The housing bubble trouble

Dear Mr Gyourko,

I refer to the 29 Sept 2010 reports ‘The housing bubble trouble’ and ‘I bet that housing does not drive child-bearing decisions’ of your interview with the Straits Times.

The housing cycle is undesirable and should be smoothened out as much as possible. People who buy at the crest of the cycle suffer a loss. People who sell at the trough of the cycle also suffer a loss. We can’t say that these cycles even out over the lifetime because no matter how we look at it, the person who paid higher prices simply lose out to the person who paid lower prices.

As an example, Tom bought a flat for $100,000 when prices were low. Three years later Jerry bought the flat next door for $200,000 when prices were high. Let’s say ten years later, the flats Tom and Jerry bought have risen to $500,000. For Tom, that’s a gain of $400,000 but for Jerry, the gain is only $300,000. So for the rest of their lives, Tom will always be $100,000 better off than Jerry. That is easily five times the median annual salary. It’s like Jerry has to work an extra five years just to be even with Tom. Or Tom can afford to quit working for five years and still end up on par with Jerry.

People can’t time their housing purchase to coincide exactly with the trough of the cycle as they can’t time when they get married. It’s not fair that they lose out simply because they got married a few years earlier or a few years later. So they are at the mercy of the property cycle which should be managed.

There is no truth to the saying that our houses are affordable even to those with modest incomes. Who are we comparing with? Only when we compare with some of the world’s most expensive places like Hong Kong and London do we find Singapore home prices lower. Try comparing with American cities, our homes are so much more expensive.

You also need to understand that the financial inducement for child bearing is in terms of thousands of dollars. But housing price is in terms of hundreds of thousands of dollars. Even the initial down payment can come up to tens of thousands of dollars. In Singapore’s context, setting up a home comes before child bearing. If we can’t even afford the tens of thousands of dollars to set up a home first, what use is the few thousand dollar carrot for child bearing?

While Singapore is far more prosperous than Bangladesh, cost of living is also much higher. Singaporeans simply do not allow their kids to run around unclothed or to be fed the simplest of foods. As a society progresses, the standard of living rises and with it comes higher cost of child bearing.

Since income affects fertility while housing eats up a huge chunk of income, housing cost should affect fertility too.

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2 Responses to “The housing bubble trouble”

  1. Kute Steiner Says:

    Excuse me…

    Are we talking about leased hold or free hold properties here…

    My current understanding is that a majority of singaporeans are living in HDB flats which are “leased” and not ‘owned’.

    Hope can clarify this if feasible for the above article.

  2. genghis Says:

    love your letters.
    according to an article i just read, it takes 7.1 years to pay off for the average home in london. so about a sixth of the time it does in spore. consider too tt in london, what is being paid off is a Private home. in
    spore u are paying for Public housing. this is housing meant for the lower
    income, the poorer people. but 80% of sporeans live in public housing!
    shouldn’t it be 80% living in private homes? and what does this say about
    us? that 80% are in the lower income group? heck, even those with a household income of $10,000 cant afford one of the disgustingly expensive private properties here, unless perhaps it’s a mickey mouse flat!

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