Global Investing

On a recent trip home to Singapore, I was startled to learn just how much housing prices in the city-state have risen in my absence.

A cousin said he had recently paid over S$600,000 — about US$465,000 — for a yet-to-be-built 99-year-lease flat. Such numbers are hardly out of place in any major metropolis but this was for a state-subsidised three-bedroom apartment.

Soaring housing prices have fueled popular discontent — little wonder as median monthly household incomes have stagnated at around S$5,000.

For its part, the government — which houses 80 percent of people on the densely populated island — insists that public housing prices are shaped by ‘market forces’, pointing to a raft of financing schemes to help first-time buyers.

What’s less contentious is that Singapore is only part of a regional real estate boom that has driven property values by as much as 70 percent since the start of 2009 in cities such as Sydney, Hong Kong and Beijing.

Like Singapore, the government in China is acting to cool house prices that have skyrocketed in recent years out of the reach of a large swathe of its middle classes.

Chief among Beijing’s policy arsenal is social housing. The government is stepping up construction of public housing, targeting a rollout 36 million affordable homes from now until 2015. At the same time, clampdown on property speculation has also helped ease Chinese housing prices.

No doubt, the hope is that larger state involvement would help stabilise Chinese property prices over the longer term and prevent the build up of a speculative bubble.

But research from the International Monetary Fund imply quite the opposite.

In its Global Financial Stability report last year, the Fund said its study of the recent credit crisis suggests that greater government participation in housing markets is linked to steeper house price declines.

Government involvement, whether in the form of subsidies to first-time home buyers or tax deductibility on capital gains for housing, amplified housing price swings “by exacerbating both the boom and the subsequent bust”.

Some tax breaks to homeowners distorted demand and led to volatility in home prices.

As the U.S. experience illustrates, state schemes to provide low-cost mortgages to encourage home ownership could also have the unintended consequence of lax lending standards as the private sector tries to compete with the government in housing finance.

As it steps up efforts to expand home ownership, Beijing could do well to keep these findings in mind.