Singapore: Bubble? What bubble?

Written by || September 17 2007
On a recent trip to Singapore, I was shocked to see that the 3 bedroom flat that I used to rent with a few people in 2004 for SGP$2,100 was now renting for SGP$4,300. Just over double in 3 years. Now what becomes even more eye-opening is if you take the USD exchange rate fluctuations into account, for those of us still clinging to greenback savings, the rise is closer to 230%. Indeed, according to government statistics, the prices are continuing to rise: in Q2, rents rose 10% and private-home prices rose 8.3 percent, the fastest in 8 years. Now, that’s not so bad when you consider Singapore’s GDP grew a healthy 7.9 percent last year, but it is worrying nevertheless.

Last Friday, as reported by Bloomberg, Jackson Tai, the CEO of DBS Group Holdings, said that property prices are supported by strong economic growth with no danger of a "bubble" developing. He continued to explain that about 90% of Singaporeans own their homes, compared to 65% in the US, which had been hit by the subprime crisis, “The culture here of protecting one's home is very different. We don't have the situation in the U.S., where the Federal Reserve creates or manufactures a housing bubble, inducing people to refinance their homes” with “artificially low rates.”

Did you cringe a little on that last bit? I did.

Ok, so yes, low rates do induce people to refinance their homes, but to "manufacture a housing bubble" with “artificially low rates”? As I’m sure Mr. Tai knows, interest rates are based on a basket of different economic indicators and as most economies know (with the exception of the EU some might argue), interest rates are not a one size fits all solution. The “artificially low rates” weren’t artificially low at all, they were what the US economy needed at the time. The core causes of the subprime mess were borrower education, individual credit risk decisions and how that risk was then bundled and sold off.

What Tai should really be worried about is the very real issues that the rising property prices are causing in Singapore. On one hand, Singapore is becoming the private banking capital of Asia. Newly minted university graduates with a talent for numbers and/or some people skills are being paid upwards from US$100k/year base starting salary for jobs in private banking. Great for the bankers like Tai, who earned about US$5M in 2006; for them, a 200% rent increase isn’t an issue. But for the rest of the foreigners in Singapore who are not involved in banking, it’s a bit more difficult.

This disgruntled foreigner

Let’s look at that a bit more. In mid-2005, 10% of the 4.3 million living in Singapore were foreigners. In May of this year, out of the 4.4 million Singapore residents, nearly 20% are foreign. Census data shows that nearly 100,000 foreigners have come to Singapore every year, and indeed they must: the birth-rate in Singapore has declined by 30% since 2003. With a country that’s so heavily reliant on human capital, maintaining the population is critical and the government has been pushing increased immigration as a solution.

This problem is that the cost of living is starting to put off the kind of foreigners that they are trying to attract. An informal survey of 30 of my well paid non-Singaporean friends and associates living in Singapore showed that 100% were dissatisfied with the rising costs. Many took jobs in Singapore years ago because of some of the best pay in Asia and relatively low taxes, however, these days, a lot of those gains are rapidly disappearing because of the increased cost of housing and living in general*. Now, a lot of the same foreigners who contributed to Singapore’s growth may have to decamp to other locations where the economics makes more sense**.

The disgruntled local

The average Singaporean is becoming less satisfied as well. According to a survey reported on by Time magazine earlier this year, a January poll by a local newspaper found that 90% of Singaporeans opposed the efforts by the government to increase immigration because they fear losing their jobs to foreign professionals. “43% said they believe the government is more concerned about foreigners than its own people.; they also expressed doubt that Singapore's open-door policy will translate into more jobs. ‘The backlash comes from so-called foreign talents taking the best jobs without any obligations to maintaining the national good,’ says National University of Singapore sociology professor Chua Beng Huat.’”

So it’s not a bubble yet, but if costs continue their upwards march, it may be. With HK’s position as the destination of choice for multi-nationals and foreign professionals diminished over the past few years (not least due to pollution from mainland China), Singapore stock has only increased. However, to keep that position, the government is going to need to get involved soon to prevent undermining Singapore’s growing stature in the region. Luckily for that small city-state, the government is always willing to get involved.

* A survey by theonlinecitizen takes a rather humorous, yet sobering look at how prices have changed here. (For some reason couldn’t link to the original, so had to use a repost link)

** That's not even touching the fact that over 85% of the foreigners working in Singapore are employed in low-paid jobs such as construction workers or domestic maids. For them, it's even more difficult.