Smooth out all cycles... and not just the commercial ones

(Abstract from TodayOnline 14th Nov, 2009 by Colin Tan)

Asset inflation and property cycles hogged the news again this week. On Tuesday, Finance Minister Tharman Shanmugaratnam spoke about the need to manage the property cycle while the Finance, Trade and Industry GPC stated that businesses want predictability to minimise volatility and to remain cost-competitive. It felt there is room for the Government, particularly in the industrial and commercial arenas, to manage externalities and reduce waste.

Today, the problem of economic waste cannot be over- emphasised. Recent third-quarter data show that the office vacancy rate has risen to 12.2 per cent. As at the end of September, there are an estimated 9 million sq feet of empty office space. This translates to about four years' worth of annual supply.

At the same time, those tenants who have signed new leases 18 months ago or earlier are packed like sardines to cope with the then-high rents. Imagine how much more efficient these firms could have been with more space?

But managing cycles in the residential arena is just as important, if not more so, as it concerns every Singaporean from the very top to the bottom.

Should we have "managed" the sharp rise in prices in the upper-end of the private housing market in 2007 ? Or as one columnist in a business paper suggested: Having high luxury-home prices is good. Besides bringing big-spending wealthy investors, it helps generate real-estate-related jobs.

On hindsight, we should have. This is because the economic rent earned by developers in the upper segment lead to the re-assignment of resources from the mid- and mass-segment to the upper-end. It was thus no surprise that supply at the lower end in 2007 was thin. This eventually led to rising prices this year.

But another negative impact of price volatility is that it encourages anyone wishing to enter the market to "time" their purchases. This is because if you got your timing right, you could potentially "save" or "earn" a lot. So, we have a situation where buying is based not on need but on sentiment. Households who should be buying are not, while those who should not are doing so.

Some will delay their purchase in the hope that prices will correct later. Others will buy ahead of their needs because they are afraid prices may rise beyond their reach.

Yet others will speculate. The higher the volatility, the greater the opportunities for speculation. Housing demand then becomes very distorted and difficult to understand or predict. It is no wonder then the relevant policy-makers took such a long time to decide what to do.

And when potential buyers get their timing wrong, as many probably did, they were "forced" into the cheaper HDB resale market. By adopting a market-based approach to pricing new flats, the HDB was also caught out by the market distortion in the private market which had spilled over into the public segment.

For months, it insisted that applicants were very fussy even though demand for new flats remained low even after it introduced new rules to weed out frivolous applicants. Marketers will tell you that if you reduce the price of an unpopular unit enough, there will be takers. That's what private developers do with their remaining units.

Property is also about location. Even though prices are the cheapest in the outlying areas, it does not mean that the less well-off will automatically buy them. Although priced higher, resale flats may offer better value overall in terms of amenities, social networks, travelling time and fewer ERP gantries. ¢

The writer is the head of research and consultancy at Chesterton Suntec International. The opinions expressed here are his own.

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