America, Japan and Europe have low interest rate for many years. It was thought that low interest rate would reduce cost to business and encourage more businesses to be created to create jobs for the people. It did not seem to work well.
The low interest rate has caused asset prices to increase, especially property prices. It has made housing more expensive and out of reach to ordinary citizens - although the low interest rate helps to remove the pain of paying the mortgages.
At a certain point in the future, the housing prices will collapse. It happened in Japan, USA and Europe. This is why the banks are shaky, as they have lent too much on the inflated housing prices. There seem to be no escape from the disaster down the road.
There is actually a solution - and that is to get away from the concept of marking to market of property prices. I shall not go into much discussion here - as it requires a totally different approach. It may be necesary to avoid the global disaster.
A more fundamental question is - could the developed economies have adopted a different approach (instead of low interest rate) to grow the economy and create sufficient jobs for everyone? The answer is "yes" - and that is to get everybody to work less, so that the available work can be distributed to all those who are willing to work. There will be more time for social life. Life is not just work alone.
How can work be better distributed? This is another interesting question and requires a more detailed discussion. At this juncture, I only wish to bring out this concept. Maybe, some economists have already written about it, and we can share their thinking.
Tan Kin Lian
The low interest rate has caused asset prices to increase, especially property prices. It has made housing more expensive and out of reach to ordinary citizens - although the low interest rate helps to remove the pain of paying the mortgages.
At a certain point in the future, the housing prices will collapse. It happened in Japan, USA and Europe. This is why the banks are shaky, as they have lent too much on the inflated housing prices. There seem to be no escape from the disaster down the road.
There is actually a solution - and that is to get away from the concept of marking to market of property prices. I shall not go into much discussion here - as it requires a totally different approach. It may be necesary to avoid the global disaster.
A more fundamental question is - could the developed economies have adopted a different approach (instead of low interest rate) to grow the economy and create sufficient jobs for everyone? The answer is "yes" - and that is to get everybody to work less, so that the available work can be distributed to all those who are willing to work. There will be more time for social life. Life is not just work alone.
How can work be better distributed? This is another interesting question and requires a more detailed discussion. At this juncture, I only wish to bring out this concept. Maybe, some economists have already written about it, and we can share their thinking.
Tan Kin Lian
7 comments:
The low interest rate has caused asset prices to increase, especially property prices. Banks are shaky, as they have lent too much on the inflated housing prices. Agree. Will our XXXXXXXXXX dare to increase interest rate to a reasonable level?
I like to ask a question. Should we do away with mark to market pricing for other assets as well such as gold? If no then people will complain of unfaireness. One way to create jobs with shorter working hours is to break down the job or task into different components, so that different people can do different components of the job.
1) USA should have passed a legislation in 2009 that bans the building of new housing.
2) USA should also stop issuing building licenses.
3)Natationalize all home building companies.
Cut off new supply.
And the market will regain equilibrium more quickly.
Today's situation is reminiscent of the 2008, chaotic and dangerous.
Actually our local banks are burdened with mortgaged loans, in fact overly so. US banks tottered to brink of collapse like subprime mortgages after Lehman bankruptcy.
The same with our local banks, though not on the same scale of reckless lending as US banks, still banks heavily rely on property loans.
Heard many NUS new engineering graduates are desperate for jobs, this is sinister for the economy.
Better be a tortoise and be cash rich, even at very low interest returns. Investments of any type and shape is playing roulette now.
For equity investors, lay off Banks, and anticipate STI to drop to 2,500 points before bottom, just check technical charts. Hope wrong analysis.
Also owing to huge property supply, house owners have seen difficulty leasing out their properties the past two months.
So cash is King now. Even Soros sits on mountain of cash.
Even Warren Buffett sold all his Bank of America holdings, and bought their preference shares instead, just before its share price fell, and before US Govt starts suing all those Banks. It really pays to watch what these legendary share investors doing.
Looks like next year a better year to invest, US Equity market tends to rise 6 to 9 months before any Presidential Election.
Just making a forecaste, disclaimer here.
The Singapore property market did not collapse during the recent financial crisis because there was no need to mark to market. The properties were bought with CPF money and bank financing. The bank loan takes higher priority than the CPF savings.
When the property market drops, the value of the property was still higher than the bank loan, so there was no need for the bank to repossess the property, in the event of default.
In the advanced countries, they could have device a way for the property market to be temporarily prompt up by the future retirement savings, i.e. the government guarantees the shortfall (but as a charge to the citizen's future retirement savings). This is a way to avoid the temporary mark to market situation.
This is not a perfect solution (i.e. there could be loop holes) but it should provide some floor to prevent a disaster!
Singapore property will not likely fall because the government owns 80% over of the land. They control the supply of land.
A major portion of bank loans (50% ?) are linked to properties. Any increase of interest rate will see the collapse of the S'pore economy.
@"The bank loan takes higher priority than the CPF savings.
When the property market drops, the value of the property was still higher than the bank loan, so there was no need for the bank to repossess the property, in the event of default."
The real problem is that "CPF" money meant for retirement is eaten up by expensive property prices.
Many got confused by long mortgage at current low interest rate vs real affordability (backed by income stability).
The worst is that our Govt had used "CPF" as an economic tool in past few crises.
Although CPF used for property might have prevented "default" of loans and a collapse of the banks, it will manifest as a "deferred" problem later on for the common people.
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