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Ripe for an asset price bubble

Posted on 1 Sep 2009 | Comments Off

QUEUES can once again be seen at condo launches – a sight that may surprise many, given that the effects of the world financial crisis will last long after countries emerge from the recession.

Are the queues a sign of the start of a new asset price bubble? Will we learn from our mistakes? What can policymakers do to pre-empt future crises?

Sadly, the root cause of financial crises is in our genes. We are genetically coded to survive and to seek a better life for our offspring. In economic terms, this means consuming some resources now and accumulating the rest for a better future.

While the relentless pursuit of wealth may be individually rational, it can become collectively destructive. The role of a government is to put in place a system that can mitigate the destructiveness by constraining the actions of individuals and businesses.

Going back to the condo frenzy, I can understand why people would line up even after being burned by the market recently. Who would want to miss the boat? The price may soon be out of one’s reach if one doesn’t jump in now. Continue reading →

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Posted in Property Market / Real Estate

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Defusing a potential housing bubble

Posted on 31 Aug 2009 | Comments Off

Goh Eng Yeow asks if banks should tighten lending guidelines now.

IT MAKES sense to ask ourselves if the current terms extended by our banks for home loans are too generous.

If I recall correctly, these guidelines were relaxed, along with the scrapping of other anti-speculation measures like the capital gains tax on property sales profits, to fight the then scary free-fall in home prices after the bursting of the dotcom bubble bust in 2000.

But the loose monetary policy now practised by the US Federal Reserve to fight falling prices in the United States has the effect of depressing interest rates elsewhere in the world, where economic conditions are not similar to the US.

Given the risk of bursting a rather big bubble in our housing market, one has to ask if it is still sensible to stick to the same guidelines which were used to combat our own deflationary downward spiral in home prices. Will we be sowing our own seeds of destruction by doing so?

Banks will, of course, say that they have a sophisticated risk management system to screen borrowers to ensure that such a similar disaster like the US sub-prime crisis does not take place here.

Examples extended by bigger and more well-established global lenders offer no consolation. Continue reading →