The Singapore Government announced its SEVENTH round of taxes and regulations in three years, designed to stop the upward accretion of property prices in the City State. The government believes that a property bubble has formed that needs to be deflated. Are they correct and what can be done?
First, I think the price bubble diagnosis is wrong. Strictly speaking, price bubble’s occur when prices rise today simply because prices rose yesterday and the same thing will happen tomorrow. There is no other reason. Price bubbles accelerate exponentially and reach explosive proportions in short time. Singapore’s property prices exhibit contrary behaviour to this description – prices have been rising for more than five years, they have accelerated, decelerated and even fallen at some point during this period. Moreover, there are fundamental reasons why Singaporeans have accumulated assets that need investing during the last five years – growth in incomes has been strong, housing affordability is at historically cheap levels, rents have risen and people are getting richer. Price behaviour and the fundamentals both suggest that there is no price bubble…
So what is happening? Basically, individual’s balance sheets are very strong and there are few investment options available domestically and internationally. Domestically, Singapore is a very small country so that investments in industries are few. Bank deposits offer little more than zero interest while education costs are high restricting the flows into human capital development. Property offers a much higher yield and its limited supply supports the view that it will hold its value against high inflation. As far as domestic investments are concerned, property promises yield plus maintenance of purchasing power.
With a limited supply of domestic assets, the logical alternative for investors is to invest internationally. But here’s the rub – the SGD is undervalued so that future capital appreciation implies losses on offshore investments. On this basis, domestic property dominates international everything and this is why the property market is well bid.
It follows that, rather than tax property transactions, if the Government wants to reduce rational portfolio demand pressure on the property market then it should appreciate the currency. Partial equilibrium solutions carry unintended consequences (this is a topic for the next blog entry), and while there will be losers from a stronger SGD, the many Singaporean portfolio investors will benefit from the expanded investment universe it will open up and we wont have to concentrate our wealth in domestic property.