Tan Kin Lian's Blog: Biggest speculation of a lifetime

Friday, February 19, 2010

Biggest speculation of a lifetime

The biggest speculation that most people can make in their lifetime is in property. This is a big transaction that takes 5 to 10 years of their earnings. If they get it right, they are rich. If they get it wrong, they have to pay for this mistake over many years.

Many took this decision out of fear that the price of a home will become more expensive in the future. Some speculate out of greed, to make money while the bubble continues. In most cases, the losers are the consumers who are ignorant of market trends and economic forces, have to depend on gossips, and can be exploited by the property agents and developers.

The property market in many countries have gone through cycles of boom and bust. They are the results of greed, fear and exploitation. This is not a fair market. It is an exploitative market. Many do not realize that it is a big speculative gamble - because it is clouded by the false belief that they are "making an investment".

A good government can shelter its citizens from the exploitation of the market by regulating the market. It can manage the economic forces to ensure that property prices bear a fair multiple to the average wages of a country. Each working person should be required to set aside a certain percentage (say 25%) of their earnings for a decent home. They should not be required to be exploited and pay more (say 35%) for this cost of living.

If a government has control over most of the land, it can set a benchmark for the market to follow. If the government allows the speculative forces to set the market price and then use it to justify its own pricing, it will contribute to instability in the property market - which is harmful for the economy.

It does not matter whether the people are buying or renting a property - it is more important that the cost is fair. I am referring to a decent housing at a fair rental or purchase price. If any person is willing to spend more for a larger house, it is their personal decision.

Many people have clamored for "affordable housing". It is an important role of a good government, especially one that has control over the cost of land.

Tan Kin Lian

9 comments:

Anonymous said...: People are not really wrong to think that property prices only go UP.
Look at the price of a hdb flat (say 5 rm). My parents bought one about 90k (Tampines) in 1985. I bought a 5 rm hdb flat (in different towns and mine is smaller in size) in 1996 (ie about 10 years later), the price was about 185k (Bukit Batok). Even if we take inflation into consideration, is this hike reasonable? We know it does not make any sense but this is reality.; February 19, 2010 10:06 AM
C H Yak said...: Q
"This is not a fair market. It is an exploitative market. Many do not realize that it is a big speculative gamble - because it is clouded by the false belief that they are "making an investment"." UQ

I totally agree. In my grandparents & parents' generations. A good piece of property (freehold) can appreciate 10~20 folds. These days, even a mid-range condominium (free-hold) depreciate/ appreciate +/- at least 20% both ways only. If one is lucky, the cost of captial investment (interest) is at least 15%. If we are lucky we may time our investment for that 5% return.

To enjoy a higher return one need actually to have a large capital outlay (cash) to time an outright purchase at the bottom of the property market. Refrain from borrowing or mortgage, which is quite impossible for the average person, if he thinks he is an "investor".

Is it really an "investment" or "luxurious consumption"?

Q "A good government can shelter its citizens from the exploitation of the market by regulating the market." UQ

Yes, the Govt once acquired and accumulated its land bank at cheap prices. By selling lands to private developers it is making lucrative profits and can add to the speculation. Even HDB flats (actually a lease) is now sold at ridiculous prices because it is tagged to prices subject to open market forces of re-sale flats. Affordability becomes an issue. HDB flats today (actually just 99 year leases) are actually worth as much as "freehold landed properties" during my parents/grandparents' generation if we could take prices back historically.

But, has income has also risen up by such bounds (10~20 folds), not forgeting about job uncertainty?

I agree that "costs" should be fair for the majority, particularly for HDB flats.

I do not believe that the majority will earn a profit out of the "investment" even with what the Govt. termed the asset enhancement policy for HDB flats, unless one can own more than one piece of property which is already so expensive.

Q "Many people have clamored for "affordable housing". It is an important role of a good government, especially one that has control over the cost of land." UQ

I totally agree. Rather than joining the fray for speculation, especially in HDB Flats, ensuring "affordability" from the perspective of "real" costs falls under the responsibilty of a good Govt. I see a fault in HDB letting out BTO flats at high prices claiming a "premium" over the sale of such properties.

Similarly, I see private developers of condominiums pricing their new launches at a higher price banding as compared to historical prices. E.g. what used to be 99 years lesaes condominium are price at low-band prices of private freehold condo prices. The mid-range condo are now priced at historical "high-end" price band.

If the market works, the developers and banks are all laughing with outright profits, while you are stuck with the "investment".

I conclude by quoating Mr Tan :-

Q " Many took this decision out of fear that the price of a home will become more expensive in the future. Some speculate out of greed, to make money while the bubble continues. In most cases, the losers are the consumers who are ignorant of market trends and economic forces, have to depend on gossips, and can be exploited by the property agents and developers."
UQ

I hope the "point-of-balance" in pricing will strike the local property market soon, at least for HDB flats, just like the prices of electronic goods; getting cheaper and not much higher.

In electronic goods, technolgy actually add value and make it cheaper. But in properties, there is not much "technology" to add value.; February 19, 2010 10:18 AM
Anonymous said...: Maybe the govt have been "caught off-guard".

When you are caught off-guard, it is too late to do anything. Just have to think of how best to control the bad consequences, if it can be controlled at all.

Most important is to make sure political stability is not affected. This is something they can control very well. I give them 98% marks for this.; February 19, 2010 10:58 AM
vincent wan said...: yes, i strongly agree that for every citizen of a country. we should be able to own a property / house that is affordable. the initial mission of HDB in the early years is to provide good housing to everyone in land scarce SGP. now, it seem a bit different, people are saying we are investing into a house we can rely for in our golden years...... i don't agree!! if people only own one such property / house, it is not an investment.
Cash is king in our golden years.; February 19, 2010 11:03 AM
ym said...: hi mr Tan,

if you look at history, whenever gahmens say it wants affordable housing, price of houses have in fact shot up.. we can look to the USA for such examples eg FNMA, etc were created to make home affordable but the outcome was the total opposite - home has become unaffordable eg costing 13 times of household income at the peak of the bubble..

the reason for this is simple - printing money and fractional reserve banking of creating credit/money out of thin air..

printed money always finds a home and in most of the cases its in capital goods like businesses and real estate titles..

another example, is think of a market where there is little regulation and gahmen intervention eg tech industry (PCs, laptops, telco etc).. prices of PCs, Ipods, etc has fallen and the public is that much richer.. children from poor families can still afford PCs to do their research and read this blog.. isnt it great?

Prices of these producst falls because :
1) there is little gahmen meddling
2) printed money never flows into consumer goods.. why should it?.. would a counterfeiter buy 10,000 PCs?.. naturally no.. but he may buy 5 condos..

in conclusion, we need to stop gahmen's from manipulating money and how money is created out of thin air in the banking system..

ym; February 19, 2010 11:23 AM
Anonymous said...: With over 30 years in banking, I have seen many property cycles. In each downturn, the property investor needs only to sit it out and service the instalment or interest, then he/she will come out better over the medium to long term.
This phenomenon is exarcebated by politicians consistently talking about asset enhancement.
Traditional methods of using 3 or 4years annual income to assess affordability has become obsolete.
This is unique to Singapore where almost everybody(politicians/heartlanders, middle income/high networth/foreigners)all think about property asset enhancement.
It remains to be seen whether there is a HUGE bubble waiting to burst in the future.; February 19, 2010 12:29 PM
Anonymous said...: Very soon our gahmens can add another "achievement" to their record..............the most expensive public housing in the world. For those who own a house you can pass it to your children, that is if you have only one child. If you have more than one child just make sure they do well in their studies and become a Minister.; February 19, 2010 12:41 PM
Anonymous said...: I think fair cost cannot be defined purely based on N X annual household income. You must also take into supporting infrastructure. For example, when Tampines HDB flat was sold at 100k in early 1980's, there is no MRT, no shopping mall etc. After 25y, now Tampines flat is sold for 400k but you have 3 shopping malls, MRT to town and airport. If government offers same-size HDB flat at Coney Island for 150k without MRT/mall which is 3 times annual median household income, would anybody buy?; February 20, 2010 5:41 PM
Anonymous said...: Will the recent government measures to "cool" the market crash the property market AGAIN like in 1996 or is there some difference? I think a Lot of people are going to lose money.; February 21, 2010 12:48 AM