October 20,
2009 by admin
Filed under
Opinion
Leave a
comment
OPINION
On
Christmas Day 1989, the Bank of Japan raised its benchmark interest
rate by half a percentage point. Nine months later, the Nikkei
stock market index had fallen by nearly half, and by 2001, it had
shed 70 per cent of its value. Land prices followed suit 80 per
cent between the end of 1989 and 2002.
With
inflated asset prices went Japan’s inflated growth. Between 1992
and 2003, growth averaged less than 1 per cent a year. Japan
experienced what became known as the Lost Decade.
What
went wrong? In the 1980s, when Japanese companies appeared destined
to conquer the global economy, the country had become convinced
that its miraculous breath-taking growth will never end.
The
result of such thinking – that economies always grow, property
prices and stocks always rise – created an exuberance that proved
irrational, not quite unlike what Singapore is going through right
now.
Japan’s conviction in its own
invincibility had caused a rise in asset prices that endangered the
economy.
Like
Singapore, land is scare in Japan and land prices escalated through
the 1980s. Based on these inflated values, Japanese banks were
willing to lend to buyers larger and larger amounts.
Some
of the money borrowed was used to speculate on land and stocks.
Property and share prices pushed each other to loftier and loftier,
and less and less rational, heights. Japan unknowingly entered a
bubble economy with disastrous results when it burst. Today,
Japan’s real estate is still more than 50 per cent below its peak
value in 1991.
Is
Singapore entering the same property bubble as Japan in the 1980s?
Since its recovery in 2006, Singapore’s previously lackluster
property market has been on a bull run saved for a minor blip in
the first half of 2009.
According to the
latest figures, property prices have rebounded strongly in the
third quarter with the private sector increasing by as much as 15
per cent.
Though Singapore is
out of a recession, the global economy has still not quite
recovered. Even the government admits that growth is likely to be
sluggish for the rest of the year till 2010.
The
official cautious mood is in stark contrast to the ebullience on
the ground where the sellers, agents and media conspire to whip up
a speculative frenzy which saw Singaporeans flocking back like
sheep to new launches.
Unlike Japan, the
Singapore government has a huge stake in the property market
through the HDB which builds more than 85 per cent of the island’s
public housing and hence it is in a unique position to influence
the direction of the market through policies and price
controls.
The
price of HDB resale flats hit a record high in June 2009,
surpassing its previous peak in the fourth quarter of 1996. It is
expected to rise by a further 2 to 3 per cent by the end of the
year. As the prices of new flats are pegged to resale flats, they
skyrocketed too.
Under free market
conditions, the prices would not have escalated at such a rapid
rate. The government is partly responsible for the price inflation
through its immigration and housing policies.
In a
bid to increase Singapore’s population via immigration, the
government has opened the floodgates to foreigners to study, work
and live in Singapore.
Singapore’s population has reached
the 5 million mark of which 36 per cent are foreigners, many of
whom are encouraged to become Permanent Residents.
PRs
are permitted to purchase resale HDB flats. A recent ERA report
revealed that 40 per cent of resale flat buyers are PRs. Needless
to say, these newcomers are instrumental in causing the prices of
resale flats to rise in the face of a limited supply.
HDB
has started to reduce the supply of new flats in 2000s. Under its
Build-to-Order (BTO) scheme, buyers will have to select their flats
first before they are built and ready to move in 3 to 4 years
later.
For
those who cannot afford or are unwilling to wait that long, they
will have no choice but to purchase a flat from the resale
market.
It
is obvious that the demand for flats has far outstripped the
supply. In less than 2 weeks since HDB announced the sale of
balanced flats, there are already over 20,000 applications for some
2,100 flats.
As
the value of flats continue to climb, banks are lending buyers at
greater and greater amounts. The tenure of the loan is now
increased to 35 years.
Is
it possible for prices to continue rising forever? Common sense
tells us that what goes up must come down. It is inconceivable that
the prices of HDB flats will continue to grow at the same rate
every year while the wages of the average worker remain
stagnant.
Unfortunately, most
Singaporeans still do not recognize the danger. Partly influenced
by the relentless government propaganda that rising prices help to
generate wealth for them, they are under the false belief that
property prices will always rise, like the Japanese in the
1980s.
Home-owners try to
capitalize on their asset values by selling them with exorbitant
COVs in order to upgrade to a condominium. Few realize that they
will have to take out a much larger bank loan in order to finance
their new purchase.
Young couples fresh
out of school are willing to fork out 20 to 30 per cent of their
household income to finance a HDB flat without realizing that they
may not have sufficient savings for their retirement needs, not
that they have much of a choice anyway.
Singapore is entering a property
bubble or is in fact in one. With an election looming ahead, the
government is unlikely to take tough measures to cool the property
market out of fear of incurring the wrath of those who bought them
at high prices which means that prices are likely to continue
rising way into 2010.
Since public
housing is a basic necessity in Singapore, buyers will be forced to
take up higher loans to purchase a flat. They have to pray hard
that prices will not drop or crash for the banks will ask them to
make up the difference in the valuation should it
materialize.
Given Singapore’s
over-reliance on the export economy and foreigners, as well as its
insipid domestic economy dominated by gigantic state-linked
companies with no world-class brands, it is not a question of if
but when the property bubble will burst.
In
the next one to five years, the Singapore economy will find it
increasingly harder to compete heads-on with the emerging giants of
China and India with their creative and talented entrepreneurs and
well-run firms like Lenovo and Wipro.
What
will cause the bubble to burst? Find out more in Part 2 of the
article.
October 21, 2009 by admin
Filed under Opinion
Leave a
comment
OPINION
There is a Chinese saying – “ju1 an1 si1 wei1″ meaning that when
one is living in good times, one must not forget to contemplate on
the possible dangers ahead.
For Singaporeans, the good times are not even remotely back yet
and they are already jumping on the property bandwagon in the hope
of making a quick buck either a few months later or many years down
the line.
After all, the prices of HDB flats have appreciated in the last
two decades, no thanks to the PAP government who kept reminding
Singaporeans that their assets will continue to appreciate in value
under their charge so much that it has become one of the greatest
myth ingrained in the collective consciousness of the populace.
What if the prices stop going up, drop or even crash? Can
Singaporeans foresee or stomach this disastrous scenario at the
back of their minds?
MM Lee is right that Singapore needs foreigners who not only
keep our GDP figures impressive but also help to shore up our
property market.
70 per cent of buyers of Singapore’s private properties are
foreigners while PRs comprise 40 per cent of buyers for resale
flats.
If foreigners were to pull out of Singapore, both the private
and public property market will crash precipitously.
While the United States has regained its footing following the
implementation of the stimulus package by the Obama administration,
it is still not out of the woods yet.
U.S. banks are still saddled with a lot of bad debts and the
cleaning up of its financial system has only just begun. Nobody
really knows the true extent of the damage.
With an uncertain global economic climate, any tiny jolts in the
geopolitical landscape will send it into a tailspin – e.g. renewed
hostilities between Russia and Georgia engulfing the entire
Caucasus and Eastern Europe, another attack on the U.S. by
Al-Qaeda, Iran lobbying a nuclear warhead towards Israel, the
implosion of North Korea following the demise of Kim Jong-IL or
conflict across the Taiwan Straits.
These are potential international and regional flash-points
which are both unpredictable and devastating in effect. Given
Singapore’s reliance on the international trade, political
instability in the U.S., Europe or China will deal a terrible blow
to its vulnerable economy.
With a plummet in demand for its goods and services world-wide,
MNCs will fold up and return home, bringing with them its
foreigners and PRs thereby precipitating a crash in the property
market.
The domestic demand is surely insufficient to support
Singapore’s buoyant private property market. As the prices go into
free-fall, they will bring down that of public housing with them as
it is inconceivable that a condominium will cost less than a HDB
flat.
Even if this doomsday scenario does not materialize, the
downward pressure on prices will increase with time in the next
three to five years.
Though actual figures are not given, the majority of Singapore’s
immigrants are from China and India. They are mostly here to seek
fresh opportunities and to earn a quick buck rather than to escape
from the poverty of their homelands.
As China and India become more and more affluent, it will be
increasingly harder for Singapore to draw their brightest talents
to work and settle here.
Based on anecdotal evidence, there are few Chinese from the rich
coastal cities of Beijing, Shanghai, Shenzhen and Guangzhou who
make Singapore their home compared to those from the poorer inland
provinces.
More than often not, it is the qualified PMETs who have the
purchasing power to buy private apartments and resale flats while
the blue-collar unskilled workers are put up at crammed dormitories
or rented flats.
The brain drain suffered by these two countries may slow down
and even reverse soon as they catch up with Singapore in terms of
living standards and quality of life.
With decreasing numbers of foreigners from this “elite” pool
coming to Singapore, it will be difficult for property prices
to be maintained at current levels for long.
The price increase of HDB flats has far outstripped the growth
in real wages. If prices were to continue rising, there will come a
time when ordinary Singaporeans will be priced out of the market
and they will have no choice but to stay with their parents or rent
a place.
Faced with stiff competition from cheap foreign labor, it is
highly unlikely that the salaries of Singaporeans will increase by
much, if any at all. In fact, they may be forced to accept lower
pay and longer working hours in order to land a decent job in an
employers’ market like ours.
5 years ago, the starting pay of an electrical engineering
graduate is about $2,800. Today, it is only $2,200 to $2,400.
Prices of HDB flats have increased by more than 50 per cent since
then. It doesn’t take a mathematician to realize that Singaporeans
have actually become poorer especially if inflation is factored
in.
Singaporeans have been complaining recently that HDB flats are
becoming unaffordable. They may soon have to contend with the fact
that they simply cannot afford to buy one and give up their
cherished dream of owning a home.
The government is stuck in a quandary here. It is impossible for
them to cater to the needs of both the home owner and the
first-time buyer at the same time. Cooling the market now will
cause recent home owners to suffer a loss while allowing the prices
to continue escalating may soon make their biggest nightmare come
true – a bubble followed by a crash.
The best hope for Singaporeans is that prices will soon hit a
peak, stagnate for a period of time before dropping gradually to
more sustainable levels.
The worst scenario will be a sub-prime type of crash with prices
plunging abruptly by more than half and buyers defaulting on their
loans with devastating effects on the rest of the economy.
Japan has been through it in the 1990s. The U.S. has not
recovered for its housing crisis last year. Will Singapore avoid a
similar fate?
For post-65 Singaporeans brought up on a daily dose of state
propaganda to believe that they will continue to enjoy the good
times of their parents, the bitter dose of reality may be hard to
accept.
What are the political ramifications of such a crash? Find out
in Part 3 of our article
October 22, 2009 by admin
Filed under Opinion
Leave a
comment
OPINION
In the parts 1 and 2 of this article, we compare the
similarities between Japan in the 1980s and Singapore now.
Despite signs that public housing is becoming more and more
expensive to ordinary citizens, prices of HDB flats continue to
rise, fueled by demand on the ground from both new citizens and
PRs.
Given Singapore’s over-reliance on the global economy, it is
only a matter of time before another crisis happens and precipitate
a burst of the property bubble.
The political ramifications of such a crash will be disastrous
for the ruling party. Either way, it cannot escape responsibility
from causing the housing inflation with its ill-conceived policies
in the first place.
A crash akin to the 1996 housing crisis which threw Singapore’s
property market into the doldrums for a decade or so is well on the
cards except that this time, the pain may be harder especially for
some to bear.
Singaporeans have been fed with the illusion by the ruling party
that HDB flats are “pots of gold” whose values will only appreciate
with time which is further exacerbated by the use of estate
upgrading as a carrot canvass for votes during elections.
In a speech made at Kim Keat ten years ago, then Prime Minister
Goh Chok Tong told the residents unshamedly that it was the PAP
government who was responsible for the rise in their asset value
through various upgrading programmes.
During the 2006 general elections, residents of the two
opposition-controlled wards Hougang and Potong Pasir were offered a
$100 million upgrading package if they voted for the PAP.
Unlike in the past when housing inflation is caused by a
combination of GDP growth and limited land, the present bubble is
created artificially by increasing the demand via immigration and
limiting the supply of new flats by HDB.
As an indication of how serious the housing shortage is, there
were over 20,000 applications for about 2,100 balanced flats
released for sale by HDB last week.
A sudden and precipitous drop in housing prices will plunge many
home owners, especially those who bought during the peak period
between 2007 and 2009 into financial distress with dire
consequences rippling to the rest of the economy.
A mini-subprime crisis is not an unforeseeable result with banks
repossessing flats due to unpaid mortage loans and bankruptcies
hitting a record high.
The anger, angst and frustration arising from such a catastrophe
will naturally be directed at the ruling party.
Already, there are some quarters who are blaming HDB for its
lack of foresight in building more new flats to meet rising demand
between 2004 and 2006.
The number of foreigners arriving in Singapore has increased
dramatically over the last few years and yet the number of flats
built by HDB have not kept pace with the increase in population,
leading to the present situation right now.
Having witnessed their parents and grandparents owning their HDB
flats, young Singaporeans expect themselves to be beneficiaries as
well, but flats are relatively cheap then unlike now when loan
tenures have to be stretched to 35 years in order to accommodate
more borrowers.
Naturally, Singaporeans are aghast at having to fork out a
substantial portion of their monthly income to finance 99-year
leasehold public housing which are obviously over-priced.
For those who are forced to buy a home at today’s prices because
they have nowhere to stay, they will surely be peeved with the
government should they make a loss subsequently following a
property downturn or even worse, a crash.
Burdened with debts and a property which they cannot offload,
they will be inclined to cast a protest vote against the ruling
party in subsequent elections.
The real impact at the polls will depend on the number of
disgruntled Singaporeans who feel hard done by the government’s
housing policies.
In narrowly contested wards, it may tip the scale in favor of
the opposition enabling them to snare a few seats and even one or
two GRC. However, it is improbable that the incumbent will be voted
out of office given its relative strength in comparison to the
opposition’s weakness.
The ruling party is aware of rising dissatisfaction on the
ground which explains shotgun measures introduced by HDB lately to
address concerns of Singaporeans such as the release of balanced
flats and the building of BTO flats.
Unfortunately, these are unlikely to stem the rise in prices at
least in the near future.
With more and more PRs and new citizens popping up the demand
and BTO flats not ready till three years later, the housing
shortage is likely to get worse before it stabilizes.
HDB has predicted that prices of resale flats are likely to grow
by another two to three per cent till the end of the year.
Singaporeans who need a place to stay urgently will have little
choice but to purchase a flat now. Even for those who can afford to
wait, they may be unwilling to do so out of fear of “missing the
boat” and having to pay more should prices continue on the upward
trend.
Even for existing home owners who bought their flats at low
prices years ago, they will be devastated by the depreciation of
their asset values for HDB flats have become the Singaporeans’
primary source of wealth over the years.
The backlash against the ruling party will be predictable but
manageable unless a credible opposition emerge to challenge its
authority.
For a long time, the ruling party has claimed its mandate from
the people by generating wealth consistently in the form of asset
appreciation though its claims had been debunked by a recent study
done by two NUS economists.
Many Singaporeans continue to believe that the ruling party is
primarily responsible for rise in flat values despite evidence on
the contrary.
The false premises offered so liberally by the ruling party to
garner and consolidate support for its rule will return to haunt
them in the event that the prices decline or even crash.
As we have seen from the examples of Japan, Iceland, Ireland and
the Baltic states, Singapore’s inflationary market is untenable in
the long run. It is not a matter of if, but when it will be brought
back to earth.
Singaporeans may not be overly concerned about the lack of civil
liberties, but they are surely obsessed with material possessions
especially their flats.
When the crunch comes, they will have no qualms deserting the
ruling party in droves and casting a protest vote against them.
The opposition should start studying and formulating an
alternative public housing blueprint to replace HDB’s profit-driven
one to win support from the masses.
More rules and subsidies should be provided to safeguard the
interests of first-time home buyers.
HDB must be completely transparent about its building, land and
operating costs to allay public concerns that it is making obscene
profits at the expenses of citizens.
PRs should not be permitted to profit from the sale of their
flats in the future when they leave Singapore. A capital gain tax
can be imposed on their profits which can be directed to help less
well-off Singaporeans afford a home of their own.
HDB flats have now grown to become a necessity in land-scarce
Singapore. As the largest landlord and property developer in
Singapore, the government is well placed to ensure that public
housing remains affordable in Singapore not by some arbitrary
benchmarks, but in real terms according to public perception.
Source: The
Temasek Review