the same as mortgage are declining balance.

[corydorus]

Yes for 30 years the spread is slightly wider but the monthly amount is smaller. So impact is even smaller from interest rate.

The effective compound term maybe slightly misleading if there is financial term for it. I was trying to compute XIRR between total amount paid VS purchase price. Though there is monthly payment in-between, i like to remove their complexity so that i have a good view compared investment returns annually. So it maybe same as you mention if do nothing with cash in bank.

[specuvestor]

Impact is smaller from monthly payment point of view as it is stretched out but substantial on a % increase point of view. So it all depends on our assumption on the borrower. At 5% 30 years interest paid is about the size of principal.

I think cash-flow in between over long period is very important. It's the difference between coupon paying and zeros