May 6, 2010

Who really gains from runaway property prices?

Many will benefit, but too quick a surge can cause anxiety

By Fiona Chan

WHEN data released last month showed that the prices of private homes and HDB resale flats continued to rise in the first quarter of the year, the dismay from some people was palpable.

Online, netizens griped about property being priced out of their reach. In Parliament, MPs asked if the Government could do more to help home seekers.

Singapore's ongoing property boom appears to be downright unpopular - and not just among those yet to buy their homes. Why might that be so? After all, as the theory goes, higher prices benefit not only home sellers making a profit, but every home owner whose property is appreciating in value.

In Singapore, land of the highest home ownership rate in the world, this should mean that apart from a small group of home seekers being priced out of the market, the large majority of the population gains whenever home values go up.

Property developers have also always maintained that some level of froth is good for the property market. The president of the Real Estate Developers' Association of Singapore (Redas), Mr Simon Cheong, has said that speculation is unavoidable and not all bad.

'In any market...there is always the element of speculation, which I think is healthy,' he said in an interview in 2007.

The executive director of Hong Kong's Cheung Kong Holdings, Mr Justin Chiu, told reporters here in March that he likes property bubbles as they draw in more buyers and make the market more active.

But is it really true that rising home prices present more pros than cons for the majority? The short answer: Not if prices are surging sharply, and not if a significant proportion of home owners are aspiring to upgrade.

To be sure, a housing boom is incontestably better for home owners than a slump. When home prices plunge by so much that your property is worth less than the loan you took to pay it, you basically cannot afford to sell it even if you really need to.

But this does not mean that all home owners can afford to sell their houses in a boom either. Those with only one home can afford to sell only if they are willing to downgrade to a cheaper property, or move further from the city centre. Otherwise, whatever profit they get from selling in a high market will be wiped out from buying just as high, if not higher.

Suburban homes have an implied price cap as their main target market is Housing Board flat upgraders and first-time home buyers. But high-end homes in the prime areas have less of a limit, thanks largely to the well-heeled foreigners now firmly entrenched in the property scene.

All things being equal, this means that if your Upper Bukit Timah condominium rises in price by 10 per cent, chances are that condo prices in the posher Bukit Timah area will go up by 20 per cent, putting a spanner in the hopes of upgraders.

Today's home owners also worry about tomorrow's prices: They fear that if property values rise unceasingly, their children will never be able to afford a home.

So, who benefits from a runaway housing market? Investors clearly do: Those who own more than one home and can cash out. Higher home prices also usually mean higher rentals, so investors seeking rental yields love booms.

Also in this category are the property traders and speculators - those who have bet that prices will go up.

But because there are no publicly available figures on how many Singapore residents own more than one home, it is hard to gauge how dominant this group is.

Developers are also an obvious beneficiary of a boom. But to the extent that a sudden spike in home prices could trigger cooling measures by the Government, steeply rising prices may also portend uncertainty and instability in the real estate sector, making it less attractive to investors and property developers.

Of course, the Government itself gains when property values soar, from higher stamp duty and property tax collections, which are based on property values. When luxury home prices hit one high after another in 2007, stamp duty takings reached a record $3.8 billion.

Another advantage of a property boom is the impact on the wider economy. A rising housing market lifts the real estate and business services sectors. High prices also send a signal that a country's property sector is desirable, speaking well of its fundamentals and growth prospects.

It is no coincidence that property prices are highly correlated with gross domestic product. In rankings of cities with the highest home prices, thriving financial centres such as London, New York and Tokyo often dominate.

High home prices also have an indirect effect on the economy. Just sitting on a quickly appreciating asset makes people feel more secure about their finances and more willing to spend.

This so-called wealth effect should be magnified in a country like Singapore, where 90 per cent of the population own their homes. But a 2004 study by two National University of Singapore professors questioned this assumption, and instead found that the wealth effect is 'very much absent' in Singapore.

A key reason could be because Singapore, as both a city and a country, offers few options for home owners to realise their higher wealth by cashing out of their city homes and moving to cheaper quality homes in the suburbs, said Professors Tilak Abeysinghe and Choy Keen Meng.

There is also a lack of financial instruments such as reverse mortgages that allow home owners to convert the savings locked up in their houses to consumption of non-housing goods and services.

The professors argued that sharp escalations in house prices should be avoided here as, far from creating a wealth effect, they produce a negative 'price effect': As people anticipate further rises in home prices, they cut back on spending.

Rising home prices also increase the financial burdens of Singaporeans in the form of higher downpayments and monthly instalments, they said.

So, while high property prices benefit many, the truth is that a market that is too buoyant can create the opposite effect and cause anxiety even among home owners. This may be mere perception, but helps explain why the current unhappiness over high prices seems to extend beyond first-time home buyers.

The upshot of all this is that while falling home prices claim the most casualties, steeply rising prices can hurt as well.

Ultimately, home prices should be viewed like inflation: Best when rising at a slow and steady rate.

Property traders, speculators, developers and all those pushing the boundaries with significant price hikes would do well to keep that in mind.

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