Wednesday, November 21, 2012

When is a housing market not really a market?

Interesting article in the Straits Times the other day about the number of housing projects that are about to reach the maximum time period they can remain unsold.
There are government regulations which limit the time developers have to sell their projects.  After completion (TOP), developers have two years to sell their project or face considerable levies.  They are not allowed to retain units for rental which would be one holding strategy.  see Ministry of Law

In a chart accompanying the ST article, 8 projects were highlighted that have substantial numbers of unsold units two (2) years after completion.  Considering that most projects are pre-sold before construction starts, this is quite something. 

One has to blame low interest rates I suppose for the fact that developers have managed to escape the normal rules of commerce.  One would expect the normal mechanism of willing buyer/willing seller to apply.  If you make something that nobody wants, you keep reducing the price until a buyer emerges who is willing to pay.  As banks and individuals learned during the financial crisis, there is no such thing as the “right” price, just the price the market is willing to pay at the moment you are trying to sell.

Housing prices in central Singapore have been on a supposedly one way trip up, yet if you look at the 8 projects mentioned, they can’t sell units at the price offered.  In the case of Residences at Emerald Hill, they haven’t sold a single unit.  The Marq on Paterson Hill is always in the news for setting a new highest price per square foot, yet half (33) of the units remain unsold. 

So what constitutes fair value, and where is the market?

Instead of assessing levies on developers and providing extensions, the Government should acknowledge the distorting effects of low interest rates and force developers to sell their projects.  

As long-suffering Singapore residents will attest, some reality and clarity on housing prices would be welcome.  

Allowing a small club of developers to artificially raise prices while increasing costs for everyone else is no way to manage an economy.


waileong said...

All the aforementioned unsold properties are the $3k psf types, targeted at rich foreigners, did you realise?

Waleed Hanafi said...

I think you may have missed the point of the article. The asking price is high, but there are no sales. The actual price is unknown because there are no transactions. A normal market would have price transparency based on actual transactions.

joe lam said...

MRT stopped. The Government charged them a levy. M1 disconnected. the Government charged them a levy/ Do they know these semi-monopolies have done harm to the public and they should compensate the public but not the Government? Is levy that the only thing they know?

Interest rates and the nature of debt commerce is missing in the country. Blame the open economy, let currency be the sole tool to fight inflation. Look how much Singapore Dollar has appreciated past three years - 15% against USD - during which world inflation was around 2-3% vs. 5% in this country. Does currency appreciation work as a tool to fight inflation as policy makers have expected? Hope they would not celebrate with the results. So what went wrong?

The extremely accommodation housing policy provided affordable homes to over 85% of the citizen for nearly 40 years. It is difficult to understand why such high GDP per capita country have people living in subsidized housing in a large scale for so long. Subsidy made perfect sense in early days of social and economic development a few decades ago. Now it should be the tools of those developing countries but not here. A 3-4 room unit costs 300,000 dollars. Nowhere else in the world any Government could be more accommodating. And thus, the whole country collect relatively high disposable income. Check COE price if one needs to prove it. And yet the COE only means a certificate of entitlement to use a vehicle on roads for ten years. People must be loaded with spare cash to make such spending. More interestingly, a household might end up spending more cash on cars than on their properties. It doesn't sound right. So making the currency stronger and ideally imported good cheaper... does it not stimulate demand? ECO101 - when demand curve shifts to the right, the equiv. price might end up higher if supply cannot cope up. Why supply side not catching up, I can't explain that but guess it has to do with efficiency and margins across.

I was talking to an independent economist who called the Asian crisis. He strongly believes that policy rate should be at around 3.5% for this country. We have a serious negative real rate problem. The time has not come but it will and things will have to be repriced. No it won't. they tired to depreciate the currency out of the Asian crisis and mitigated price moves and it worked. Let's hope that it will.