What the property market needs

Source : Today – 21 Dec 2009

THE cautions have come in fast and furious as investors and speculators continue to plough into the property market, which has seen prices rising sharply in the last few months.

Various parties – including the Monetary Authority of Singapore (MAS) – have issued warnings that if the economy proves to be weaker than expected, or if interest rates start rising in a rebounding economy, property buyers, especially speculators, could suffer losses.

It also said that more action to cool the property market may be needed if recent measures to curb speculation prove inadequate.

The MAS’ warning, carried in the November issue of its Financial Stability Review, came on top of earlier cautions by National Development Minister Mah Bow Tan.

Meanwhile, Finance Minister Tharman Shanmugaratnam also said last month said the government will use every tool at its disposal “in a calibrated fashion” to prevent a boom and bust in the property market.

The Urban Redevelopment Authority had reported that private home prices had surged 15.8 per cent in the third quarter – the sharpest quarterly rise in 28 years.

And nearly 13,000 homes had been sold in the first nine months of the year, with many predicting that the final total is likely to exceed the 2007 sales record of 14,811 units.

In an effort to cool the market, Mr Mah pointed out that the government was going to release more land for housing and so there was no need for the rush to buy.

A couple of months ago, the government had banned developers and lenders from offering interest-only housing loans and the interest-absorption scheme, except for those already on them.

Earlier this year, it reinstated the confirmed list of its land sales programme in the first half of next year to meet the strong demand for private homes.

No doubt these measures are for the overall good of the economy.

But wouldn’t it be better if there was an orderly system with automatic triggers to kick in these initiatives rather than ad hoc or arbitrary measures, even if they are calibrated?

Perhaps, they could be in the form of circuit breakers, not unlike those in place in certain stock and other financial markets where if a share price or the market rises or falls too sharply, and if a certain percentage point is breached, there is a cooling-off period.

For instance, if property prices rise or fall beyond a certain level within a certain period, various measures, like the confirmed list or release of more land, could kick in.

This would be more transparent and remove any uncertainty that warnings bring, even if they come from a Minister or a government body.

And since speculators are a necessary evil of an open economy, they will also be forewarned of the risks involved in gambling on a rising market.

It would be fairer to those making the right bet, and those who lose out will have nobody but themselves to blame for their misfortune.

After all, Mr Mah himself has said that “… we must let market forces determine prices, based on genuine demand from home-buyers and investors”.

Using ad hoc or arbitrary measures is no way of letting market forces prevail.

To cool down the property market even more, shouldn’t the government stop the practice of having reserve prices on its land sales?

For sure, it would mean less money for our state coffers if the property is bid too cheaply, but then wouldn’t home buyers (and commercial property buyers) benefit from even lower prices?