Quite an insightful article on why
HDB should keep a minimum inventory of flats.
There are too many yes-man in the
govt who believes its either BTO or a huge glut of HDB flats.There
are no shades of grey...
http://www.businesstimes.com.sg/sub/money/story/0,4574,384341,00.html?
The necessary evil of inventory
There is a carrying cost but that's the price to pay if
the goal of policy makers is to have stable prices
By JOSEPH CHONG
IMAGINE the following announcement: 'Due to an administrative
oversight, HDB has discovered 10,000 unsold completed apartments.
The Housing Board intends to sell these gradually over the next
three years.' What would the impact be on HDB resale
prices?
I posed this scenario and question to quite a few on April 1
recently and the answer was quick and unanimous - it would
stabilise HDB re-sale prices. The recent triumph surrounding the
announcement that HDB had managed to sell 31,000 completed flats
and had no more unsold inventory is misplaced. I believe it is a
policy error not to carry any unsold inventory.
It should be official policy for HDB to always carry a minimum
of unsold inventory. Without ready inventory to sell, HDB would not
be able to meet any sudden surges in housing demand or compensate
for demand misestimates.
Inventory and spare capacity are a necessary evil if the goal of
policy makers is to have stable prices across various markets.
Indeed, we see this in fiscal and monetary targeting across the
world daily.
For example, central bankers and markets around the world watch
the unemployment rate very closely. We want a rate as close as
possible to NAIRU but not zero. NAIRU is the Non-Accelerating
Inflation Rate of Unemployment. That is, a steady state
unemployment rate above which inflation would fall and below which
inflation would rise.
NAIRU in the US is estimated to be about 5 per cent. If
unemployment falls too low, it invariably leads to a spiralling
jump in prices and eventually a bust in the economy as interest
rates rise to quench inflation. Yes, there is carry cost of having
unemployed people but the cost of a recession is far worse.
This also applies to the argument from HDB that unsold flats
have a carrying cost. What is good for HDB may be bad for the wider
Singapore economy. Without the stabilising effect of unsold
ready-to-stay inventory, volatile housing prices carry a far bigger
cost for the economy. In any event, unsold flats can always be sold
to reflect their holding costs. In an upturn when demand surges,
these should still fly like hot cakes.
Indeed, evidence of this stabilising effect of unsold inventory
can be seen in 2005 to 2007. Despite a surging economy then, HDB
resale prices moved up more modestly than private property. Indeed,
I would argue that carrying unsold inventory intentionally would
also allow HDB to influence to some extent private property
prices.
Oil as example
A very good example of the stabilising effects of spare
inventory is Opec, in particular Saudi Arabia. Spare production
capacity (inventory stored underground) of about 5 million barrels
per day or about 6 per cent of global demand has allowed Opec to
keep prices at around US$80 per barrel. Prices shot up to US$140
per barrel in 2007 because Opec ran out of spare capacity. And the
markets knew that.
In business, we would love to carry zero inventory but this is
not possible as demand surges cannot be predicted with absolute
certainty. Even build-to-order firms such as Dell carry inventory!
If we have nothing to sell when demand picks up, business goes to
the competition. Here again, the cost of losing business outweighs
the cost of carrying inventory.
Unfortunately, the topic of inventory and spare capacity is
often poorly reported or analysed in the financial media. It is
however crucially important. Changes in inventory affect the
measurement of true GDP growth and corporate profits. Misunderstand
this and you may end up investing in property or your business on
fall premises.
For example, the US reported 'sterling' GDP growth of around 5.6
per cent for 1Q 2010. See chart from Moody's Economy.com which
shows this impressive trajectory. Unfortunately, the breakdown of
data shows that more than 3.5 per cent from this 5.6 per cent comes
from re-stocking. That is, final demand, which is the true level of
growth, was only 2 per cent.
Indeed, this is affirmed by other data points. Currently, US
real retail sales (ex-autos and gasoline) are growing at about 2 to
2.5 per cent annually.
When demand started to recover in the second half of 2009, US
firms did not ramp up production because they were uncertain of the
future. They sold from existing inventories. Now that things have
stabilised, inventory has to be re-built because the shelves are
nearly empty.
Unfortunately, the latest ISM data shows that the pace of
inventory rebuilding is far greater than the pace of new orders -
meaning that production has to be throttled back in the second half
of 2010. I expect US GDP growth to taper off to 2.5 per cent by the
end of 2010 - the level of sustainable final demand.
The big jump in Singapore's 1Q 2010 GDP numbers, led by
manufacturing, is very likely due to this re-stocking in the US.
Once the US is through re-stocking, Singapore's GDP will taper off
as well. Therefore, it is premature for any hikes in CPF.
Does it make sense to stipulate a wage increase for labour just
because companies are re-stocking? I thought growth through
productivity was all about growing one's wages from higher skills
and global relevance.
The author is CEO of financial adviser New Independent. He
welcomes feedback at [email protected]. This
article is for information only. Readers should seek independent
advice before making any investment decisions
