ST : The housing bubble trouble

Sep 29, 2010

THE ST INTERVIEW

The housing bubble trouble

In Singapore, Government's repeated intervention in the market is a good thing, says US expert

By Tan Hui Yee

IN MOST parts of the world, a government that intervened in the property market three times in one year would heighten uncertainty.

But not so in Singapore, observes Professor Joseph Gyourko, a housing economist from the University of Pennsylvania who was in town recently to speak at a forum conducted by the National University of Singapore's (NUS) Institute of Real Estate Studies.

He says: 'If the government gets into a habit of intervening all the time, it will harm market development. Investors won't want to invest because they can't be sure what the government is going to do Monday versus Friday.'

But the picture is clearly different in Singapore, he notes. The Government tried to temper speculation by abolishing developers' interest absorption schemes in September last year, and followed that with two additional rounds of measures in February and August this year that made it increasingly expensive for speculators to flip properties.

'You are sending a clear signal to investors that you are going to stop the price boom. The fact that you're doing the third round is a signal that you are going to do whatever it takes,' he says.

'And that actually may be providing clarity. You are telling everyone, 'Okay, we're just not stopping, we'll come up with something else down the road.''

This show of political will may just be what it takes to deflate Singapore's property bubble, he says.

Prof Gyourko, 54, knows bubbles intimately, having studied the sizzling property market in China and being privy to local developments as a board member of NUS' real-estate institute.

He believes home prices in Hong Kong, Singapore and China are being driven up by a mixture of real economic growth and short-term capital flows.

'Singapore's inflation rate is above the rate banks pay on deposits. When that happens, people want to put their money elsewhere. And one of the few alternative investments you can make is in housing.

'That's shifting a lot of money into homes. And that's not permanent or sustainable,' he says.

When the economy grows rapidly again, companies will ramp up production, the competition for capital will heat up, interest rates will rise - leaving over-leveraged property buyers in danger of defaulting on their loans. That could send property prices into a tailspin.

That said, he concedes that housing bubbles are by nature unpredictable, and the fact the Government here had to intervene three times indicates it had difficulty calibrating the measures required to tame the beast.

'Clearly, if the Singapore Government had known, it would have introduced Round Three right up front,' he says.

He rejects claims that rising property prices widen inequality, based on his experience in the United States market.

'The housing market is cyclical, so the claim is not true in the long run. In the US, when we had the boom...people were worried about wealth gains along coastal California and the East Coast of the US, which had the highest price rises. But prices cycle, and guess what? They fell - by a lot. What generates long-run inequality are skill differences, not home ownership,' says Prof Gyourko.

He predicts property prices in Hong Kong, China and Singapore will take a hit in the next one to three years, effectively cancelling out the gains owner-occupiers have made in the recent run-up.

'I don't worry about the fact that people got a bunch of capital gains because I think they are going to lose those capital gains,' he says, pointing out that these are paper gains.

But although property gains and losses even out over a lifetime, the resulting short-term frustrations may be hard to handle. 'It's easy for an academic to go, 'Don't worry, this stuff cycles.' If you are a politician, you've got to worry about that person being angry now because he has the vote, and you've got an election coming up.'

He acknowledges that while land in Singapore is scarce and property prices can be chased up without adequate control, the Government here has tried its best to make housing affordable through its public housing programme.

'You guys do public housing about as good as it's done anywhere in the world,' he says. 'For such a small place, it's well-planned. It's affordable to people with modest incomes,' says Prof Gyourko.

But one suggestion he has is that Singapore could be more flexible about the housing grants or similar subsidies it gives households, to give them more freedom over what homes they can buy and where they can live.

Currently, subsidised households can use their housing grant of $30,000 to $40,000 to buy only HDB resale flats. With a voucher system, they would not be limited to government housing.

He also questions Singapore's system of allowing Central Provident Fund savings to be used to pay for homes. This encourages people to base a huge chunk of their retirement savings on the fortunes of the property market in a tiny country. In investment speak, this is considered 'undiversified'.

'That's a really risky thing to do. What happens if there is a housing market collapse?' he asks.

The Singapore property market has had its hairy moments: Housing prices plunged after the 1997 Asian financial crisis, although they have since bounced back and even surpassed 1996 levels.

Singaporeans, he says, have to understand that the CPF housing scheme amounts to an 'implicit subsidy' as it lowers the interest payable on bank loans by reducing a home buyer's loan amount.

'I view housing as a consumption good. I view it literally as 'I'm eating my house.'' That means retirement savings should be kept separate from housing expenditure, he says.

In his view, owner-occupied homes especially are not investments that can yield returns, so people should not devote their retirement savings to their homes in the hope of growing their money.

Asked about the attributes of an ideal housing system, he offers a verbal sketch of its key planks: It should be equitable, responsive and flexible.

This means society would have to determine some minimum quality of housing that everyone should be entitled to. Households that cannot afford to pay for this minimum standard would get subsidies. Poor households with children would get more subsidies because 'kids do not get to pick their parents, and thus, are not responsible in any way for their poverty'.

Ideally, housing supply should be plentiful, in the sense that the rules should allow developers to easily ramp up home building to meet increased demand.

This moderates housing prices, he says, as it will allow prices to be close to or at the level required to cover land costs, construction costs and a builder's usual profit.

Finally, an ideal system would offer different kinds of housing - including rental housing - to meet the needs of the population over its life cycle. It is also one where the population is 'educated on the true benefits and costs of the different types of housing'.

He accuses governments worldwide of a bias 'towards encouraging owning' homes instead of being upfront on the opportunity cost of doing that.

As a result, most people underestimate the costs of owning a property, he says. They forget the transaction costs of buying and selling a home are 'quite high', and it does not occur to them to set aside money for long-term maintenance.

Buyers also risk getting stuck with their homes if a sharp drop in prices pulls the value of their homes below the mortgage amount.

Unless a home owner in such a predicament has enough cash to make up the shortfall, he cannot move house. Some academics have fingered such 'underwater' mortgages as a possible explanation for stubbornly high unemployment figures in the US, as it means people living in declining cities cannot move to places where jobs are more plentiful.

In Singapore, which takes just about an hour to cross by car, the problems posed by such immobility are less serious. Still, he thinks being stuck in such 'underwater' homes could result in longer commutes to workplaces and stop families from moving close to the school they want their children to attend.

Prof Gyourko - a home owner himself in Philadelphia - is careful to declare he has nothing against home ownership, especially as it makes someone a stakeholder in his community. In the case of Singapore, it makes one a stakeholder in the nation.

But the goal of the Government should be to get people to 'make the right choice about owning versus renting, not that owning always is better'.

In sum, housing choices should follow people's needs over their lifetime, instead of determining how they have to live their lives.

Young people, he says, make 'natural renters' instead of home buyers because this arrangement allows them to respond quickly to changing circumstances.

'You can move to opportunity. You can get married. You can do all types of different things instead of being stuck in a house,' he says.

tanhy@sph.com.sg





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An authority on real estate and housing policy

'I bet that housing does not drive child-bearing decisions'

· What do you make of Singapore's quotas for different ethnic groups in public housing estates to discourage racial enclaves from forming?

I've never been a fan of quotas. My preference is to always incentivise people positively.

I would prefer paying a positive price for you to live in someone else's neighbourhood if you were of a different ethnicity. I'd bribe you to go into an area where you are not the majority. You get a bounty.

It provides more freedom of mobility and choice. But governments don't like my way because it is costly.

· Young couples in Singapore have complained that they are not able to start families because they have been priced out of the housing market. Your view?

I understand the claim, but I don't put much credibility in it. Governments like yours are famous for trying to encourage child-bearing through financial inducements. It doesn't work very well, does it?

It's because this decision is incredibly complex, incredibly long-term. My gut feel is the claim is made by people who just want a subsidy, and it's not affecting child-bearing decisions at all.

If it were a simple matter of finance, Singapore would not have a fertility problem. And there'd be no one with kids in Bangladesh.

· How has your view of housing as a consumption good shaped your own consumption of housing?

I certainly did not buy a bigger house than I needed because I knew the costs were very high. I tried to figure out with my wife how many kids we were going to have, and how much space we needed. We thought we wanted to have two kids; we bought our house when our first was coming.

But our family decisions drove our housing decisions, not the other way around.

Having said that, there's no doubt that incomes can affect fertility. For instance, in the Great Depression, fertility dropped worldwide. If you don't think you can support a family, you won't start a family.

Back then, it was about unemployment of 25 per cent and the danger of starving. Here, you are talking about an extra bedroom. There's a big difference.

· Still, wouldn't the lack of an extra bedroom make you delay child-bearing?

I think so. Living with mum and dad could delay it because of the lack of space. But the right way to do deal with this is to develop a rental market.

· So isn't housing cost an opportunity cost vis-a-vis having a family?

Without a doubt. Kids are expensive that way. The correlation could be worth looking at across countries. And you will have to take into account a lot of stuff.

Just think about Catholic countries where you have a religious group saying 'no' to birth control. You're going to see high fertility rates, no matter how low the income and what type of housing there is.

That's what makes it so hard to tell. But I still bet that housing does not drive child-bearing decisions.