The problem now is rising asset prices as global capital pours in
By Robin Chan
THE Real Estate Developers' Association of Singapore (Redas) had a sharp riposte for the Government on Wednesday night, after an unprecedented set of cooling measures was unveiled for the property market.
It said there had been 'no return to a speculative market' in Singapore - implying that the Government misread the problem of continually rising prices and consequently applied the wrong sort of medicine.
With all due respect to Redas, I suspect that the association may have been the one to have misread the problem.
That is because any casual observer - and so, certainly policymakers in the Government - can quite easily tell that there is very little speculation now in the property market.
Subsales, a classic indicator of speculative buying, now constitute just 6.6 per cent of transactions - their lowest level in five years.
The Government also killed off most, if not all, speculative activity by imposing a hefty seller's stamp duty of up to 16 per cent on any property that is resold within four years.
So the measures announced on Wednesday could not have been about warding off speculation. That issue has mostly come and gone.
The measures also did not seem to be about protecting buyers against default. That objective was largely met by progressively lowering the loan-to-value ratio to 60 per cent for property investors with an existing home loan, to ensure that they are adequately cushioned against a sudden fall in prices.
So if they were not primarily about preventing speculation or protecting buyers, what were the latest curbs really meant to do?
To me, the answer does not lie with Minister for National Development Khaw Boon Wan or his colleagues, but with economic agencies like the Monetary Authority of Singapore (MAS).
For a while now, Singapore's financial stability watchdogs have been warning about the dangers of rising asset prices as increasingly large waves of global capital flood into the country in the current era of low interest rates.
In MAS' recently published 40th anniversary book, its managing director Ravi Menon is quoted as saying that monetary policy has traditionally focused on stability in consumer prices, but 'dislocations in asset prices' like property prices can be much more disruptive to economic growth. He made the same point in a speech last week.
To see this, we need only look back a couple of years to the last global financial crisis, which was triggered by a property bubble that burst in the US and parts of Europe. In Singapore, buyers and developers took almost a decade to recover from the 1996 property crash.
The problem, Mr Menon says, is that 'we don't have a means for even measuring asset price inflation, let alone a coherent set of tools to deal with it'.
'Developing a toolkit to address asset price inflation is going to be a key challenge for the next 10 years,' he concludes.
'What does it mean for adjusting our existing policy framework - I don't know. I do know that we just cannot sit still and continue to apply the old paradigms. And we may need solutions that perhaps go beyond the MAS.'
Indeed, in announcing the property curbs, Deputy Prime Minister and MAS chairman Tharman Shanmugaratnam put large investment flows into the property market at the heart of the rationale for policy change.
He said action was needed now to 'avoid the prospect of a major, destabilising correction further down the road'.
Seen in this light, the property curbs announced on Wednesday night are really a prudential measure to safeguard the economic stability of Singapore.
The risks are very real. With anaemic economic growth forecast for all the world's major developed economies - the US, Europe and Japan - central banks look set to continue pumping cheap money into markets. There is already talk of a third round of quantitative easing and more interest rate cuts in Europe.
Much of that money will flow into Asia, which has more attractive growth prospects. And this will send more money into hard assets like Singapore property.
The island Republic is already seen as a safe haven for foreign investors and its property market is open and highly attractive. Bank of America-Merrill Lynch economist Chua Hak Bin said that for Singapore, these episodes of foreign capital inflows (and outflows) can be 'enormous and unsettling'.
A second factor influencing these latest measures is political. As Citigroup economist Kit Wei Zheng put it, part of the social contract in Singapore is to turn each average worker into a property owner and allow him to benefit from asset price inflation.
Therefore, property prices ought not to rise faster than people's ability to pay those prices, that is, they should roughly be in tandem with wage increases.
But the link between property prices and wage increase breaks down if a substantial proportion of purchases is from foreigners whose ability to pay has nothing to do with Singapore's economy.
Will the measures work as intended? Commentators say there are two major risks.
One drawback is that they could signal to foreign investors that Singapore is becoming less open, even if people like Mr Tharman speak to the contrary, especially as it comes on the back of tighter immigration laws.
Another is that these measures could further drag down growth in the Singapore economy, which is already expected to grow a weak 1 to 3 per cent next year.
If home prices collapse, consumer spending will be hit. Business services will likely slow as property transactions freeze up, conveyancing activities wind down and mortgage loans soften further, affecting banks, law firms, property developers and agents.
It all just goes to show how tricky it has become to manage all the interconnected parts of an open and global economy.
'I think the world is in an experimental phase on how to deal with asset price inflation. And in Singapore we have been doing our own experiments,' says Mr Menon in the MAS book.
So as the toolkit is being refined and expanded, expect plenty of heart-stopping moments like Wednesday night's along the way.
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