Category Archives: News & Politics

Why does the Malaysian government love a property bubble so much?

Even by the dismal standards of the Malaysian government, the recently announced plans to “help” first-time house buyers left my mouth agape in amazement. They propose to do this by allowing them to take loans of up to 100% of the purchase price for properties costing up to RM350,000, essentially doing away with any need to make a down-payment. Predictably enough, this prompted commentators to observe that this would make it even easier to speculate in real estate, causing prices to shoot up even more and taking them further out of reach of first-time buyers. But the government is firmly of the opinion that there is no bubble, meaning that price increases of fifty percent or more over the past two years in key areas of Kuala Lumpur and Selangor were perfectly normal.

You know how else the government plans to help people who can’t afford a house? It thinks that people should extend their house loans over longer periods and are encouraging the take-up of two-generation loans. This means loans that are so expensive that you have no hope of repaying them within one lifetime, so your kids must continue servicing the loan long after you are dead. Of course, this also means that your kids are in debt from the moment they are born. In the meantime, saner governments in Singapore and China are responding to the rapid increase in property prices in their respective countries by doing the exact opposite: severely restricting the amount of loans that can be taken out and insisting that buyers stump up ever higher down-payments for each additional property they buy.

I’m not alone in thinking that contrary to what the government is saying, there is a bubble. Take this columnist in The Star for example. As he notes, if prices rise so high that they are out of whack with rental rates and incomes, they will inevitably come crashing down again. Even the consensus on the Property Talk section of LYN, a place that is extremely bullish about making money from real estate deals, has come around to the idea that a popped bubble is a matter of when and not if, though the forum is still full of people who think that they can run and in out for a quick buck before the house of cards come crashing down.

And of course, all this when the world is still grappling with the fallout of the US-based subprime crisis. While the financiers certainly played their part in securitizing all the loans to hide the credit risks inside, the reason why these loans were possible in the first place was because the US government wanted to make it easier for people who had difficulty in proving that they had regular income to get loans to buy houses.

Note that I don’t claim to be an expert in these things and unlike the US, it’s hard to get good statistics on the situation in Malaysia. It’s certainly possible that the bubble is confined to a few key areas so that there’s little to fear on a wider scale and it’s equally possible that as a nation with a population that is still growing, Malaysia has a property market that is going to be able to absorb such price increases for a great deal longer. But it’s also worth noting that property prices in markets like Tokyo and Hong Kong still have not recovered the peaks they reached during their respective bubbles, more than ten years later.

Overall, I can’t imagine how anyone, beyond those directly poised to benefit from the higher prices and the enlargement of the already dominant construction industry, would think that these moves by the Malaysian government are wise. Perhaps this is just a bit of pump priming to jumpstart the economy so that the BN will have a better chance during the 2012 elections or perhaps this is a crass money grab by cronies. Either way, if this is the direction that the Malaysian wants to take for the property market, we’re in for some volatile times.

Nobel Prizes 2010

The Nobel Prizes are generally considered to be one of the most prestigious awards in the world but depressingly few people are able to name the winners of the various categories. Compare this to the likelihood of people being able to name past and present Oscar Award winners or how readily sports fans can recite the entire histories of major sporting events. When it comes to the Nobel however, even experienced bloggers who write frequently about economics can get the name of the Nobel laureate in economics wrong, as Steven D. Levitt pointed out recently.

So I thought that listing this year’s winners and summarizing their accomplishments would make for a worthy blog post. We’ll start with the Nobel Peace Prize, which despite being the least objective and most disputed of the different categories, is easily the most well-known among the public. It is also the only one of the prizes to be judged by a Norwegian committee instead of a Swedish institution. Whereas the other Nobel prizes are traditionally awarded only many years after the original breakthrough to ensure that it is real and confers genuine benefits to humanity, the Peace Prize is occasionally awarded only to send a political signal or to encourage someone who is deemed to be on the right path but hasn’t really done much yet, as last year’s award to Barack Obama demonstrated.

Continue reading Nobel Prizes 2010

Be careful when using percentages

The above chart caught my eye while I was reading through an issue of The Economist. The article is available online here. It basically shows how much gold a US dollar can buy from 1973 to 2010 and uses this as a measure of the dollar’s devaluation. In 1973, we can see that one US dollar could buy slightly less than 2 troy ounces of gold while in 2010, a US dollar can buy less than 0.10 troy ounces of the stuff.

What’s interesting is that the chart is that it also divides the period of time under study into three separate phases and gives a percentage for the change of value in each period. So it notes that the US dollar was devalued by 90% from 1973 to 1980, that it was revalued by 236% from 1980 to 2000, and devalued again by 80% from 2000 to 2010.

The chart is impeccably correct of course, but intuitively if someone told you that something went down in value by 90%, then shot up 236% and then went down 80% again, would you understand that its current value is now about one twentieth of the original? Unless you took the trouble to actually work the maths out, I think most people would be surprised by the actual results.

Anyway, this isn’t really apropos of anything, but since investment returns tend to be stated in percentage terms, I thought it would be a good idea to demonstrate how important it is to actually chart out the real values instead of relying on percentages and using guesstimates. This also demonstrates how valuable a good chart is to help people understand what’s really going on.

Inheritance taxes

This is something that I’ve touched on before, but I recently got involved in an extended discussion on the subject on the LYN, so I’ll post a summary here. To me, the argument in favor of inheritance taxes is painfully obvious. Unless you’re a tax-hating anarcho-capitalist, in which case I invite you to move to Somalia, everyone agrees that every country needs to raise taxes somehow to function. And for the sake of fairness, it is a given that taxes should be progressive. This not only means that folks who are better off needs to pay more taxes as an absolute figure, but that they need to pay more as a proportion of their total income and wealth.

This means that inheritance taxes need to be a part of any reasonable tax system as they’re probably the most progressive form of tax possible. True, you can make income taxes highly progressive by vastly increasing the marginal tax rates for the highest income tiers, but economists generally agree that this is inadvisable that extremely high income tax rates create a disincentive to work. Inheritance taxes have similar effects, but to a much lesser degree than income taxes. Given all this, what are the objections to them. The following is directly from one my posts on LYN:

Continue reading Inheritance taxes

REITs revisited

Since it’s been almost exactly a year since I made this post, I thought that an update would be in order. I did end up investing money in REITs and have been very impressed with the results. Perhaps too much so. My average returns are close to 20%, which is too frothy for my tastes. Of course, most of this is due to the economic recovery. Like everything else, REIT prices were somewhat down in 2008 and this is just a return to par value. Going forward, I don’t expect to see returns of more than around 7-8 percent a year.

Most of the investing public still don’t seem to have clued in on REITs yet, but clearly they’re getting hot. Sunway’s recent launch seems to be one of the most attention-grabbing IPOs so far this year and more are in the offing, such as the one from CapitaMalls Asia Ltd., apparently with a substantial stake in Sungei Wang Plaza. This makes now a good time for me to raise some of my concerns about them.

  1. Quite a few of the REITs currently listed in Malaysia are linked to larger companies. For example, Starhill, UOA and AmFirst have obvious links to the far larger groups they’re named after. The new Sunway REIT will be another example. This is bad for the minority investors in them. AmFirst’s properties for example are mainly rented out to AmBank, its parent company. This is a clear conflict of interest as it calls into question how fairly the rental rates for the properties are assessed. I believe that the market has taken these factors into account and this is why Axis is one of the most valued REITs in the country, because it has no clear parent company and its shares are widely dispersed amongst different owners, including KWSP.
  2. Many of the property acquisitions and disposals that the REITs have conducted are with their related party companies. It’s especially bad when the REITs have to raise new capital to acquire new properties from related companies but only offer the new shares, which are always at a discount to the current market price, to private parties instead of the open market. This of course dilutes the shares of the other shareholders. Independent valuers are supposed to ensure that the purchases are being done at fair market value, but who trusts this kind of stuff in Malaysia?
  3. Strangely enough, the new REITs being announced have predicted yields that are substantially lower than just about all of the REITs already on the market. Both Sunway and the expected REIT from CapitaMalls are supposed to have yields of only around 6.8%. Take a look at the current yields for the various REITs in the country. Axis is considered to be slightly overvalued now but its yield is still better than the proposed IPOs. I predict that the share prices for these IPOs will tank. Actually, REITs in Malaysia do have a history of trading below initial prices after being launched. Since the total valuations for the REITs are still quite low, this makes me curious about why their prices are being traded up and their yields consequently depressed. The only explanation I can offer is that as trading volumes for REITs are very low, you’d have to increase your bid prices very quickly if you were looking to accumulate a substantial stake in any one of them within a reasonable time frame.
  4. The only advantage that I think of that the new REITs have are their more diversified portfolios of property. Al-Aqar for example has only one tenant, the KPJ hospitals. Similarly Atrium has very few properties and consequently tenants. So even though REIT prices so far have been very stable, in theory, it doesn’t take much to cause them to wobble if one of their tenants have problems with rental payments. The newer REITs have lower yields but should in theory be less risky.

Anyway, sorry for the somewhat rambling nature of this post but perhaps there will be readers out there who might be interested in my thoughts on them. Be sure to check out the REITs discussion thread on LYN. It’s a fantastic resource on the subject.

European hypocrisy in Greek crisis

So Greece is getting a bailout amounting to 750 billion Euros despite Angela Merkel swearing up and down that it wouldn’t happen. At least she’s getting some serious heat in Germany over it and it looks as if her days in political office are numbered. Apparently she gave in because she did not want to go down in history as the Chancellor who caused the Euro project to fail.

In the meantime, American commentators, such as Paul Krugman, have been talking up the disadvantages of the European currency union, which seems a bit mean spirited, unless you recall that the Europeans made similarly snide remarks about the health of American capitalism in the wake of the sub-prime mortgage blow up. What a difference a year makes!

More fun stuff:

  • Remember when the ratings agencies were blamed for the financial crisis and accused of conflict of interest issues due to rating CDO products too leniently? Now, they’re being blamed for rating European sovereign bonds too harshly. The rationale given is that the agencies are American, hence they must hate Europe.
  • European leaders have been outdoing each other attacking speculators for bringing about the current crisis in the first place, yet the Belgian finance minister has boasted that his country would make a profit on the loans it would make to Greece due to the spread between the rates Belgium pays for loans and the rates Greece needs to pay. As The Economist notes, it looks like speculation is not evil so long as governments are the ones doing it.

I’ve been previously been of the opinion that unified currencies are great. They should reduce cross border transaction costs and free central banks from government meddling. The corollary however is that governments then lose access to the toolbox of monetary policy to influence the economy. This should be okay, provided that governments are able to responsibly use the fiscal p0licy tools still available to them but I guess asking that governments be fiscally disciplined is too much of a pipe dream. This is why governments are forever hooked on the easy ways out of problems by playing with interest rates and devaluing their currencies.