http://www.businesstimes.com.sg/real...ty-markets-don

Govts should lay off property markets: don

Much better for authorities to regulate banks instead of trying to control real estate prices

By Lee Meixian

[email protected]

@LeeMeixianBT

Nov 14, 2015


IF he had his way, Joseph Gyourko would prefer to see governments regulating banks instead of directly intervening in real estate markets.

The real estate professor at The Wharton School of the University of Pennsylvania acknowledges that private real estate markets don't always work perfectly - but neither do government regulations. "They are not the answer, because they have limitations themselves," he says.

Prof Gyourko is the Martin Bucksbaum professor of real estate, finance and business & public policy at the university.

He also believes that governments cannot possibly know the optimum price levels for the property market. So they should stick with ensuring that banks are well-capitalised to withstand gyrations in the property cycles.

At a lecture-cum-panel discussion here on Thursday titled Lessons from 2008-2015: How should governments and private developers manage real estate cycles?, he said: "I am sceptical of price targets. Trying to achieve a price target in its stock market led the Chinese government to intervene in a way that was counter-productive. I think it tends to get you more in trouble than it does otherwise."

He was referring to the Chinese government buying heavily to prop up the Shanghai Composite Index, and injecting capital into state-owned companies that made margin loans to brokers, after panic sales shaved trillions from the index's market cap earlier this year.

"It takes the market a long time to figure out what the right price is. I don't think the government has any insight," he said.

"I would prefer governments not to target prices, but to enact policies that ensure that whoever is investing in the property sector has enough equity to make it out of a downturn if there is going to be systemic risk."

On this note, he believes that there has been a good shift towards increasing capital requirements for banks, especially the "too-big-to-fail" ones. Holding more equity can stop bank runs from turning dangerous, he said.

"I think there is a legitimate role for the government to worry about leverage, particularly if they think it can be systemically risky. And housing is such a huge part of our asset base, it's not hard to imagine that the Federal Reserve would think a massive collapse would cause systemic risks in the financial system."

In August, Singapore's former national development minister Khaw Boon Wan said that deciding when to pull back the property cooling measures was "not a straightforward (matter of) looking for a figure or a statistic, then you say, 'Aha, we have arrived'". This is because there are various moving parts that are interlinked.

But he added that Singapore was not at the point where the price equilibrium was certain and sustainable. In short, the time was not yet right to review the cooling measures.

Richard Lai, chief financial officer of GuocoLand, who was in the audience, said during the panel that he agreed with the speaker that less government intervention is not necessarily a bad thing.

"I think the key to it is information - how transparent the information is that you have on supply, potential demand, population cycles and demographics and so forth. That allows private developers to figure out ourselves whether or not an oversupply situation will happen."

But while transparent data is available from Singapore's Urban Redevelopment Authority (URA) to help property developers here plan forward into the next few years, many other markets like China don't have this luxury, he said.

Mr Lai added that he was apprehensive about banks using equity as a buffer, because doing so comes with a price.

"For most of the banks which are listed, it gets more expensive to run a bank and the profitability level drops because a lot of this equity is just used as a buffer to create a more robust bank."

In today's world - flush with liquidity and with everybody chasing yield - shareholders may instead pressure banks to do more with that money, whether it's lending to the traditional consumer market or to some other riskier commercial proposition.

"I'm not entirely sure that, at the end of the day, just equity alone will help the situation, because you haven't included the cost of equity in that equation," he said.

But Prof Gyourko maintained that modestly lower returns from banks are still an acceptable price to pay in order not to incur a repeat of a bank collapse in a the event of a shock.

The lecture was jointly organised by the Centre for Liveable Cities and the NUS Institute of Real Estate Studies.