Tan Kin Lian's Blog: A free market has to be regulated

Tuesday, November 10, 2009

A free market has to be regulated

The headline of a Straits Times report said "MAS flags two risks for property buyers". MAS is warning about the risks of a weak economy (which may cause property prices to drop) and a strong economy (which leads to higher interest rates). Property buyers should not be paying high prices which they may not be able to service.

This move is timely to prevent an asset bubble in property - the same type of bubble that caused the collapse of the US and global financial system last year.

Some people think that a free market should be unregulated. This is not correct for many markets where one party, usually the seller, has more information that the other party, usually the buyer, and can take unfair advantage of the buyer. This situation applies to the property market, financial market, insurance market and for many professional services.

For the free market to work well, it has to be regulated to ensure that information is made easily available to all parties and that a code of fair practice and professional ethics is observed. A free market is not one which allows some people can take advantage of other people to make an excessive profit.

There is now a trend towards stronger regulation in America. I hope that this trend is followed in other countries.

Tan Kin Lian

10 comments:

wjsim said...: If the property bubble is due to unregulated free market, why don't we see bubbles forming in every other unregulated product being sold on the market?

Housing, in Singapore and US, is one of the most heavily regulated industries. In US, reckless buying is encouraged through cheap government money and almost 0 down payments. In Singapore, subsidies are given to low income homebuyers, new homes are not immediately introduced into the open market, buyers have to stay in their HDB for a few years before selling and a whole slew of other regulations etc etc.

You can see effects of regulations in healthcare as well. While prices of surgery other standard hospital care are spiralling out of control, prices for LASIK and plastic surgery are actually coming down over the years. Government, in the form of subsidies, is heavily involved in the former and non-existent in the latter.

Any wonder why university prices are going up? Anyone thought that the culprits are government subsidies? The universities are not dumb. They know the more they charge, the more the government is going to subsidise anyway, at the expense of taxpayers.

and the list goes on.

Information is a commodity as well. Either you research and learn it, or pay for it.; November 10, 2009 8:36 AM
Anonymous said...: S'pore is the HDB land of landlords. After going thru most HDB rental ppty websites and newspapers, you will notice most (8in 10) are illegal or against HDB policy of subletting.

It's damn good business with return on investment greater than 4% (> than rate for CPF Special acctt) for most resale buyers. For 1st time owner of flat, the return is even more lucrative. Do the maths.

In financial terms, this is known as arbitrage. They rent out their flats at greater than 4% and buy private properties financed at less than 2%. They still earn more than 2% implicitly.

Quite a few are rented out to a master PR tenant for the whole flat, who then sublets rooms he does not need to other fellow PRs.

For 'legal' HDB rental, do you beleive that everybody complies with the 'lock-up 1 bedroom' policy? The ground shouts a resounding NO.

Where is HDB in all this? Eyes wide shut!!

Facts from HDB:
No of hseholds HDB took action against for illegal subletting
2007 - 62
2008 - 28
2009 - 17 (up to Aug)

Do you believe the low numbers? They dun bother prosecuting. So what regulation?

This is one contributing factor as to why prices HDB resale flats is high.

One way to curb high ppty price is also to prosecute those offenders seriously.

From another perspective, it's also about enforcing the law fairly.

I always wonder why illegal HDB flat renting is so rampant but why enforcement of littering/smoking is pursued religiously.; November 10, 2009 12:50 PM
Anonymous said...: I enjoyed the point raised by wjsim, which basically boils down to subsidies, resulting in "inefficient" markets... good point.

To remedy this situation, there should be better regulation to prevent "abuse" which is surely taking place.

Eg. maybe the HDB should provide a higher subsidy for the first time buyer and the 2nd purchase would have a lesser subsidy... so that people will make sure their first purchase will be well thought out!

I believe, Mr Tan has been pointing out is about regulating markets and not about subsidies...I believe in regulation it is just human nature to go wild when there is no
"goverment" eg. Somalia; November 10, 2009 5:04 PM
Anonymous said...: "Any wonder why university prices are going up? Anyone thought that the culprits are government subsidies? The universities are not dumb. They know the more they charge, the more the government is going to subsidise anyway, at the expense of taxpayers."

Do you even understand the mechanics of HDB housing subsidy in Singapore ? How is it that it is at expense of taxpayer when the subsidy is actually deduct from excessive profit of a flat, which very much compensate by high price cause by free market. Why do you think our government love free market ? Competitive price ? Or supernormal profit due to GLC's industry monopoly ?; November 10, 2009 5:10 PM
Unknown said...: dear wjsim,
i applaud you for your painstaking efforts in educating the people here on what free market and capitalism is.
you are a true blue austrian economics follower.
however, most readers here speak of the free market or capitalism so matter of factly, but they do not realise they do not understand it in the first place.
they keep blaming the wrong stuffs for this crisis. Free market has failed, capitalism is evil. utter nonsense, the wealth and prosperity they enjoy now is precisely due to free market and capitalism, the crisis is born out of the lack of it and excessive government regulation. but most people do not see how this could be the case, that this is the truth.
what really is a free market, what really is capitalism, people do not really spend the effort and time to learn these kind of stuffs anymore nowadays.
they prefer to have the problem solve by the government instead by having more regulations.
these are the classic reactions predicted by the great austrian economist ludwig von mises.
government regulations creating the problems in the first instance and then people calling for more regulation to correct the previous problems, neverending.
again, i comment your effort,
but the crux is to draw people attention to educate themselves on such stuffs, get them to be interested in the books by rothbard,hazlitt,woods,ron paul and mises.; November 10, 2009 9:48 PM
Anonymous said...: They bring in more FTs to CHEAPER S'poreans pay?

They bring in more FTs to BETTER higher property prices?

They bring in more FTs to FASTER kill more S'poreans?

Where got regulate?; November 10, 2009 11:20 PM
YZ said...: Thanks WJSIM for the effort, despite knowing your side is far outnumbered & your view less well-understood, as expected in any public forum.

I've been following your comments & mostly agree with u, save for this instance "an economy grows by production not consumption".

(1) An impt aspect u raise (since the past) is the possibility that ppl are blaming the wrong culprit, bearing the consequence of killing the goose that lay golden eggs. But I think in all likelihood this possibility has never crossed the intended recipients' minds, not until the outcome is realised.
(2) Another point u raise here is the possibility that regulation/subsidy (any gov intervention) will distort behaviour -- leading to unnecessary waste. Sometimes competition will do it better. [I guess your intention is to point out that regulation is not the panacea, but can be the cause. But the examples u choose (housing, healthcare, edu) might lead to the wrong impression of u. I guess u agree that gov subsidy in these 3 sectors brings greater benefit than cost to society, and thus is still needed?]

I've come to believe that logic is not an appropriate tool to face an angry crowd. Like Dr Goh Keng Swee's speech, brilliant but it's asking too much from the voters. Sadly a public speaker needs to employ emotional appeal to achieve any impact. So wjsim, keep it up.

But let's give Mr Tan credit where credit's due. "Free mkt needs regulation" is true. Gov is the only actor capable to address market failure (e.g. information asymmetry, externality). Condition is: The principle of any such gov intervention should be based on identified mkt failure (not out of good intention) where gov is ascertained its actions will not add gov failure on top of mkt failure.

A thriving free economy rests on a credible and effective government to enforce property rights, address mkt failure, and to redistribute resources to the needy.; November 11, 2009 6:23 PM
Unknown said...: It's the ugly side of things when we touch on housing, education and healthcare. That's why in reality, the ideal of free market can never be achieved in certain areas due to political reasons. Obama will probably be lynched if he doesn't sign the bailout, or scrapped public healthcare totally (instead he just buffed it up). Similarly, our government will probably be gone if suddenly people have to pay 20k more per year for their education in local universities. It will have to perpetuate.

Initially I had doubts about Say's law as well. Don't give it up though, it is very good principle to live by.

The illegal subletting of HDB is a perfect example of a black market forming due to controlled prices. In this case, the price of money was controlled at 2+%, according to anon1250pm. If the housing loans were managed privately, the interest rates would adjust to reflect the real value and such illegal subletting won't be as profitable anymore. Then you would have another bunch complaining house loans so expensive how to buy house, no welfare for "public housing" etc etc...

To answer another anonymous guy, no, our government DON'T like free market in HDB. They put in those regulations to act like they're "controlling" the market and prices, but they know better... ;); November 11, 2009 11:29 PM
Vincent Sear said...: I support regulation. Otherwise, it's going to become a bandit's market. However, I don't support arbitrary ideas of what one feels to be too expensive or inexpensive. Let the market decide, as long as they're no frauds. Financial consumers are ignorant and needing protection? Yes, I agree with too. Educate and protect them by all means.; November 12, 2009 4:02 PM
Anonymous said...: Land in Spore is limited, hence property in Spore should be treated as a scarce resource and it should not be allowed to be treated as a financial instrument whereby people can trade and speculate in it.

Property in Spore should be restricted for housing the population only. Opening it up anyone around the world (non-landed properties) to invest/speculate in it would be detrimental to the people staying in Spore.

I would suggest that that government control property prices, allowing it to appreciate to cover for inflation only, and this can be achieved by reinstating capital gain taxes (should be for at least 5 years to be effective). This will then remove the element of short term speculation.; November 19, 2009 6:40 PM