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Tuesday, 19 October 2010

The Next Bubble

"The Next Bubble" abstracted from the New York Times.

Note Other Updates on the Property Market :-

(a)  Friday 15 October 2010, the banks pulled a stunner by lowering the SIBOR rate (Singapore Inter-Bank Offered Rate), from 0.5 to 0.44%, after MAS's tighening of monetary policy the day earlier.

(b) First the government raises monetary policy then the banks lower the SIBOR rate and now the government gets tough on developers and curbs foreign speculation :-

(i)   Another key change will affect property developers, who have to complete their developments within a certain timeframe and sell all units within two years of receiving its Temporary Occupation Permit (TOP). Now, developers will be charged a daily fee for any extension of time beyond the given period, similar to the Urban Redevelopment Authority’s (URA’s) Government Land Sales programme.

(ii)   Foreign buyers can only purchase one landed home for owner-occupation and not for rental.

He must also sell his existing property before buying a new one, and is not allowed to sell the property in the first few years of ownership. The exact period depends on whether the property is still under construction or completed.

Owners found to breach the above rules will be fined up to $200,000 – up from $5,000 previously, with an additional fine of $2,000 per day for any continuing offence.

In the past, a foreigner who inherits a landed property must sell off the property within 10 years – the new bill has shortened this to five.

(c) Then China raise interest rate on 19 Oct 2010, aimed in part at curbing a red-hot property market, prompting the Shanghai property sub-index to fall 3.3 percent at the open. [Why is Singapore acting differently?]

"The Next Bubble" abstracted from the New York Times
It seems premature to start worrying about the next financial crisis. Yet amid the current gloom, Wall Street is snapping up assets of the “emerging economies” that are growing faster and offer higher, more consistent returns. Financial regulators and policy makers in these countries need to pay close attention.
The Institute of International Finance, which lobbies for big banks, estimates that $825 billion will flow into developing countries this year, 42 percent more than in 2009. Investments in debt of emerging economies alone is expected to triple, to $272 billion.

While developing countries often benefit from foreign investments, huge inflows of capital complicate their macroeconomic management. They push up the value of their currency, boosting imports and slowing exports, and they promote fast credit expansion — which can cause inflation, inflate asset bubbles and usually leave a pile of bad loans. This money turns tail at the first sign of trouble, tipping countries into crisis.

Those are the dynamics behind Mexico’s 1994 “tequila crisis,” the 1997 Asian crisis, the 1998 Russian catastrophe, the 1999 Brazilian debacle and the 2002 Argentine collapse. The housing bubble that burst here in 2008 was painfully similar, with irrational investments and then a sudden flight.

A collapse in emerging market bonds would further damage the weak balance sheets of American banks. Still, it is not time to panic. Developing countries are in relatively good economic shape, while interest rates in the wealthy countries are likely to stay low for years. Yet the financial system remains fragile. And a shock — say a default in Ireland or Greece — could prompt a fast U-turn away from emerging markets.

There is little policy makers in the rich world can do to stop these flows. Governments in the developing world must prepare now for when the money masters change their minds.

That means they cannot let their budgets get out of hand. And they have to keep a very close eye on their own banks. This might also be a good time to consider capital controls to slow inflows. Chile managed them successfully in the 1990s. Even the International Monetary Fund — long a foe of anything that got in the way of money — acknowledged this year that controls should be part of the toolkit.


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