Markets exist primarily to efficiently allocate resources. The market mechanism has its imperfections but it is still the best way we know for ensuring that people get what they want.
From time to time, regulators decide to shut down markets. Recently, it has become fashionable to justify closing down an asset market due to a “price bubble”. The argument is that market prices do not reflect a proper market clearing equilibrium, so that closing the market protects buyers and sellers from trading at incorrect prices.
By definition, speculative asset price bubbles burst. Successful identification and regulation should have the effect of very quickly bringing prices back to equilibrium in a matter of weeks or months. What happens, however, if there was no price bubble at all and the price does not correct? In this case, the market shutdown must lead to resource misallocations.
The Singapore property ‘market’ has recently been regulated out of existence on the presumption of a price bubble. Property prices are expensive in this land starved, cash-rich economy, but despite the regulators’ best efforts, prices remain pretty much at the levels they reached when the last draconian lending restrictions were put in place 15 months ago. 15 months is a long time in the life of a bubble, so it is fair to say that while the regulators had good intentions, they basically mis-identified as a bubble what was rational market appreciation. What is the resource cost of this policy error and what should the regulators do?
There are many casualties. The obvious victims are the builders and workers in the residential property industry who have had to abandon new housing initiatives and re-tool to focus on small scale renovations. The next obvious casualties are the real estate agent’s who have seen turnover in the property markets collapse due to trading taxes and liquidity constraints on borrowers. But these front-line casualties mask a deeper, more far reaching allocation cost…
… these are the billions and billions of dollars that has been invested in property which is now immobilised, locked up through a combination of prohibitive taxes and lending restrictions. Freely flowing capital is important to allow investors to respond to new opportunities, and property is a valuable form of collateral for funding investments. Property is a form of saving that can be used to finance investments which drive economic growth. However, with the prohibitive cost of selling property (up to 18% stamp duty) together with the blanket restrictions on borrowing against property (the TDSR rules), this pool of wealth is now excluded from functioning as an engine of growth.
What should the regulators do? The best action is to admit the (well intentioned) error and reverse their taxes and liquidity constraints immediately. In so doing, the regulators may well reserve the right to reinstate the measures should a bubble form in the future. However, leaving the restrictions in place as a ‘preventative’ measure is entirely the wrong approach since it will lock up capital and stymie growth forever.