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29-09-2010, 07:16 AM
Sep 29, 2010
THE ST INTERVIEW
The housing bubble trouble
In Singapore, Government's repeated intervention in the market is a good thing, says US expert
By Tan Hui Yee, Correspondent
IN MOST parts of the world, a government that intervened in the property market three times in one year would heighten uncertainty.
But not so in Singapore, observes Professor Joseph Gyourko, a housing economist from the University of Pennsylvania who was in town recently to speak at a forum conducted by the National University of Singapore's (NUS) Institute of Real Estate Studies.
He says: 'If the government gets into a habit of intervening all the time, it will harm market development. Investors won't want to invest because they can't be sure what the government is going to do Monday versus Friday.'
But the picture is clearly different in Singapore, he notes. The Government tried to temper speculation by abolishing developers' interest absorption schemes in September last year, and followed that with two additional rounds of measures in February and August this year that made it increasingly expensive for speculators to flip properties.
'You are sending a clear signal to investors that you are going to stop the price boom. The fact that you're doing the third round is a signal that you are going to do whatever it takes,' he says.
'And that actually may be providing clarity. You are telling everyone, 'Okay, we're just not stopping, we'll come up with something else down the road.''
This show of political will may just be what it takes to deflate Singapore's property bubble, he says.
Prof Gyourko, 54, knows bubbles intimately, having studied the sizzling property market in China and being privy to local developments as a board member of NUS' real-estate institute.
He believes home prices in Hong Kong, Singapore and China are being driven up by a mixture of real economic growth and short-term capital flows.
'Singapore's inflation rate is above the rate banks pay on deposits. When that happens, people want to put their money elsewhere. And one of the few alternative investments you can make is in housing.
'That's shifting a lot of money into homes. And that's not permanent or sustainable,' he says.
When the economy grows rapidly again, companies will ramp up production, the competition for capital will heat up, interest rates will rise - leaving over-leveraged property buyers in danger of defaulting on their loans. That could send property prices into a tailspin.
That said, he concedes that housing bubbles are by nature unpredictable, and the fact the Government here had to intervene three times indicates it had difficulty calibrating the measures required to tame the beast.
'Clearly, if the Singapore Government had known, it would have introduced Round Three right up front,' he says.
He rejects claims that rising property prices widen inequality, based on his experience in the United States market.
'The housing market is cyclical, so the claim is not true in the long run. In the US, when we had the boom...people were worried about wealth gains along coastal California and the East Coast of the US, which had the highest price rises. But prices cycle, and guess what? They fell - by a lot. What generates long-run inequality are skill differences, not home ownership,' says Prof Gyourko.
He predicts property prices in Hong Kong, China and Singapore will take a hit in the next one to three years, effectively cancelling out the gains owner-occupiers have made in the recent run-up.
'I don't worry about the fact that people got a bunch of capital gains because I think they are going to lose those capital gains,' he says, pointing out that these are paper gains.
But although property gains and losses even out over a lifetime, the resulting short-term frustrations may be hard to handle. 'It's easy for an academic to go, 'Don't worry, this stuff cycles.' If you are a politician, you've got to worry about that person being angry now because he has the vote, and you've got an election coming up.'
He acknowledges that while land in Singapore is scarce and property prices can be chased up without adequate control, the Government here has tried its best to make housing affordable through its public housing programme.
'You guys do public housing about as good as it's done anywhere in the world,' he says. 'For such a small place, it's well-planned. It's affordable to people with modest incomes,' says Prof Gyourko.
But one suggestion he has is that Singapore could be more flexible about the housing grants or similar subsidies it gives households, to give them more freedom over what homes they can buy and where they can live.
Currently, subsidised households can use their housing grant of $30,000 to $40,000 to buy only HDB resale flats. With a voucher system, they would not be limited to government housing.
He also questions Singapore's system of allowing Central Provident Fund savings to be used to pay for homes. This encourages people to base a huge chunk of their retirement savings on the fortunes of the property market in a tiny country. In investment speak, this is considered 'undiversified'.
'That's a really risky thing to do. What happens if there is a housing market collapse?' he asks.
The Singapore property market has had its hairy moments: Housing prices plunged after the 1997 Asian financial crisis, although they have since bounced back and even surpassed 1996 levels.
Singaporeans, he says, have to understand that the CPF housing scheme amounts to an 'implicit subsidy' as it lowers the interest payable on bank loans by reducing a home buyer's loan amount.
'I view housing as a consumption good. I view it literally as 'I'm eating my house.'' That means retirement savings should be kept separate from housing expenditure, he says.
In his view, owner-occupied homes especially are not investments that can yield returns, so people should not devote their retirement savings to their homes in the hope of growing their money.
Asked about the attributes of an ideal housing system, he offers a verbal sketch of its key planks: It should be equitable, responsive and flexible.
This means society would have to determine some minimum quality of housing that everyone should be entitled to. Households that cannot afford to pay for this minimum standard would get subsidies. Poor households with children would get more subsidies because 'kids do not get to pick their parents, and thus, are not responsible in any way for their poverty'.
Ideally, housing supply should be plentiful, in the sense that the rules should allow developers to easily ramp up home building to meet increased demand.
This moderates housing prices, he says, as it will allow prices to be close to or at the level required to cover land costs, construction costs and a builder's usual profit.
Finally, an ideal system would offer different kinds of housing - including rental housing - to meet the needs of the population over its life cycle. It is also one where the population is 'educated on the true benefits and costs of the different types of housing'.
He accuses governments worldwide of a bias 'towards encouraging owning' homes instead of being upfront on the opportunity cost of doing that.
As a result, most people underestimate the costs of owning a property, he says. They forget the transaction costs of buying and selling a home are 'quite high', and it does not occur to them to set aside money for long-term maintenance.
Buyers also risk getting stuck with their homes if a sharp drop in prices pulls the value of their homes below the mortgage amount.
Unless a home owner in such a predicament has enough cash to make up the shortfall, he cannot move house. Some academics have fingered such 'underwater' mortgages as a possible explanation for stubbornly high unemployment figures in the US, as it means people living in declining cities cannot move to places where jobs are more plentiful.
In Singapore, which takes just about an hour to cross by car, the problems posed by such immobility are less serious. Still, he thinks being stuck in such 'underwater' homes could result in longer commutes to workplaces and stop families from moving close to the school they want their children to attend.
Prof Gyourko - a home owner himself in Philadelphia - is careful to declare he has nothing against home ownership, especially as it makes someone a stakeholder in his community. In the case of Singapore, it makes one a stakeholder in the nation.
But the goal of the Government should be to get people to 'make the right choice about owning versus renting, not that owning always is better'.
In sum, housing choices should follow people's needs over their lifetime, instead of determining how they have to live their lives.
Young people, he says, make 'natural renters' instead of home buyers because this arrangement allows them to respond quickly to changing circumstances.
'You can move to opportunity. You can get married. You can do all types of different things instead of being stuck in a house,' he says.
tanhy@sph.com.sg
THE ST INTERVIEW
The housing bubble trouble
In Singapore, Government's repeated intervention in the market is a good thing, says US expert
By Tan Hui Yee, Correspondent
IN MOST parts of the world, a government that intervened in the property market three times in one year would heighten uncertainty.
But not so in Singapore, observes Professor Joseph Gyourko, a housing economist from the University of Pennsylvania who was in town recently to speak at a forum conducted by the National University of Singapore's (NUS) Institute of Real Estate Studies.
He says: 'If the government gets into a habit of intervening all the time, it will harm market development. Investors won't want to invest because they can't be sure what the government is going to do Monday versus Friday.'
But the picture is clearly different in Singapore, he notes. The Government tried to temper speculation by abolishing developers' interest absorption schemes in September last year, and followed that with two additional rounds of measures in February and August this year that made it increasingly expensive for speculators to flip properties.
'You are sending a clear signal to investors that you are going to stop the price boom. The fact that you're doing the third round is a signal that you are going to do whatever it takes,' he says.
'And that actually may be providing clarity. You are telling everyone, 'Okay, we're just not stopping, we'll come up with something else down the road.''
This show of political will may just be what it takes to deflate Singapore's property bubble, he says.
Prof Gyourko, 54, knows bubbles intimately, having studied the sizzling property market in China and being privy to local developments as a board member of NUS' real-estate institute.
He believes home prices in Hong Kong, Singapore and China are being driven up by a mixture of real economic growth and short-term capital flows.
'Singapore's inflation rate is above the rate banks pay on deposits. When that happens, people want to put their money elsewhere. And one of the few alternative investments you can make is in housing.
'That's shifting a lot of money into homes. And that's not permanent or sustainable,' he says.
When the economy grows rapidly again, companies will ramp up production, the competition for capital will heat up, interest rates will rise - leaving over-leveraged property buyers in danger of defaulting on their loans. That could send property prices into a tailspin.
That said, he concedes that housing bubbles are by nature unpredictable, and the fact the Government here had to intervene three times indicates it had difficulty calibrating the measures required to tame the beast.
'Clearly, if the Singapore Government had known, it would have introduced Round Three right up front,' he says.
He rejects claims that rising property prices widen inequality, based on his experience in the United States market.
'The housing market is cyclical, so the claim is not true in the long run. In the US, when we had the boom...people were worried about wealth gains along coastal California and the East Coast of the US, which had the highest price rises. But prices cycle, and guess what? They fell - by a lot. What generates long-run inequality are skill differences, not home ownership,' says Prof Gyourko.
He predicts property prices in Hong Kong, China and Singapore will take a hit in the next one to three years, effectively cancelling out the gains owner-occupiers have made in the recent run-up.
'I don't worry about the fact that people got a bunch of capital gains because I think they are going to lose those capital gains,' he says, pointing out that these are paper gains.
But although property gains and losses even out over a lifetime, the resulting short-term frustrations may be hard to handle. 'It's easy for an academic to go, 'Don't worry, this stuff cycles.' If you are a politician, you've got to worry about that person being angry now because he has the vote, and you've got an election coming up.'
He acknowledges that while land in Singapore is scarce and property prices can be chased up without adequate control, the Government here has tried its best to make housing affordable through its public housing programme.
'You guys do public housing about as good as it's done anywhere in the world,' he says. 'For such a small place, it's well-planned. It's affordable to people with modest incomes,' says Prof Gyourko.
But one suggestion he has is that Singapore could be more flexible about the housing grants or similar subsidies it gives households, to give them more freedom over what homes they can buy and where they can live.
Currently, subsidised households can use their housing grant of $30,000 to $40,000 to buy only HDB resale flats. With a voucher system, they would not be limited to government housing.
He also questions Singapore's system of allowing Central Provident Fund savings to be used to pay for homes. This encourages people to base a huge chunk of their retirement savings on the fortunes of the property market in a tiny country. In investment speak, this is considered 'undiversified'.
'That's a really risky thing to do. What happens if there is a housing market collapse?' he asks.
The Singapore property market has had its hairy moments: Housing prices plunged after the 1997 Asian financial crisis, although they have since bounced back and even surpassed 1996 levels.
Singaporeans, he says, have to understand that the CPF housing scheme amounts to an 'implicit subsidy' as it lowers the interest payable on bank loans by reducing a home buyer's loan amount.
'I view housing as a consumption good. I view it literally as 'I'm eating my house.'' That means retirement savings should be kept separate from housing expenditure, he says.
In his view, owner-occupied homes especially are not investments that can yield returns, so people should not devote their retirement savings to their homes in the hope of growing their money.
Asked about the attributes of an ideal housing system, he offers a verbal sketch of its key planks: It should be equitable, responsive and flexible.
This means society would have to determine some minimum quality of housing that everyone should be entitled to. Households that cannot afford to pay for this minimum standard would get subsidies. Poor households with children would get more subsidies because 'kids do not get to pick their parents, and thus, are not responsible in any way for their poverty'.
Ideally, housing supply should be plentiful, in the sense that the rules should allow developers to easily ramp up home building to meet increased demand.
This moderates housing prices, he says, as it will allow prices to be close to or at the level required to cover land costs, construction costs and a builder's usual profit.
Finally, an ideal system would offer different kinds of housing - including rental housing - to meet the needs of the population over its life cycle. It is also one where the population is 'educated on the true benefits and costs of the different types of housing'.
He accuses governments worldwide of a bias 'towards encouraging owning' homes instead of being upfront on the opportunity cost of doing that.
As a result, most people underestimate the costs of owning a property, he says. They forget the transaction costs of buying and selling a home are 'quite high', and it does not occur to them to set aside money for long-term maintenance.
Buyers also risk getting stuck with their homes if a sharp drop in prices pulls the value of their homes below the mortgage amount.
Unless a home owner in such a predicament has enough cash to make up the shortfall, he cannot move house. Some academics have fingered such 'underwater' mortgages as a possible explanation for stubbornly high unemployment figures in the US, as it means people living in declining cities cannot move to places where jobs are more plentiful.
In Singapore, which takes just about an hour to cross by car, the problems posed by such immobility are less serious. Still, he thinks being stuck in such 'underwater' homes could result in longer commutes to workplaces and stop families from moving close to the school they want their children to attend.
Prof Gyourko - a home owner himself in Philadelphia - is careful to declare he has nothing against home ownership, especially as it makes someone a stakeholder in his community. In the case of Singapore, it makes one a stakeholder in the nation.
But the goal of the Government should be to get people to 'make the right choice about owning versus renting, not that owning always is better'.
In sum, housing choices should follow people's needs over their lifetime, instead of determining how they have to live their lives.
Young people, he says, make 'natural renters' instead of home buyers because this arrangement allows them to respond quickly to changing circumstances.
'You can move to opportunity. You can get married. You can do all types of different things instead of being stuck in a house,' he says.
tanhy@sph.com.sg
My Value Investing Blog: http://sgmusicwhiz.blogspot.com/