The necessary evil of inventory (HDB Flats)
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Quite an insightful article on why HDB should keep a minimum inventory of flats.
There are too many yes-man in the govt who believes its either BTO or a huge glut of HDB flats.There are no shades of grey...
http://www.businesstimes.com.sg/sub/money/story/0,4574,384341,00.html?
The necessary evil of inventory
There is a carrying cost but that's the price to pay if the goal of policy makers is to have stable prices
By JOSEPH CHONG
IMAGINE the following announcement: 'Due to an administrative oversight, HDB has discovered 10,000 unsold completed apartments. The Housing Board intends to sell these gradually over the next three years.' What would the impact be on HDB resale prices?
I posed this scenario and question to quite a few on April 1 recently and the answer was quick and unanimous - it would stabilise HDB re-sale prices. The recent triumph surrounding the announcement that HDB had managed to sell 31,000 completed flats and had no more unsold inventory is misplaced. I believe it is a policy error not to carry any unsold inventory.
It should be official policy for HDB to always carry a minimum of unsold inventory. Without ready inventory to sell, HDB would not be able to meet any sudden surges in housing demand or compensate for demand misestimates.
Inventory and spare capacity are a necessary evil if the goal of policy makers is to have stable prices across various markets. Indeed, we see this in fiscal and monetary targeting across the world daily.
For example, central bankers and markets around the world watch the unemployment rate very closely. We want a rate as close as possible to NAIRU but not zero. NAIRU is the Non-Accelerating Inflation Rate of Unemployment. That is, a steady state unemployment rate above which inflation would fall and below which inflation would rise.
NAIRU in the US is estimated to be about 5 per cent. If unemployment falls too low, it invariably leads to a spiralling jump in prices and eventually a bust in the economy as interest rates rise to quench inflation. Yes, there is carry cost of having unemployed people but the cost of a recession is far worse.
This also applies to the argument from HDB that unsold flats have a carrying cost. What is good for HDB may be bad for the wider Singapore economy. Without the stabilising effect of unsold ready-to-stay inventory, volatile housing prices carry a far bigger cost for the economy. In any event, unsold flats can always be sold to reflect their holding costs. In an upturn when demand surges, these should still fly like hot cakes.
Indeed, evidence of this stabilising effect of unsold inventory can be seen in 2005 to 2007. Despite a surging economy then, HDB resale prices moved up more modestly than private property. Indeed, I would argue that carrying unsold inventory intentionally would also allow HDB to influence to some extent private property prices.
Oil as example
A very good example of the stabilising effects of spare inventory is Opec, in particular Saudi Arabia. Spare production capacity (inventory stored underground) of about 5 million barrels per day or about 6 per cent of global demand has allowed Opec to keep prices at around US$80 per barrel. Prices shot up to US$140 per barrel in 2007 because Opec ran out of spare capacity. And the markets knew that.
In business, we would love to carry zero inventory but this is not possible as demand surges cannot be predicted with absolute certainty. Even build-to-order firms such as Dell carry inventory! If we have nothing to sell when demand picks up, business goes to the competition. Here again, the cost of losing business outweighs the cost of carrying inventory.
Unfortunately, the topic of inventory and spare capacity is often poorly reported or analysed in the financial media. It is however crucially important. Changes in inventory affect the measurement of true GDP growth and corporate profits. Misunderstand this and you may end up investing in property or your business on fall premises.
For example, the US reported 'sterling' GDP growth of around 5.6 per cent for 1Q 2010. See chart from Moody's Economy.com which shows this impressive trajectory. Unfortunately, the breakdown of data shows that more than 3.5 per cent from this 5.6 per cent comes from re-stocking. That is, final demand, which is the true level of growth, was only 2 per cent.
Indeed, this is affirmed by other data points. Currently, US real retail sales (ex-autos and gasoline) are growing at about 2 to 2.5 per cent annually.
When demand started to recover in the second half of 2009, US firms did not ramp up production because they were uncertain of the future. They sold from existing inventories. Now that things have stabilised, inventory has to be re-built because the shelves are nearly empty.
Unfortunately, the latest ISM data shows that the pace of inventory rebuilding is far greater than the pace of new orders - meaning that production has to be throttled back in the second half of 2010. I expect US GDP growth to taper off to 2.5 per cent by the end of 2010 - the level of sustainable final demand.
The big jump in Singapore's 1Q 2010 GDP numbers, led by manufacturing, is very likely due to this re-stocking in the US. Once the US is through re-stocking, Singapore's GDP will taper off as well. Therefore, it is premature for any hikes in CPF.
Does it make sense to stipulate a wage increase for labour just because companies are re-stocking? I thought growth through productivity was all about growing one's wages from higher skills and global relevance.
The author is CEO of financial adviser New Independent. He welcomes feedback at [email protected]. This article is for information only. Readers should seek independent advice before making any investment decisions
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Their aim is to always create a shortage in housing, so as to keep prices high and thereby maximise profits.
The housing situation right now is the product of that thinking.
Keeping an inventory of unsold flats to stabilise prices is seriously not on their list.
If you still believe they will solve the problem they created, think again.
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Originally posted by Clivebenss:
I'm serious.
They will never allow supply to be greater than demand.
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Originally posted by charlize:
I'm serious.
They will never allow supply to be greater than demand.
I know it is for the "benefit" of the "owner".
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Wow hes advocating building flats until there is excess inventory? What then if there is another crisis and people default on their payments? HDB would then have even more inventory on their hands and suffer massive losses.
As for the Oil, Prices shot up because of the speculative Peak Oil Theory; where the world's supply of oil can no longer meet demand and everyone had a run on that commodity. For Oil you cant simply make more oil when there is increased demand - it is truly limited. So comparing Oil with flats doesnt make sense.
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Originally posted by charlize:
Their aim is to always create a shortage in housing, so as to keep prices high and thereby maximise profits.
The housing situation right now is the product of that thinking.
Keeping an inventory of unsold flats to stabilise prices is seriously not on their list.
If you still believe they will solve the problem they created, think again.
True, its the election time and they are too busy creating feel good factors by inflating prices with supply shortage..
HDB's policy failures shows that highest pay alone does not produce the best results. Past performance also does not guarantee future performance. Its is the openess to competition of ideas and the less efficient ones being discarded that have stood the test of time.
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http://www.temasekreview.com/2010/05/05/property-the-hypocrisy-of-it-all/
Another interesting read about HDB and high HDB prices.
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Originally posted by ulquiorra87:
Wow hes advocating building flats until there is excess inventory? What then if there is another crisis and people default on their payments? HDB would then have even more inventory on their hands and suffer massive losses.
As for the Oil, Prices shot up because of the speculative Peak Oil Theory; where the world's supply of oil can no longer meet demand and everyone had a run on that commodity. For Oil you cant simply make more oil when there is increased demand - it is truly limited. So comparing Oil with flats doesnt make sense.
Oh the next 1.5- 2 million people thats going to be flooded in can mop the excess inventory easily.. The govt wants to embark on a policy of liberal immigration and you are worried a minimum inventory is a problem?
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Originally posted by Calvin86:
Oh the next 1.5- 2 million people thats going to be flooded in can mop the excess inventory easily.. The govt wants to embark on a policy of liberal immigration and you are worried a minimum inventory is a problem?
He is worried about HDB making massive losses.
The rest of us are just worried about our jobs, retirement and our children's future.
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Do you realize that the rise in housing prices is an asset bubble that is due to excess liquidity and speculative buying because of singapore's 'liberal immigration policy'? When they build more to fuel the speculation and the current stimulus injected economy, and include even more unsold inventory, and the housing bubble bursts, the value of the flats many of us stay in will evaporate by way of excess supply.
Your flat would be worth much much less then in future. Ok this is just my opinion only time will tell
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Originally posted by ulquiorra87:
Do you realize that the rise in housing prices is an asset bubble that is due to excess liquidity and speculative buying because of singapore's 'liberal immigration policy'? When they build more to fuel the speculation and the current stimulus injected economy, and include even more unsold inventory, and the housing bubble bursts, the value of the flats many of us stay in will evaporate by way of excess supply.
Your flat would be worth much much less then in future. Ok this is just my opinion only time will tell
And you are okay with them creating this massive "asset bubble" in the first place with their liberal immigration policies?
Why did they not ensure that flat prices are stable and affordable to all instead of letting it run out of control?
That is the million dollar question.
They are paid million dollar salaries to ensure everything runs smoothly. Not paid million dollars to solve the problems that they themselves created in the first place.
There is a big difference.
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Originally posted by ulquiorra87:
Do you realize that the rise in housing prices is an asset bubble that is due to excess liquidity and speculative buying because of singapore's 'liberal immigration policy'? When they build more to fuel the speculation and the current stimulus injected economy, and include even more unsold inventory, and the housing bubble bursts, the value of the flats many of us stay in will evaporate by way of excess supply.
Your flat would be worth much much less then in future. Ok this is just my opinion only time will tell
The govt created the problem by not keeping stock and switching to BTO even though they are going to have liberal immigration. Keeping a buffer would have kept the prices of HDB more stable..
So you think the solution is doing nothing and keep to BTO? BTO as a policy has been proven to under supply flats even though population is surging strongly.
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Originally posted by Calvin86:
The govt created the problem by not keeping stock and switching to BTO even though they are going to have liberal immigration. Keeping a buffer would have kept the prices of HDB more stable..
So you think the solution is doing nothing and keep to BTO? BTO as a policy has been proven to under supply flats even though population is surging strongly.
Yup either high prices now(sucks to be home buyers) and have the housing market be shielded in the event of a downturn
Or, do what the government is doing to make people happy, keep prices 'reasonable' by soaking up excess demand and risk having your flats be worthless in a downturn.
I'd rather the first choice.. I'm Bearish i believe a downturn is very soon and imminent
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Originally posted by charlize:
And you are okay with them creating this massive "asset bubble" in the first place with their liberal immigration policies?
of course not, noticed in my posts i critisized keyesian economics that temporarily overstimulated the economy that creates asset bubbles
And in my posts i advocated the damned government leaving us alone