Prime Minister Office Impact of high property prices
The economic problem faced by Singapore starts with the policy to allow the price of leasehold property (both public and private) to increase to astronomical levels. This was due to the "asset enhancement policy".

It has a follow through effect in increasing the cost of doing business and the cost of living. It feeds into the eco-system at multiple levels and has an multiplier effect. It goes through endless rounds of increases, one level feeding on to another level.

There seemed to be no end to this spiraling increase. 

As property price increases beyond the reach of ordinary workers, the government has to increase the grants for purchases of new flats. 

But the underlying cost of doing business is pegged at a high level.

Rentals of commercial properties start to increase to high levels, often unaffordable. Workers need higher wages to pay for their home mortgages. Employers cannot afford these higher wages. They opt for foreign workers to reduce their cost of operating a business. 

Slowly, the various economic activities becomes unaffordable - education hub, medical hub and to a slower extent, the financial hub.

The inflow of direct foreign investments in manufacturing, research and development, seemed to be doing well and not affected by the high cost. I suspect that there multi national companies receive generous grants, subsidized lands and generous tax benefits to set up their operations in Singapore. This is only a suspicion, as it is not transparent.

In a few cases, the multinational companies leave Singapore after the grants and benefits dried up.

It has another serious negative impact.  Although many businesses operate at a loss, the owners consider the appreciation made on their personal and business assets, including properties. They feel that they have become more wealthy. It is a delusion.

Workers may be retrenched, but they did not feel distressed because their properties have appreciated in value. They can realize the gains and downgrade to a lower cost property, if this was necessary.

How long can this last? It can last a few decades. Slowly, slowly the rot will set in.

Tan Kin Lian

  

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