The new generation is being priced-out of the market. Many young Singaporeans are worried they won’t have good-paying jobs in the future, let alone earn enough to afford a decent home. If the economy is not booming, then what’s keeping home prices up? Why haven’t the government cooling measures brought home prices back down to historical values? Why are interest rates on loans still near zero? Are there good reasons to want home prices to come down? Here are some things to consider.

 

The “Giant Pool of Money”

Over the last 10 years, the money supply in many nations, such as the US, UK, and Australia, have doubled. The world money supply has also grown tremendously, especially in developing Asian nations. 

With such a massive flood of newly created money, many people assumed that inflation would occur, as it had historically. Recent cases include Zimbabwe and Argentina. But it didn’t. Inflation, for the most part, has been kept stable and relatively low. The Singapore CPI (a measure of inflation) was just 0.4% from August 2016 to August 2017.

 

So Where Did All That Money Go?

A lot of that money went to the banks, who have been keeping that money uncirculated and held as reserves.

But what about the massive amounts of money coming from savers, investors, institutions, companies, funds, and sovereign nations? With low interest rates from banks, that “giant pool of money” preferentially went to assets with hopes and promises of higher returns. This is why over the last decade, asset prices have been going way up despite a sluggish economy.

Low interest rates also make it easier to borrow money, and that too drove up asset prices (and especially homes prices).

Historically, rising home prices were a result of economic prosperity or productivity (i.e., an increase in a nation’s GDP). But this isn’t the case here. The asset prices of stocks, derivatives, start-ups, and property have been increasing mostly due to this giant pool of money attempting to chase higher yields.  

The US derivatives market (made up of such things like futures contracts, options, warrants, and swaps) is estimated to be as much as $2 quadrillion. As a reference, $2 quadrillion is 22 times all global GDP combined. This growth of the value of this particular asset simply isn’t sustainable.

Home prices have been bid up as well, though on a much smaller scale.

 

Why You Don’t Want Singapore Housing Prices* to Keep Growing Unsustainably

“Housing prices” here refer primarily to the private market, not to government-subsidised BTOs or HDBs.

What does it mean to be unsustainable?  Historically, housing prices generally increased with the median wage. This makes sense because you need a significant portion of the population to be able to afford housing, to have a place to live and raise a family, and to have a type of “forced savings” which can serve later as a safety net.

Housing prices also didn’t grow much faster than the rate of economic growth.  

Then in the early 1990s, a variety of factors drove up prices and encouraged speculation. These factors included (1) easy money and credit, (2) a demand to upgrade one’s lifestyle, (3) the deregulation of the HDB resale market, (4) the flood of foreign investment and foreign developers into local real estate, (5) the introduction of CPF housing grants, and (6) few other alternative avenues of investments.

Because the general population had a distrust of stocks, and ETFs (exchange-traded funds) & REITs (real estate investment trusts) were not yet in existence, property became viewed as a way to earn investment profit. Sub-sales, in which a person buys a property and then sells it before completion, became common. Many uneducated and inexperienced “home flippers”, became legendary because of their quick profit.

This led to a property bubble, which was only tempered by the Asian Financial Crisis in 1997. This caused the first major downward dip in the Singapore Residential Property Price Index.

 

Some Side Effects

When there is a dramatic and rapid increase in home prices, it makes owners feel like they’re becoming wealthier. They spend more as a result. This is in part what Fed Chairman Alan Greenspan wanted as a way to spur the US economy. But this newfound “wealth” is really unfounded.  

And as their “wealth” increases, their children’s “wealth” ends up decreasing. Why? Because their children will have to pay even more to buy a house. They will have to take up an even larger amount of debt and/or earn even more income.

Rising home prices themselves don’t create additional net GDP value over the long term. Any new construction-related jobs created as a consequence of a booming real estate market are clawed back during downturns. What rising home prices do instead is distribute wealth to the people who already have homes from those who don’t yet have homes.

 

What is a “Sustainable” Property Value?

When I was living in the States, there was a general rule of affordability that my parents and their generation preached. For them, affordability meant 2.5 times your annual income. That means a person making $100,000 per annum should aim for no more than a $250,000 home. This rule was also popularly prescribed in other nations, such as the UK.

Today, this is no longer the case. In many places, such as San Francisco, New York City, and London, home values are more than 9 times the annual income of borrowers.

In other cities around the world, this is even worse. The top 5 spots on the Property Price to Income Ratio ranking (mid-2017) are all Asian cities. Shenzhen and Hong Kong are at the top with their Property Price to Income Ratio at almost 40! Singapore (private market) ranks #10, with property values at 22 times annual income.

 

This is definitely not sustainable. This is, in fact, the opposite of sustainable. Home price appreciation should not continuously exceed wage growth over the longer term. Other people have also questioned whether home prices should be tied to income growth or GDP growth as it had been historically.

 

Homes are for Living in, Not for Speculation

Unless you have a lot of disposable income, most people should not speculate in property. Just think about it. Housing is usually the most expensive, yet undiversified and overleveraged asset that you’ll ever own.

It also comes with a rather lengthy 25- or 30-year commitment. And this debt is adjustable depending on a reference rate such as SIBOR. So once you purchase your home, can you really keep up with the payments if/when interest rates rise? The SIBOR has been as high as 8% (during the Asian Financial Crisis). Can you be absolutely sure that it will never go that high again?

It is also becoming more common for households to be disrupted by financial and life altering events. This results in changes to a household’s economic situation and housing needs. Hence, most people will tend to stay in their homes for only about 6-13 years, when the home is not fully paid off.

Given all these concerns, speculating on property can be unwise. We’re told that “home values always appreciate” (which is what property agents, mortgage lenders, and those who’ve already made this wager want you to believe), but it isn’t so black-and-white. And a rise in home values means the next generation will get priced-out, and will have to go further into debt to purchase a home.

Even if you don’t care about the next generation, if a future situation arises requiring you to shift homes, you may also be priced out or forced to buy at inflated prices.

 

Keeping Homes Affordable also helps the economy

We know that high home values make people spend more, which in turn spurs the economy. But home affordability also has positive effects on the economy. Being able to afford a home gives households a sense of stability. It also lessens the inequality. It affects overall happiness, levels of crime, and job satisfaction and retention. After all, one of Singapore’s founding principles and reasons for success was adequate and affordable housing for its people. Having a home means having a stake in the community, the local economy, and the nation as a whole.

I left the US at a time when there were rows of empty boarded up McMansions next to tent cities where hundreds of homeless people lived. And I couldn’t help but wonder how that even makes sense.

One of Detroit’s tent cities

Perhaps we need to reexamine our assumptions and beliefs. Should we desire home prices to increase faster than wages or economic activity? Should a home purchase be primarily for the purpose of basic shelter or for speculation? And what are the long-term consequences of wishing for ever increasing home prices?

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