Tuesday, April 20, 2010

Property: Do something drastic or do nothing?

HOUSING markets everywhere are fraught with market failures and there is no housing market in the world devoid of government intervention.

I am stating the obvious, of course, but it bears repetition, especially in the light of the growing frenzy in the residential property market in Singapore. There are two schools of thought, diametrically opposed, on what should be done.

Would-be home buyers, especially first-timers, want the Government to ‘Do Something Drastic’ to control runaway prices. Depending on their aspirations, they want prices kept down for: new Housing Board (HDB) flats, resale HDB flats, executive condominiums or private condos.

The other camp wants the Government to ‘Do Nothing’ about rising property prices. This point of view was best articulated by developer Simon Cheong, who argued that private property served just 16.5 per cent of the population and should be left free of government intervention. In other words, the state should keep its hands off, and developers should be able to price condo units as high as the market can accept, never mind if the only ones who can afford the units are New York bankers or celebrities who want an apartment here so they have somewhere to sleep in between their board meetings or botox treatments.

Both points of view are disingenuous and limited. If the Government panders to either, you and I – the rest of Singaporeans who are neither first-time home-owners nor the super rich – will be worse off.

The majority would be better off if the Government judiciously steps in to ‘Do Something Selectively’ now and then to keep the market on a relatively even keel.

The Government has to consider the public interest in managing the property market. And so far, its handling has been a lot more right than wrong.

True, there is currently a mismatch between supply and demand, with queues for new HDB flats and at popular condo launches. This is likely to be a short-term glitch.

Critics also point to the last big property boom of 1996 before the Asian financial crisis hit, which was sparked in part by credit loosening for HDB resale flats, spurring a boom in demand for private property. Anti-speculation measures were slow in coming then. Since then, the Government has stated that it favours small incremental dampeners as the temperature rises, rather than wait for a blazing fire before trying to douse the flames.

But if you take a long view, a lot is going right in housing, thanks to the Government’s refusal to treat housing as a free market. Anyway, Housing Economics 101 tells us the housing market is rife with market failures.

Housing is heterogeneous – units are diverse and can’t be substituted. As a result, what constitutes an economically competitive price is often not transpa-rent, leading to information asymmetry.

The average unit takes about three years to build, so the time to market is long and the price is always prone to short-term swings while supply catches up with demand. So buying a housing unit is a lot more complex than buying, say, a cellphone.

Instead of pretending that the housing market is like any other market, the Government has explicitly turned housing into an object of social policy, making home ownership a national objective and tailoring policies accordingly.

A Housing Board flat is not just a home; it is an important component of the social safety net and an asset which can be monetised for retirement or in bad times. (Rent out a room for $500 a month, say.)

Pandering to those complaining of being priced out of the market, and ‘Doing Something Drastic’ to chill the housing market, will be a great disservice to existing home owners. Simple arithmetics tell us the issue of rising housing prices cannot be one that disgruntles the majority. The 30,000 young couples who set up home each year may be vexed, but the 900,000 who already own their homes are probably not.

On the other hand, ‘Doing Nothing’ is also not a good idea as it could lead to an asset bubble.

Every government in the world intervenes in the housing market for social objectives. In the United States, subsidised mortgages help low-income households own homes. Tax exemptions for imputed rent for owner-occupied homes and mortgage interest deduction make it attractive for people to buy their own homes, rather than rent.

An interesting paper by Ms Rebecca L.H. Chiu of the University of Hong Kong in 2008 looked at government intervention in housing in Singapore, Hong Kong, Taiwan, South Korea and China before and after the Asian financial crisis of 1997.

The paper found that every government intervened. Taiwan subsidised housing loans liberally. The South Korean state monopolised land supply, introduced price caps at different points of the cycle and used capital gains tax and property tax to dampen demand. Hong Kong slowed down land sales to mitigate supply. In contrast, the paper found Singapore’s intervention in the years immediately after 1997 ‘mild’.

Singapore has got the big picture on housing right with its hybrid system, which combines socialist-style provision of mass housing with elements of free market competition and market-driven pricing in both the resale HDB market and the private property market.

The result is an underlay of housing security benefiting almost all households, with 90 per cent being able to afford to own homes. New HDB flat prices are not allowed to soar freely in tandem with a bullish market, but are priced with an eye on affordability and pegged to median income levels, ensuring the median income-earner can always afford a home.

Market forces are allowed some free play to allow home-owners to realise the value of their assets – but with the Government retaining a watchful eye in case of wide swings.

Instead of ‘Doing Nothing’ or ‘Doing Something Drastic’, the best policy in an overheating market is precisely what the Government is doing now: Stay cool, watch the market and be prepared to ‘Do Something Judiciously’.

Source: Straits Times, 20 Apr 2010

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