Tuesday, 27 July 2010

The "market" as deus ex machina (or, The Scapegoat For Rising Housing Prices and Other Inconvenient Realities)

Today’s newspapers (both TODAY and The Straits Times) featured comments by National Development Minister Mah Bow Tan about rising prices in the public housing market.

"It's in the interest of buyers to have low COVs, but it's in the interest of sellers who own the flats to have high COVs. So, between these two groups, we must let them fight it out. The Government is not able to settle or fix COVs to say that it should be this or this figure. The Government prefers not to interfere. But we can interfere in the supply. This is something we can control.”

In short, the Government will not set or fix prices directly -- but it will indirectly influence prices by manipulating the factors that affect prices. In particular, the Government will influence supply, and then leave it to the magic of “the market” to set prices. These latest statements are consistent with what Mr Mah told Parliament back in April, that the Government intended to leave the purchase of resale flats by first-time flat buyers "to the market".

"Leave it to the market" is a rationale that is often trotted out, to justify why the Government should not intervene in something or other, be it rising housing prices or rising COE prices. But government policy can have a huge impact on prices (and sentiment, which can drive prices in markets like property), as implicitly acknowledged by Mr Mah when he talked about ramping up supply as a way to moderate price increases.

In this case, what’s ironic is that the Government is now scrambling to fix a problem that is largely of its own creation. Why are housing prices rising so quickly? Here are some likely reasons, all linked to Government policy from the last few years:

  • Recent HDB changes making it easier for HDB owners to rent out the entire flats. After living in the HDB flat for a few years (I think 5 years in most cases), HDB owners can now rent out their entire flats even after upgrading to private property. Previously, they would have had to sell their HDB flats if they want to move into private property. Well, not any more. This has been portrayed as a liberalization, and hence presumably A Good Thing. But the reality is that it keeps potential supply off the resale market -- I suspect that many HDB-owners who upgrade to private property actually keep their HDB flats as an investment property to rent out. In fact, HDB flats strongly outperform private apartments in terms of rental yield.


  • The influx of foreigners. I work with a lot of foreigners, and I think in many cases they do bring net benefits to Singapore. In light of our immigrant roots and as a matter of necessity, I do think we have to be open to foreigners. But I also believe that we are close to the creaking limits of our country’s present infrastructure; that the rate of increase in recent years has been too fast; and that this influx has limited the opportunities available to locals. In other words, the Government did not think through the costs of such a rapid increase in the foreign population in Singapore (costs which are of course not captured in the GDP figure), and continues to disregard these costs. The Government’s approach of “sharpening the differences” between citizens and foreigners misses the point, because it focuses on increasing prices for foreigners, which only makes life harder for them without making life better for citizens.


  • The ease with which foreigners could become permanent residents (PR), thereby qualifying to purchase HDB flats. I know of at least one foreigner whose PR application was approved in 3 weeks or so. This has massively increased demand for public housing, hence driving up prices. The absolute number of PRs purchasing HDB flats may constitute a fraction of the overall HDB-purchasing population, but you actually only need a small number of purchasers bidding up prices at the margins, for overall property prices to increase.


  • The rise of en-bloc sales over the past decade. I’m told that a popular retirement strategy for older folks who cashed out from en-bloc sales, is to buy a HDB flat in cash and then live off the massive cash balance left over for the rest of their retirement. The lax rules for en-bloc sales therefore channels cash-flush buyers into the HDB resale market, hence the advent of near-million-dollar HDB flats.


  • HDB’s dogmatic adherence to its Build-To-Order (BTO) model. Burnt from the huge supply overhang of public flats when it massively over-built in the face of the HDB bull market that ended in 1996, HDB now only builds flats when it is confident of selling most of the flats built. This means that HDB will launch a project (i.e. start taking orders from interested buyers), but only start construction when most of the flats (I think at least 70%) have been booked. This avoids a supply overhang, which means that the cost of public funds being tied up in unsold public housing (which is saved by the Government) is transferred to citizens, who end up bearing the cost of a longer waiting period for new flats. In addition, the delay in getting a flat drives potential buyers to the resale market. This in turn pushes up resale prices, which actually then increases BTO prices down the road since BTO flats are priced at a discount to the then-prevailing market price. So this policy is a vicious cycle that delivers a double whammy (if not more) to prospective buyers.

But most fundamentally, increasing HDB prices marks the coming to roost of the Government’s deliberate (and much ballyhooed) policy of making one’s flat a financial asset for retirement purposes. This works only if flat prices increase over time – otherwise, they would make really bad investments that are unsuitable for retirement. By mixing up the public policy goals of providing affordable accommodation and helping citizens plan for their retirement, the Government has ended up achieving neither, with public housing becoming increasing unaffordable and many retirees being asset-rich and cash-poor.

The point that I ultimately want to make, is that the “leave it to the market” message is deceptive when the bearer of the message is able to manipulate the market. Markets do not exist in vacuums, but are instead influenced by government regulations and policies. So when the Government declines to intervene or to change the underlying rules, it is really a conscious political decision to maintain the status quo.

In such cases, the “market” becomes a convenient scapegoat for a mess that’s really of one’s own creation. A deus ex machine, if you will, that conveniently resolves an inconvenient political truth.

So the next time a government official or politician talks about “leaving it to the market”, or blames the market for something or other, be a little bit more questioning. Drill deeper and find out if that person is really helpless to influence the market. I would bet that’s not the case in most cases.

36 comments:

theasiafile said...

Given that the government has near-total control over the supply of land and the building of new housing, the direction of property prices is effectively in the government's hands.

Just another part of the quasi-socialist domestic economy in Singapore

yangshuyanfaith said...

Downgrading from private property to retire in a HDB flat sounds like a good retirement strategy - how else can common folks retire these days?
:)

Rockeye said...

The Government whose is the MAIN beneficiary of the increase in the cost of public housing will NOT step in to correct the market unless she is the on verge of losing the Rights to form the next Government in the upcoming general election.

singapore man said...

Leaving the invisible hand to guide the HDB market into equilibrium is alot of hogwash, or hiding behind an inconvenient truth. The current problem is clearly a supply side issue which the government could control by the number of flats they build, and they control the demand side using regulation. So why the government is so hands off on the resale market is really hard to fathom as they are clearly in control in the supply and demand.

TracyTan said...

Dear Kum Hong,

An insightful and analytical article. Thank you

Fievel said...

Greedy, home owners citizens and new citizens will vote for him in Tampines.
The rest of us will all vote against.
So his continued existence as MP for Tampines largely depends on the make-up of these numbers.
Anyone with access to data or statistics care to venture a guesstimate?
btw, if he gets booted out of Tampines like he so deservedly should, can he continue to be Minister for National Development??
I look forward to the day when our nation's development is no longer under his charge..for it sure is going in the wrong direction!

Fievel said...

If only Kum Hong will join a political party and contest Tampines!

張袁小璇翊瑜 said...

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家唐銘 said...

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瑤彥妏德 said...

成熟,就是有能力適應生活中的模糊。............................................................

emily said...

Completely agree to you may be that is the reason why HDB Singapore rates are setting records specially HDB resale prices. Just read this "HDB resale prices set record high" news in Property Guru which provide details pricing structure.
This is surely going to benefit not just people who need to shift to private property but also the ones who must be looking for HDB for rent can now have more options

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zero nm said...

Thanks for taking your time to write it up. The problem, those who can reach your blog, and understand and follow your explanation have already concluded the "goat head dog meat" that Mah has been selling. Let try to simplify and push the message to readers of New Paper, SIn Min & Wao Pao.

I do not think Mah does not know what he is selling and pushing. He is not entirely wrong as he is not referring to FREE market where there is totaly free entry and free exit, just like the COE.

Keep it up

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Tommy said...

Home ownership in Singapore leads to a 30 year mortgage and fear of losing one's job. Hence a quiet acquiescence to the status quo in the fear of losing one's house. Once one owns and lives in an HDB flat, housing value inflation is of no use in retirement unless one sells it and moves to another country. If you continue to live in Singapore in the HDB flat after retirement, then you cannot monetise your savings. The irony of the recent rules which prevent an owner from owning both an HDB flat and a private flat is that the value of HDB flats will not appreciate as much as the private condos. This creates a higher wall between the social classes and make our social classes more divided.

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