Singapore Property II…Unintended Policy Distortions

My previous post argued that the Singapore property market is not in a price bubble. This is because the shape and longevity of the price move itself (it doesn’t look like an accelerating exponential speculative market), as well as the demographic in Singapore. However, while ruling out a price bubble, one cannot argue against cyclic variation in the property market.

Cyclic price movements in all asset markets are a fact of life. Governments and investors may not like the bull-bear cycle but it serves a purpose. In the case of residential property, for instance, higher prices signal an undersupply of housing which in turn stimulates new construction. Asset prices are the most efficient way for allocating resources.

The Singapore government’s cooling measures are a classic example of the futility of fighting markets forces. Were the property market in a bubble, then the first or second round of measures would have deflated the speculation. The need for a SEVENTH round, which now reaches into the heartland of the average Singaporean, should be evidence enough to a pro-markets government that something more fundamental, other than speculation, is driving this. Worse still, the more the government tries to contain the rise in residential property markets, the more it distorts asset markets elsewhere.

Industrial property, for instance, has jumped in price as investors switched from residential property to avoid the Government’s taxes. The implications are far reaching, since higher industrial property prices lead to higher rents and higher costs of production. The Government has now reacted by imposing a tax on industrial property prices, but this is the policy equivalent of ‘…putting your finger in the dyke…’ since the pressure on asset prices will spill-over elsewhere. What’s next? The Singapore stock market of course, and maybe the market for used cars…

The real issue is that Singaporeans are getting richer and they need an investment universe that offers a reasonable rate of return, both onshore and offshore. As argued in my last post, a stronger currency will open up a world of opportunity for investors, relieving the pressure on domestic asset markets.