Sunday, July 25, 2010

HDB Unaffordability Exposes Economic Policy Failures - Housing Bubble to Grow and Pop

HDB officially released its 2010 Q2 housing price statistics. Key highlights from the latest housing statistics are as follows:
HDB’s Resale Price Index (RPI) rose by 4.1% in 2nd Quarter 2010 over the previous quarter, as compared to the increase of 2.8% in 1st Quarter 2010 and 3.9% in 4th Quarter 2009.

The median Cash-Over-Valuation (COV) amount amongst all resale transactions increased to $30,000 in 2nd Quarter 2010 (see Annex D (PDF 37KB)). The proportion of resale cases transacting above valuation also increased to 96%.

Singapore's HDB resale market is now out of reach of average Singaporeans. The median COV of $30,000 is now more than the annual take-home salary of an average Singaporean. Assuming that a person earning $3150 a month (gross) takes home $2500 a month (after CPF), this person would take 6 years to save up the median COV if he saved 20% of his income every month.

This means young, newly-wed Singaporeans who have been working for less than 5 years, and who are looking for housing when they are married, are effectively priced out of the resale market. The only way they would be able to afford the housing is if they were to borrow money from their parents to afford the COV to buy a resale flat.

For those who are unable to tap into Father-Mother Banking Corporation (FMBC), The only option available to them is to get BTO flats. However, these BTO flats take 3-4 years to build after application. Assuming the man proposes to the girl, and the wedding takes place 1 year after the marriage proposal, this leaves at least 2-3 years after the wedding before a married couple can get hold of a flat.

The unaffordability of housing will further exacerbate Singapores population and other economic problems. The reason is simple - if you can't afford a roof over your head, you can't possibly provide for a family.

Causes of the Imbalance

There are several reasons why the Singapore housing market has seen its prices rise uncontrollably out of the reach of average Singaporeans. These are divided broadly in to demand-side shocks and supply-side rigidity

1. Demand-Side Shocks to the Housing Market

Singapore's addiction to foreign labour to grow its GDP has resulted in an open door policy to foreign immigrationover the last several years, which has caused its foreign population to skyrocket. Most recently, PM Lee Hsien Loong announced that there would be 100,000 more foreigners coming to work into the country. Foreigners who want to come to Singapore necessarily have to find a place to live. This has resulted in a massive demand-side shock to the housing system.
  • Demand Shock in the HDB rental market - For the lower-income workers, they will end up renting a room in HDB flats. This happens all the time, and it is not uncommon to hear about how 4-room HDB flats have been rented out to 8-10 philipinos or vietnamese at a time. The crowding out of the rental market means that residential housing which was ordinarily built for owners to stay in, now turns into commercial real estate to be leased out to occupants. The most notorious example of this must be Sinha Shekhar, the immigrant Indian who is renting out his HDB resale flat, while staying in a Condo. This rental market would not be anywhere the size it currently is, without the unmediated influx of foreign labourers into Singapore.
  • Demand Shock in the HDB resale market - Not only are foreigners renting HDB resale flats, they are also now buying them. Foreigners with more money can apply for a PR and then can proceed to buy HDB resale flats. The record prices for HDB resale transactions all over Singapore have been created almost unilaterally by PRs who are willing to play crazy inflated prices for the flats.
  • Crowding out of Singaporeans in the private property market - With a major expansion of the private banking business and the casinos, Singapore is now trying to woo the ultra-rich to park their wealth in Singapore. Not only do their millions go into the financial markets and the IRs, they also land up in the private property market. The inflow of foreign capital into the private housing market is now causing a crowding out of Singaporeans from the same. An inflation of the prices of landed properties and condos, have resulted in an overflow of capital into the HDB resale market, since Singaporeans who are no longer able to afford private property, can only afford HDB resale flats.

2. Supply-Side Rigidity in the Housing Market

Mah Bow Tan's shift from an anticipate-and-build policy to a build-to-order (BTO) policy has resulted in a massive supply-side rigidity in the housing market. Instead of rolling out housing infrastructure to prepare for the skyrocketing of the foreign population, supply of HDB infrastructure only follows the demand of first-time applicants. Furthermore, such housing takes 3-4 years to roll out.

This means that housing supply necessarily trails demand. There is no way that the future new build housing infrastructure is able to match the demand shock occurring now in the housing market. there is a huge time lag between the massive, rapid shift in the demand curve for housing and the slow, gradual shift in supply of housing to match demand. Economics 101 will tell you that a rapid demand curve shift to the right without a corresponding supply side shift will result in price rises in the commodity in question - and the uncontrolled housing price inflation that we are seeing now is evidence of that.

The Failures of Economic Policy

The following government policies have led directly to the above demand shocks and supply side rigidity
  1. An addiction to foreign labour and foreign capital in order to artificially inflate GDP numbers
  2. Lack of focus on quality-of-life & standard-of-living economic measures and a failure to grow labour productivity (and incomes).
  3. Liberalisation of the HDB resale market to allow foreign capital inflows to inflate housing prices
  4. Failure to plan for adequate housing infrastructure to accommodate the population and immigration expansion.
  5. General failure to accommodate or plan for the externalities of the open-door immigration policy

In attempting to "solve" some of Singapore's "problems" (slow GDP growth is not a problem if the standard-of-living is improving and productivity is growing), the government has ended up creating several much other problems (decline in living standards), and has even exacerbated the population problem by making the cost of bringing up a family higher.

The Bubble will Grow, and Then It Will Pop

Institutional inertia, an elitist superior-than-thou mentality, and a lack of opposition means that the problem-creating economic policies of the government will continue to persist for at least the short and medium term. Singaporeans should brace themselves for a period of continued housing inflation, more foreign immigration, and the continuing supply-side rigidity to the HDB market. This means that we are entering (or have already entered) a multi-faceted housing bubble (HDB & private) that will continue until the pressure cooker bursts somewhere. Only then will policy failure be recognised and things change.

A bursting of the bubble could occur in a couple of ways - most likely a sudden external economic shock that causes foreign capital inflows into the Singapore housing market to dry up. The liberalisation of the HDB resale market to foreigners, and the fundamental restructuring of the Singapore economy to depend on foreign capital inflows to sustain growth, means that the Singapore economy is increasingly exposed to external economic shock. An unexpected slowdown in the Chinese or Southeast Asian economies would have a massively deflating impact not just on the housing market, but on the Singapore economy as a whole.

An alternative way for the bubble to pop, is if there were a major political restructuring in Singapore parliament and if the pro foreigner policies were suddenly over turned. This is a much less likely scenario, given the general political apathy of the Singaporean population and an overwhelming dominance of the ruling party. Such an event would be a Black Swan - low probability but high impact. Nevertheless we cannot rule out this scenario from happening.

Singapore's economic system is growing increasingly fragile, and I recommend you brace yourself for continued bubble expansion, and protect yourself against a bursting of the bubble. Those who do not protect themselves financially will be gravely hurt if and when the bubble bursts, and I hope you are not one of them.

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