Cooling measures in danger of losing credibility

Although it is still early days, many property market watchers are coming to the conclusion that the latest round of Government cooling measures – curbing the tenures of home loans – is having little or no impact.

Some have described them as “very disappointing”. Even the knee-jerk reaction that accompanied the previous rounds of cooling measures was missing.

Show flats were packed the day after the Oct 5 announcement, with prospective buyers appearing unfazed by the new measures, even accounting for the fact that the blow could be heavier on the resale market for completed properties rather than on new launches.

Maybe the crowds were there to assess the impact of the measures but there was no denying that sales continued where they left off before the announcement.

It was as though these buyers were convinced that no amount of cooling measures – or at least the way they are being introduced in a calibrated approach – is going to tame this market. In fact, I know of a few potential buyers who, having stayed on the sidelines thus far, are now taking the plunge.

To me, this signals the danger that the cooling measures – both the current ones and those that may be introduced in the future – are fast losing their credibility.

This may have disastrous consequences when we turn our attention to a hitherto unmentioned group of prospective buyers. They have similar housing aspirations as the current buyers but they have so far remained prudent and stayed away from the market, even as they see inflation eating away the value of their cash pile.

The perception that cooling measures are no longer effective – if it takes hold with this group – may yet unleash another and possibly bigger pool of potential buyers on the market, a force that will be much harder to tame.

We all know by now that the historically low interest rates are the main problem and there are no solutions because our open economy means we are at the mercy of decisions made by policy makers elsewhere.

At the moment, greater supply is keeping home prices here stable but at what cost for the market in the future? Some economists have noted that the number of good years enjoyed by the market is usually followed by a similar span of bad years. Personally, I feel supply – both private and public – has already become a problem that will manifest in the future.

If we are reluctant to take a more aggressive approach in crafting property market cooling measures, while at the same time keeping our economy open, then we need to provide investment alternatives, at least something to provide relief to those among us who have remained prudent thus far.

Inflation-linked bonds have been mentioned before but, judging from the difficulties mentioned, there are significant costs.

The borrowing costs for Singapore at present are very low because of the strength and stability of our economy relative to others. To issue bonds at a higher rate – linked to inflation – would mean that the issuer is subsidising the bond holder.

If that is the problem, why not restrict the sale of these bonds to citizens? We can also cap the amount that each citizen can buy and impose a holding period during which the bonds cannot be resold.

There is no lack of infrastructure projects planned for the country right now. Just the construction of the various rail lines criss-crossing the island alone would generate sufficient bonds.

As for the hefty subsidy, is this not a matter of money coming out of one hand and going into the other? Take it as Singaporeans financing their own infrastructure projects. The subsidy may also be worth paying if it prevents the damage a severe real estate market crash can have on our economy.

In any case, the subsidy is for a short period of time. Or don’t the authorities believe it themselves when they say that the low interest rate environment is unsustainable in the long run?

By Colin Tan – Head of Research & Consultancy at Chesterton Suntec International

Source : Today – 26 Oct 2012

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