Asia Inc Nov 93 2               

ECONOMICS: Singapore's asset bubble

Nov 1993

The Boredom Bubble
Cash-Rich, Investment-Poor Singaporeans are Sending Car and Property Prices Sky-High and for no Good Reason

Singapore. Tay Kah Poh paid $52,800 last year for a 1992 Honda Civic. Today it is worth $60,200. Sound absurd? Not in the crazy car market of Singapore. The reason Tay's car is worth $8,000 more today is a document called the Certificate of Entitlement (COE), a license that allows its holder to purchase a vehicle. The Singapore government's aim in introducing the COE was to cap the number of vehicles available for sale each month by auctioning car licenses to the highest bidder. The result, however, is that COE prices are rising faster than a faulty New Delhi taxi meter. The COE for cars with an engine in the 1601-cc to 2000-cc range hit $17,700 in the August auction, nearly six times its selling price of $3,125 in 1990.

Cars aren't the only assets surging to artificial highs. Since 1986 private residential property prices in Singapore have risen 100 percent, up 40 percent last year alone. Even in a country where nearly 90 percent of the people own their homes, Singaporeans have lined up days in advance to buy new apartments and houses. Armed with checkbooks, magazines, blankets and pillows, they are giving developers' offices the appearance of Third World railway stations.

Part of the madness can be explained by the upgrading syndrome. Explains Ho Tian Lam, executive director of Jones Lang Wootton, a leading property consulting firm: "Housing is no longer a necessity, it is an aspiration, a statement."

That statement is possible because Singaporeans can afford it. Lulled into soporific prosperity and getting richer each year, Singaporeans have few investment avenues. The bubble of car and property prices in Singapore is fueled by boredom. And cheap money is making outlandish aspirations appear within reach. Housing loan rates are declining: Interest rates are at a 30-year low, down from 14.2 percent in 1980 to less than 6 percent now. With rates like that, it's foolish to place your money in a bank account, says Sunil Gupta, research director of Crosby Securities Pte. Ltd.

Honda owner Tay, a former lecturer at the National University of Singapore and now a senior manager at property consultant Knight Frank Cheong Hock Chye and Baillieu, says: "Property values do not represent their intrinsic worth. They are way above that." Stories of people buying an apartment for $500,000 and selling it for $700,000 a year later are part of the popular folklore. "People are buying property like groceries," says Damini Shah, a homemaker who rents a 140-square-meter apartment in the suburbs. She says that when her landlady put her apartment up for sale, one prospective buyer came in, walked through the house for less than five minutes and decided to buy it for an incredible $300,000, only to find from other brokers later that its value was just $281,250. The disgruntled buyer said he'd sell it; and he did, a week later, for $312,500.

The surge shows no signs of abating. Private housing loan applications from Singapore's mandatory pension program, the Central Provident Fund(CPF), rose from 792 in January to 1,592 in June this year. "The price keeps rising with impunity because it is not real money that people are putting in, but CPF funds," explains Tay. Bank financing for home buyers rose, too, from $5.38 billion in all of 1992 to $5.7 billion in the first quarter of 1993. Some alarmed bankers have tried to cool passions; the usually bullish Citibank has reduced financing to 60 percent of the value, down from 70 percent.

Easy money isn't all that's boosting sales. The Singapore government's decision to play Cupid is also bearing fruit: Younger Singaporeans are heeding the call to marry and make babies, adding to the demand for housing. Two out of five families are double-income households, up from one- third a decade ago. More than 166,000 Singaporeans have CPF balances exceeding $62,500, up from a mere 11,000 a de- cade ago. And some 500,000 Housing Development Board flat owners have occupied their flats for at least five years, freeing them to sell their flats.

But the bubble buoyed by boredom may soon burst. Residential rents have begun to drop -- in prime areas like Orchard Road from $5,800 to $5,000 a month -- and capital values are inevitably going to adjust to more realistic levels.

So, if not cars and condos, where will Singaporeans put their cash? The government is hoping to get people excited about stocks. Its motive: to make sure the public stock offering of Singapore Telecommunications Pte. Ltd., a highly profitable and efficient utility, goes smoothly. The company is being privatized in stages (the first last month) so that the market can absorb the load. The 1 billion-plus shares are in three classes, with Singaporean citizens getting a 45 percent discount if they agree to hold on to the shares for six years.

To qualify, they have to have made a contribution to their CPF account within the past six months or pay a fee to reactivate it. But as of late August, more than 800,000 Singaporeans -- one-third of the population -- had dormant accounts. Military recruits were given the hard sell to encourage their investment: The Singapore Armed Forces offered soldiers interest-free loans of $312 to reactivate their accounts. Expected to raise between $1.25 billion and $1.88 billion and to become the largest company (by market capitalization) on the Singapore Stock Exchange, Telecom was an issue that could not be allowed to fail. In September, the government held road shows and ran advertising campaigns exhorting Singaporeans to own a piece of the corporate world.

The campaign makes sense. Singapore is a prosperous nation, but barely 10 percent of its citizens own stocks. The government wants to double that. Singaporeans now are allowed to dip into their nest egg, the CPF, to buy certain stocks. The government's hope is that stock investment will help curb property speculation. The liberalization has led to a bull run on the market -- between January and July this year, 12 companies raised $581 million through initial public offerings -- but the property storm is still raging.

Indeed, the lure of cars and property remains irresistible. Even economists are known to succumb. Tay wouldn't mind upgrading from his Japanese car, which was appropriate for the campus, to something swanky like a BMW, to blend more easily into the corporate habitat he now roams. Now, if only he can get his hands on another COE. . . .