Government should leave land prices to market forces

Source : Business Times - 4 Nov 2008

THE government has announced that it will suspend land sales until the first half of next year and move all confirmed land sites to the reserve list.

Today’s properties have been priced out of reach for many Singaporeans. Prices have gone up substantially across all property segments since the good times started a few years back. But the conundrum is that prices have not come down during lean times the way they spiked during the boom. Could the current land supply mechanism be aiding this price distortion?

The government sells state land through its land sales programmes, presumably based on projected population and business planning, and gazettes use of sites to be released. The Reserve List System (RLS) provides a tool for the government to withdraw land supply unless there is adequate interest, and developers submit a bid price acceptable to the government, which must be at least 85 per cent of the Chief Valuer’s (CV) Estimated Market Value (EMV). I see a problem here.

In boom periods, land and property values accelerate and the government tries to moderate the price effect through offloading more land supply into the market. However, the effect is slow to come due to construction lead time.

Land costs constitute the highest component in a property’s cost. So when land prices are allowed to go up more than they ever come down, then property prices will also follow the same path.

By ‘artificially’ maintaining the land prices through cutting off supply abruptly, we could end up with an outcome whereby high property prices push up land prices, and high land prices further propel property values, drawing in speculators.

When times are bad, like now, demand for property should drop; so too would demand for land. If land prices can drop to a level which reflects true demand, then the Chief Valuer’s EMV under the RLS will also drop such that the prospective developer’s bid price should not be unduly rejected because the EMV was set artificially high.

Many businesses have complained of rising business costs from escalating rentals in office, industrial and commercial properties over the past two years due to limited supply. Real estate investment trusts (Reits) also prospered during this period.

Now, if market demand dampens, prices should be allowed to adjust to levels which best reflect the new reality. If this drives down rentals, would it not be good for many small and medium-sized enterprises (SMEs) in Singapore, which are already facing declining export demand and other rising business costs?

Ee Teck Siew