Singapore’s Property Ration Pack

One of the fundamentals of finance is that investment markets tend to go up. This is perfectly rational, and indeed necessary to induce capital formation, but conflicts with the fashionable view amongst policymakers that higher asset prices are the product of speculative bubbles.

Singapore’s government introduced a combination of credit rationing and transaction taxes over a number of years in order to arrest the increase in property prices that was experienced from 2009 to 2012. The following diagram shows the performance of Singapore’s residential property market versus the US, UK, Hong Kong and Australia from January 2013 to December 2014.

The simple point of the picture is that Singapore properly has fallen nearly 5% while other markets, both globally and regionally, have appreciated between 11% and 13%. There are a number of ways to interpret this data.

1. It could be proof that cooling measures actually work to restrain the growth in property prices. On this interpretation, the assumption is that Singapore property should have risen by about 13% over two years in line with other markets. By engineering a 5% decline in property prices over the period, the Singapore government has permanently cut the price of property by 18% relative to where it would otherwise be. Rolling back the cooling measures would have no impact on prices in this scenario.

2. It could be that the 18% difference between Singapore’s property and the rest of the world is a form of rationing. Once the cooling measures are lifted, prices would catch-up quickly, but in the meantime rationing leads to resource misallocation, excessive risk-taking and sub-optimal growth.

Which of these interpretations is most likely? As a property owner in Singapore, I regularly receive unsolicited enquiries from random people looking to buy my house for a ‘bargain price’. This suggests to me that rationing is dominating – high taxes are keeping transactions low while at the same time there are many buyers ready to swoop on those forced to sell due to lack of access to liquidity. Recorded sale prices are artificially low since they reflect forced sales due to constraints on access to liquidity. Meanwhile, the rest of the market is locked due to taxes.

It is perfectly natural for property markets to rise, as it is for any asset market to show capital appreciation. If Singapore’s property market was in a bubble 3 years ago, it certainly isn’t now and the impact of the legislative measures is far greater than the -4.75% decline the government points to. Prices are 18% below those of other property markets on a relative basis. By this metric, the Government’s job is done and it should be time to stop rationing liquidity…

The immediate effect of relaxing the cooling measures will see trading volume increase and prices rise from their artificially low, rationed levels. This outcome is going to be difficult to swallow since it highlights the shortcomings of the original policy. Policymakers need to go back to their Finance principles and accept the fact that property prices are supposed to rise.