I write this for all my friends who have been subject to my barrage of chatter on the topic of the rapid deterioration of our financial states despite the ballooning of asset worth.
The easiest way to visualise the wealth creation process in developing nations is this (and we can mentally project this as Singapore in the 60-70’s). Myanmar has opened up, so they say, even as the Kachins are being annihilated and hunted down by the military. The nice little piece of slum land where families squat on will now be part of the economy and given a nice worth. Build on it and assign a value of 10,000 bucks and now we have 10,000 bucks of wealth created. Family buys it for 10,000 bucks and starts to pay off for it with their 100 bucks a month wages. Their wages go up as labour demand increases to build and to export given their low manufacturing costs. Earning 200 bucks would mean they can buy a bigger property and they sell out for 20,000 because now people are earning more. They buy a $100,000 property because their wages are increasing at 100% and they envisage their lives and wages getting better.
There is a fallacy in this. They are not the main beneficiaries because the main winner is ultimately the person, who at the start owned most of the slum. And in most of the emerging nations, like Myanmar, the ownership lies in the hands of a few. The “few” will have their net wealth explode to unimaginable riches and this is what exactly happened to China.
What is the difference between earning 100 bucks and 1,000 bucks when property prices go up from 10,000 to say, 2,000,000 ? I use 2,000,000 because if we really doubled things, the 10,000 property would go up to 5.12 million if the same doubling effect happened but that sounds just a little too incredible.
Thus affordability decreases, citizens get upset and governments in Singapore and HongKong roll out measures to halt their slide in popularity.
In a hypothetical situation, if I bought my house at 2 million in 2004 when I was earning 15,000 a month against buying it now at 4 million and earning say 30,000 ? I take the former. Firstly, buying at 4 million, you are hoping for it to double to 8 million which is a longer shot. Secondly, by the law of numbers and the ever increasing population of humans, it is harder for wages to outpace real estate pricing in cities, on average.
What we are witnessing in the Western left wing approach to populism is to tax the wealthy. US and Europe (especially France) are taxing the wealth back to equality.
It is not happening in Asia (except Japan, which is mulling tax increases) because of the ruling class have the most to lose. As it happens, Chinese officials have the biggest stakes in the country’s wealth (disputed by main media).
The road more traveled would be through wealth inflation which is easy. Raising property prices, wealth effect fueling human greed makes everybody happy… at least until they realise that it is not a sustainable option. Often too late as you become a slave to your debt, clinging to your asset worth, and beggaring your children.
The rich gets richer and the gap between the have and have nots grow. That GINI coefficient (measures of income equality) accelerates and puts the goal of property ownership further afield for the newcomer.
Let us look at some data out of Hong Kong.
We can observe that wages have increased 20-25%, by rough estimate from 2002 while property is up about 3 times. It would be fair to assume the same for Singapore with the similarities between the 2 economies.
These graphs are the likely outcomes for China and the rest of the developing world too.
Does that make the people who have bought properties earlier any richer ? Not if everyone has the same means. It is a case of status quo. People who have bought several properties can consider themselves relatively richer and people who have not, relatively poorer. But the status quo remains for most of the masses.
What actually happens when your wages go up 25% and property prices go up 3 times, is that a teacher cannot buy a house in Teacher’s Estate anymore. Unless you inherited money or house, won the lottery, begged or borrowed or stole, there is little likelihood of living there.
Majority of the new population would be exposed to longer term loans and higher rentals but they adapt. Money does buy happiness but relative income more so than absolute income, according to Forbes.
For the Rich side of the GINI gap, that is those who own the majority of the assets, the wealth can only keep cascading. In Singapore’s case, we have the top billionaires who mostly made their monies just buying land at the right time. And the gap continues to widen.
There is no right or wrong in this. Its just being born at the right place and right time (Malcolm Gladwell, Outliers) for the young ones, being greedy and far sighted for the old ones but mostly, it is pure luck if you happen to be on the Right(Rich) side of this equation. For this has been happening for most of human existence, in US, about 200 years ago, in Australia, 150 years ago, more recently, in Russia, China and South Korea.
The catalyst for a rebalancing is a Great Plague, War or Revolution or some crisis of sorts but a sane person would not wish for that, which leaves the option of taxation (Western method) or some form of policy control. Warren Buffet has a controversial suggestion of a wipe-out estate duty tax that would put the second generation on a more even playing field. Indeed, far fetched.
Meanwhile what do we do ? Cross border abitraging ? to leech off the untapped “wealth” of other nations ? Myanmar, Iskandar, London, New York ? Let their citizens curse us like we do to the foreign buyers onshore.
In Singapore’s case, it does look like we have hit the limit for property prices. Just from rough maths.
Assume dual income household.
SGD 120k borrowing a 90% 30Y loan. We are looking at a SGD 1.5 mio property.
Assume that we need 800 sq ft for comfort. That is SGD 2,000 psf and I am hearing Bishan condos are going at SGD 1,700 psf.
We are near max out.
The medium term is unlikely to bring much joy as the population ages and housing demand slows on reduced immigration.
Pay no heed to me. I am just sour grapes because I only have 1 property here which I am now hoping, they will let me turn into a small apartment block when I am older to supplement my income unless, of course, I choose to leave.