Discussing the Issues of Rising Home Prices in Singapore

Starting from the article, Singapore Tightens Mortgages to Cool Property Market by Shamin Adam and Joyce Koh, Dated August 30th 2010 from Bloomberg Businessweek

With the issue of housing hot in Singapore, this article states measures taken by the government to subdue rising prices, which surged 38 % in the second quarter of 2010. A number of Quantitative Tools were quickly introduced, the most notable being increments of down payments for second mortgages and seller’s stamp duty (SSD) imposed on property held for less than three years.

The government reacted without incurring much time lag, implementing these policies, to ease the property market amid concerns that asset bubbles are forming with increasing prices. Majority of this policies are targeted against repeat buyers and speculators who buy and sell over short term, seeing it as an investment and have readily available money to pay for housing. This was done to aid first time buyers and locals who seek homes but do not have enough money and CPF to pay. Giving them the opportunity to be homeowners.

A Further Tightening Grip

Following the implementations in 2010, the property market still did not cool down as expected. Despite these steps prices rose by nearly 40% of the second quarter, after a rise of just over 25% in the year to the end of the first quarter. So measures were taken further and in a press release from the MAS as of 14th January 2011 the SDD is now increase to four years and individuals who have more than one outstanding loans from financial institutes can only loan 60 % of the value of homes.

Stamp duties

SSD was imposed for property held for less than four years, to aid people who were looking for a home to settle down, reduce buoyancy of the property market and buyers who were looking to make a quick dollar. The Inland Revenue Authority of Singapore (IRAS) states that SSD is a tax on executed documents relating to properties or interest in properties and shares or interest in shares. These documents include a lease, sale and purchase, gift or mortgage of property.

The SSD rates are 16%, 12%, 8%, and 4% for properties sold within first, second, third and fourth year respectively. From the table below it is calculated how much SSD is to be paid and percentage gains for selling a property within a given time. Hence the introduction of SSD is a good policy that has significantly reduced profits of selling homes. Looking less appealing for investors and helping to aid individuals who are in a real need of homes.

Tax Incidents 

Tax incidence is the analysis of the effect of a particular tax on the distribution of economic welfare. Tax incidence is said to "fall" upon the group that, at the end of the day, bears the burden of the tax. The key concept is that the tax incidence or tax burden does not depend on where the revenue is collected, but on the price elasticity of demand and price elasticity of supply (Baumol and Blinder, 2009).

From IRAS, Property Tax in Singapore is calculated by the percentage paid per year of the Annual Value (AV) of property, tax rates for owner-occupied homes is 4% per year and 10% for all other properties. The Singapore Budget 2010, the government decided to move from a Flat Property Tax rate to a system of Progressive Property Tax based on AV of properties, stating this system of tax incidents are more beneficial for low income families. Leading to collection of more taxes from top income brackets, systems of property tax rebates aimed at supporting the lower and middle-income groups by significantly reducing the tax payable by HDB flat owners.

Results of cutting mortgage loans 

By reducing the percentage of loan granted to individuals who have more than one outstanding mortgage to 60%, of the loan-to-value limit of the home. How this works in easing the market is as such, if investor Mr. A has 1 million dollars, prior to this he could get a loan of 80% from the bank. If a home cost 1 million dollars and minimum down payment is $200, 000: 

          Mr. A could then purchase 5 homes with a down payment of 20% relating to $200, 000 and get a bank loan of the remained 80%.With the new system, Mr. A can only purchase 2 homes now, as he can only loan 60% of the value of the home and now he must pay a down payment of 40% of the home. 

The purpose is to make sure in the long-term making homes are affordable. The government’s objective is to ensure a stable and sustainable property market where prices move in line with economic fundamentals. 

This implementation to cool the market has shown some benefits, an article by Rashiwala (2011), ‘Latest property measures more effective: NUS Study’, the Singapore Residential Price Index (SRPI) has increased only about 0.19% per month since the January 2011 measures were introduced as compared to about 1.23% in February 2010.

Additional Measures Adopted

With press releases from the Housing development Board (HDB), Mr. Mah stated that supplies of flats in 2011 would increase; there will be a revised Income Ceiling for Purchase of 3-room flats and Special CPF Housing Grants (SHG) to bring home ownership within reach of more low-income families.

Effectiveness of measures  

The effectiveness of these measures needs to be weight out and can only be seen in the years to come as housing can be catergorised as Inelastic Supply as a big change in price only results in a minor change in the quantity supplied, the supply curve is steeper and its elasticity would be less than one. 

Effectiveness of these measures can be further advanced by the government realising that private housing and public housing should not be intertwined, as property developers are not concerned for poor Singaporean who can't afford HDB flats due to trade, who welcomes foreigners, PR to buy public housing thus raising the price of HDBs. 

Additional measures can include changing the public housing ruling such that PR's are not allowed to buy HDB flats as more than often these people do not use this flats but instead rent it out to make their investment fruitful and when the time is right will cash out their properties.  

Funny enough with all the talk with the rising housing prices, the government ensured that this issue of housing prices was a key mandate of their polices right before the 2011 General Elections. They were looking into it and trying to make housing 'affordable' again for all Singaporeans. So after the elections were over and the ruling party won again, they did some major reshuffling. At that time, Mr Mah stepped down and retired from politics as the minister for National Development. The government tried to freshen up their image to showcase that they were keeping up with times in giving the citizens what they wanted. But not long after the elections when the hype died down, it seemed everything became stagnant again. 

Months later with a new minister at the helm, Mr. Khaw, people were looking forward to see what was the new steps the HDB was going to take in easing the volatile and increasing house prices. From Channel News Asia, 'Unit prices for DBSS project in Tampines hit record high', in June 2011, the HDB announced its latest project Design, Build and Sell Scheme (DBSS) in Tampines priced at a whopping $880, 000 Singapore dollars for a HDB flat. This new project sparked a pandemonium among locals. There was a serious amount of unhappiness among the society and everyone questioned the HDB was pricing public housing at such a exorbitant price. After the uproar from the public, the price of the 5 room flat fell from $880, 000 to around $780,000, approximately $102, 000. Which sparked even more questionings, if it could reduce the price by so many in such a short time, why didn't they just market it at that price.

With all the unnecessary attention garnered by the DBSS in Tampines, the HDB decided to scrape a similar DBSS project in Sengkang, from Asiaone 'HDB withdraws Sengkang DBSS site'

So what lies in the future for Singapore's housing issues is still unsure, whether if the government sticks to their promises of trying to find a solution for affordable homes for its people or not.Or if another shocker comes again like that of the DBSS scheme, its something we do not know. As of now, it seems that the new minister is trying to come up with ways to ease the market and prevent the 'Rich' from exploiting the market and making it harder for middle and low income families to have the chance of owning homes.

In conclusion, much has been done in improving the rising cost of home ownership but in order for policies to continue to work well, the government has to remain open and readily alter polices to suit current times. As I see housing as an issue, which evolves over time, with the influx of many foreigners, income gap increasing within Singapore’s rich and poor, such policies may only remain valid over one or two business cycles. Which needs to be rethought with the chances in the economy, if inflation or recession is to hit our shores or any other issues, which can stir up this volatile market.

My take on Greece's Debt Crisis

Well how fitting that in my first post, I would like to discuss and give my views on the Greek debt crisis. It has been almost 3 years now. With still no concrete solutions, but with the latest measures, I surely hope it eases the issue and allows the EU to get back on track and start concentrating more on Italy, Spain Portugal and Ireland.

So here it is, firstly based on "The Bitter Pills in the Plan to Rescue Greece" by Dan Bilefsky and Landon Thomas Jr., Dated 30th April 2010 from The New York Times

Bringing the Article to Light

The shocking news of Greece’s degrading economy only came into light in 2009 when, she sought economic financial aid from the European Union (EU) to avoid a debt default and agreed to austerity measures totalling 24 billion euros, known as a bailout. An agreed 130 billion euros aid is to be given over three years with reasonable interest rates, in return to cut public sector spending by 8 billion euros.

Measures taken by the government included increasing taxes on fuel, tobacco and alcohol. Laying off public sector workers, whose low levels of productivity and high wages are big contributors to Greece’s debt problem. Allowing crucial sectors like health care and energy and to go into private investment.

Central bank data showed that business and household deposits at Greek banks fell, bringing total losses in the first quarter of 2010 to 10.6 billion euros. Moody’s Investors Service downgraded its credit ratings on nine Greek banks.

To sum up, speculation that austerity measures would include new taxes on savings had caused some wealthy Greeks to move their funds to foreign banks. Though Greek government had pledged to guarantee deposits at banks. But some business people said that the credit squeeze was growing worse and some foreign banks were refusing to accept credit guarantees from Greek banks, citing the economic instability

How did Greece’s Recession begin?

An article by Nagle (2010), “Bailout Talks Raise Tension between Greece and Germany”, states Greece’s mounting imbalance and growing debt over the period 2000-2007 would make you wonder how it was possible for such a wide gap between the country’s income and expenditure to be maintained throughout this period without some sort of stabilising mechanism setting in to restore equilibrium. Had Greece not acceded to the euro zone, high external imbalances would sooner or later have triggered a devaluation of its currency that would, curtail the demand for imports while helping to boost exports. Greece’s participation in the euro zone entailed an exchange rate virtually independent of the country’s external position.

Implementations in place

Austerity measures make up policies of deficit, cutting, lower spending and reduction in the amount of benefits and public services provided. An article by Wesbury and Stein, titled ‘Government Austerity: The Good, Bad And Ugly’ and, Traynor and Allen titled, ‘Austerity Europe: who faces the cuts’ stated, Austerity policies are often used by governments to reduce their deficit spending while sometimes coupled with increases in taxes to pay back creditors to reduce debts.

Greek citizens have to work harder, for longer hours with less pay and the state also has to sell off some investments. It would mean cheaper (below market rates) funding for Greece. The cost is borne by the taxpayer, as the lenders will not be charging Greece sufficient interest to compensate for the risk of default.

Public sector pensions are to be slashed. Tax increases and moves to combat tax evasion. The labour market is to be liberalised, private sector workers will be able to be fired and restrictions on part time work are to be lifted.

Below discussed are the approaches and policies, which I feel, could have a positive impact in improving Greece’s economic woes.

Fiscal policies by government

Looking at the current situation faced by Greece, Discretionary Fiscal Government Polices should to be implemented. By introducing fiscal stimulus package equivalent to, an increase in government spending.

The Keynesian framework states that effects of fiscal expansion on demand, increase in government spending would have positive effect of the economy’s GDP having a multiplier effect (Case et al, 2012).

Below shown is how, Government Spending Multiplier would work in a fiscal policy:

To illustrate let us assume MPC = 0.75

Government Spending Multiplier = 1/*MPS

= 1/(1-^MPC)

=1/(1-0.75)

=4 (is the size of the multiplier)

Hence, if government spending is 30 billion euros,

Multiplier Effect = 30 billion X 4 = 120 billion

*Marginal Propensity to Save (MPS)

^Marginal Propensity to Consume (MPC)

So in this scenario, the government spending multiplier ratio of change in the equilibrium level of output to a change in government spending is 4.This is further exemplified in the graph below,

In addition, for government to spend and multiply more and to pay off debts incurred, taxes have been raised across the country. Thus this makes government spending fiscal policies one of the most feasible approaches to take. Another reason why this would be better is because government spending has a bigger multiplier because as households may not spend all the money given to them and thus leading to a smaller multiplier effect.

Reversing scares of Depositing in banks

The role of banks in money creation could be a key tool in aiding to alleviating the current debt crisis in the long run, but in order for that to happen firms and households need to deposit money into banks again.

The most basic way to do this is to increase the interest rates offered in turn resulting in decrease of money demanded, which can be see in Graph 2.

Once this is done, new money or loans can be created by reducing the, Required Reserve Ratio (RRR), the percentage of its total deposits that a bank must keep as reserves and reducing the currency drain ratio which refers to the proportion of money households want to hold as currency, both of which leads to the creation of new money (Case et al, 2012). With excess money readily available for both loans and investments, his will create a money creation cycle that goes on, increasing revenues for local banks. Which in turn can pay back to the central banks that can pay off more debts.

Another suggested approach would be to manipulate the currency in a flexible exchange rate system, but due to the fact that it is using euro as its currency, which is shared among many countries, it would not be possible.

Once again all this are just opinions and although it may look good in theory, it might not exactly bring about the changes it states to. But such measures are better than no measures at all.

Greece’s Future

With the above mention methods proposed to aid in the economy of Greece is based on theoretical outcomes, but in reality such a hefty debt incurred over they years by Greece due to imbalances in devaluation of its currency compared to the euro, entailed an exchange rate virtually independent of the country’s external position.

The very reason it led to this bailout and has hurt its economy from what it seems like there is to be no return. From a recent article by Fouquet (2011), “Greek Aid Package to Be Decided by End of June, Juncker Says, " Two years on and there has been little improvement and more aid and rethinking of measures need to be introduced, such as Funding Bills."

I feel that time is running out for Greece’s economy, with surmounting debts and more Europeans countries seeking aid and bailouts such as Ireland and Portugal to name a few, funds meant for Greece needs to be carved up to help other economics in need of aid but not in such a dire condition as the economy of Greece. All directions seems to point towards Greece declaring itself bankrupt in order to forfeit all debts and available from Moody’s website, it has lowered credit rating of Greece to Caa1 with the constant threat of going bankrupt.

But in a twist of events, I guess done so in order to help save the entire EU, and not allowing one of its own to be left behind and being devastated, seemingly something which came as much of a surprise to me was that, the EU decided to write off half of Greece's debts in a bid to help salvage the euro crisis. 

From BBC, in an article titled 'Greek Crisis: Papadreou Promises referendum on EU deal', analysts think a referendum could derail the wider deal on the euro debt crisis. This Greek rescue package is a key part of the agreement reached last week after marathon talks between euro zone leaders. This Greek plan has rattled the financial markets leading in a domino effect in stocks worldwide. On its announcement, the FTSE 100 in London opened 2.2% lower, the Dax in Frankfurt fell, the Cac-40 in Paris dropped. 

Mr Papandreou together with his governing Socialist party said that Greek people would have the final say on the package, which is designed to reduce Greek debt by about 100billion euros. No date has been for the referendum, but indicated that it would be held after details of the deal have been finalised with the EU and the country's creditors.

It seems as though there is no solution in sight in the near future, the Greek government has to be grateful for all the help the EU has been giving them. Something concrete has to come out among the Greek government. It would be sooner or later that the rest of EU might realise that the imminent debt of another of their members comes looming on them. Focusing too much on Greece might hinder them to rectify the rest of the problems going on financially in Europe.

Well that is all I have to say for now. How this matter plays out is of great importance to the entire world and especially the European Banks and economy. Hopefully, a positive outcome unfolds in the near future.