http://www.todayonline.com/Business/...roperty-market

Budget wishes and the property market

by Colin Tan

05:55 AM Feb 25, 2011


In an online poll of about 400 people that The Straits Times conducted on the eve of the announcement of the Budget, inflation worries ranked as the most urgent issue respondents wanted to be addressed.

This did not come as a surprise but "lower housing prices" was ranked second among nine issues which included providing assistance to the sandwiched class, narrowing the income gap, boosting the birth rate, lowering the cost of education, lowering taxes, boosting productivity and topping up Medisave accounts.

Normally, I would not read too much into the results of such polls as they may not reflect accurately the feelings of the population at large. But if it was a representative sample, did it indicate that many had hoped - if not expected - something to be done about rising home prices, notwithstanding that the latest cooling measures were announced in mid-January.

It had been reasoned before that rising housing prices made many more people happy than sad because most households lived in owner-occupied properties and are sitting presumably on large potential capital gains. Should we now re-examine this notion?

In any case, nothing major with short-term repercussions on prices concerning the real estate market was announced.

Recognising the real problem that rising housing prices posed to lower income groups, a special Central Provident Fund (CPF) Housing Grant was announced to help such families make a first-time purchase of a Build-to-Order flat from the Housing and Development Board (HDB). There was also a S$10 billion plan to rejuvenate the heartlands over the next decade to preserve the value of HDB flats.

Developers were probably relieved that there were no further cooling measures announced in the Budget. Even if more measures had been contemplated, it was probably not the right time to introduce them as they would have hogged the headlines and overshadowed other issues addressed by the Budget, given that the property market has been a hot topic of late.

A post-Budget poll to gauge initial response attracted over 1,700 respondents. It showed that over two-thirds had expected more. Considering the generous handouts, are expectations too high?

When I asked those around me, most said they had no complaints. Would a doubling of benefits change their minds? The surprising answer was no.

A long-time friend explained the strange response this way: A father trying to motivate his son promised him S$500 in cash to buy his favourite mobile phone if he did well in his exams. While he was studying hard, he found out from a classmate that the price of that coveted phone had risen by a further S$100. What do you think is the effect of this new piece of information on the son?

Will he go back to his dad and try and get him to raise his reward to $600 or will he settle for a cheaper, less sophisticated model? Or will he give up the desire of having that gadget altogether? What impact will this have on his morale?

Nobody can really tell. It depends on the individual. There will be a myriad of responses but the most probable outcome is one of mixed feelings. If rising housing prices were indeed a problem to many and I am not saying they are, will this partly explain the strange response?

There were more news reports this week on the effects of inflation. In one report, an investment strategist was quoted as saying that the real rate of interest is minus 4.42 per cent if one takes the 4.6 per cent inflation rate in December and compared it against the average three-month fixed deposit rate of 0.18 per cent.

What this means is that it pays to borrow now and the more you borrow, the more you benefit.

Inflation is forcing the rich to consider more risky investments, but risk aversion remains strong, the strategist said, adding that this is why many have been buying property, which in turn drives up prices. I can understand this as many investors whom I have spoken to consider property as a long-term hedge against inflation even as you advise that this time, it may be different.

With property wired into our Asian DNA, it is no wonder that attempts by governments to prick asset bubbles have so far met with limited success.



Colin Tan is Head, Research & Consultancy at Chesterton Suntec International.