Over the last 10 years, the price of real estate in Singapore has increased to unsustainable levels in all real estate price segments. This is not an isolated phenomenon but rather has been seen throughout major cities throughout the world. Especially in cities from Manhattan, London to Hong Kong, the prices of homes have reached levels where everybody but the super wealthy have been pushed out of being able to live in the cities. For most cities, this isn’t a huge issue as large or megacities tend to be transient places where the rich and young would congregate and the middle aged and family starters move to the suburbs.

In my opinion these are the few reasons why prices have gone up:

1. The Mobile Argument
2. The Investment Argument
3. Scarcity Argument

The Mobile

One of the reason that cities have seen such disproportional increases in the price of their real estate is due to the nature cities serve as nodes for people to conduct business and handle large transactions. This naturally attracts the world’s wealthiest to congregate like bees to honey, and this typically drives up the price of luxury goods in these small markets. However, in recent years, we’ve seen the increased mobility of the high income earning group (not to be confused with the high wealth accruing group), this group has led to increase in prices across all goods classes for upper-middle and middle income people across these cities that articulate trade through the world. Additionally as this group moves across the globe, they’ve had a penchant for picking up residential properties.

The Investment Argument

Profiteering without creating value. The state of the resale market can be largely described as one where the only motive is profit and people are stretching themselves on all sorts of margins to make the most out of the boom in prices (though that has tempered somewhat over the last 4 quarters). Everybody and their uncle has been purchasing first and second properties not because they need the roof or income from rent but because they have this deep belief that real estate never goes down, at least not in this market, the memories of the Asian Financial Crisis and that burst real estate bubble completely fading from memory.

The psychology of investing allows people to forget their large burns or losses while remembering the times we have won which largely allows bubbles like these to keep growing as nobody seems to remember the bad things that happen when market bubbles pop. The resale market can largely be described or broken down into people who are trying to get out before all hell breaks loose, and people trying to buy a home to stay in (though not permanently). These are essentially 2 forms of investment passive (buying to live in) and active (buying to flip or rent) and these are pushing prices up.

One of the huge social changes that has occured that has started to impact the housing market is that new married couples are looking to buy homes straight after getting married. This is a relatively new phenomenon (early to late 90s) primarily driven by rising income levels and, at that point, cheaper homes. However, as time has progressed, those factors have changed yet peoples tendency to buy (rather than rent their first home – like most of our baby boomer parents).

In short, there are far too many buyers on the market, and there are far too many buyers willing to take massive loans to make their purchases happen at any cost.

Scarcity

To state the very obvious now; Singapore has a limited number of square kilometres of space. We have to set aside land for industry, recreation, military, government and housing usages (just to name the big ones – nature should be included here as well, except it already occupies space which hasn’t already been gazetted). Generally speaking when demand for scarce goods increases, the price of that good also goes up as well. Naturally as the population of the country has expanded over time, the demand for real estate has increased in tandem pushing prices up as well. However, what hasn’t been full accounted, in my opinion, has been the purchase of second (or third) homes as well as international investors buying holiday or non-domicile homes.

How do you push prices down?

I have a few ideas on how to push down prices though they might not all be quite politically palatable. I’ll list my ideas in order of most palatable to least palatable.

1. Have a minimum residency period for all residences purchased at 5 years. Those that choose to sell will have their profit taxed at a rate of 50%.
2. Increase the down payment amount for second properties and above to 50%. The higher equity element upfront reduces the future pay out and the rate of return.
3. COE type bidding process for the right to buy a second or more home, with a certificate for each additional property.
4. Levy a higher property tax for people who are renting out their entire property in the event that they have more than 1 property. We should not impact aging folks that are renting out their homes as they move in aged assistance living residences.
5. Developers need to sell their full allotment in their building with 6-9 months of the development being completed. Those that are not sold, would be controlled auctioned off at a valuation price floor set by a 3rd party.

These ideas are primarily for residential properties.

It is my belief that we should make real estate hogging a thing of the past where we have encouraged rent seeking on the part of capital holders which has led to a lot of capital not being placed to the best use in the development of society or the economy. Hopefully things can change but the political feasibility of such radical change will likely be hard to stomach.

#thebumblingtechnocrat