Demand and Supply

Housing Prices in SingaporeHousing prices are determined by demand and supply. The demand for housing is the quantity of houses consumers are willing and able to buy at differing prices per period of time, ceteris paribus. The supply of housing is the quantity of houses that suppliers are willing and able to sell at differing prices per period of time, ceteris paribus. The price of housing is determined by the intersection of the demand and supply curves.

The prices for both public and private housing have been rising in recent years. While supply has been expanding, it has been insufficient to meet the extent of rising demand, causing prices to rise.

Increase in Demand > Increase in Supply Increase in Housing Prices.

Factors Affecting Demand

1. Rising Incomea. Housing is a normal good and hence there is positive income elasticity of

demand, which is a positive relationship between income and demand. There is an increase in income due to strong economic growth in recent years upon recovery from the economic contraction in 2009. Singaporeans are more willing and able to take up housing loans and hence there is a higher demand for housing. This causes the demand curve to shift rightwards, thus causing a rise in housing prices.

2. Mortgage rate and cost of borrowing.a. Currently, Singapore citizen households paying by instalments are charged

the HDB concessionary interest rate of 2.6% per annum.b. The trend of low interest rates has lowered the cost of borrowing and made

housing credits more affordable. This has been evident from the good take-up rate of private condominium projects. Weak global economic conditions and a stable inflow of funds into Singapore due to its low interest rates have also led to easy availability of credit for home buyers. As the purchase of homes require a long-term financial commitment, a fall in mortgage interest lowers the financial burden of home-loan payers. This has resulted in the higher demand for housing. Hence, the demand curve shifts rightwards and causes a rise in housing prices.

3. Government policiesa. The government subsidises public housing0loan owners especially first-time

owners. This allows public housing to become relatively more affordable, and leads to a higher demand for housing, causing a rise in housing prices.

i. Singapore Housing Grant1. Additional Housing Grant by the CPF Board to ease the

financial burden of low-income families buying their first flat.

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2. Special Housing Grant by the CPF Board, given over and above the regular housing and the Additional Housing Grant, to help low-income families purchase their first flat.

ii. Ease for first-time applicants to obtain public housing1. These applicants are given better chances of being shortlisted.2. Applicants for the Married Child Priority Scheme for first-time

applicants are given better chances of being shortlisted.b. Government regulations on luxury or high-end housing have been more

relaxed recently. For example, there are no restrictions on foreigners buying landed property in Sentosa Cove. In the past, foreigners and permanent residents were not allowed to buy Good Class Bungalows. However, this has changed and approval is granted within a few days. This has resulted in an increase in the number of wealthy buyers. As the sale of such landed property is not restricted only to locals, demand increases with the inclusion of foreigner investors and expatriates.

4. Rising concentration of foreigners in Singaporea. The rising number of permanent residents has contributed to a rise in

demand for both public and private housing.b. The growing trend of Asian foreigners preferring to buy Singapore private

property, especially for the high-end private housing resulted in a higher demand for housing, eventually causing a rise in housing prices.

i. Speculations1. Buyers consider buying property as a good investment

prospects. The resale price of property is likely to be high and rental is also high. Investors expect professionals and expatriates coming to Singapore to work and this may be so with the opening of the integrated resorts. People who work in the integrated resorts are more prepared to pay high rentals and some may even be willing to pay high prices for high-end property. The Sentosa Cove property has proved to be a particularly attractive for overseas property investors, who buy at pre-construction prices and then find strong demand for the resale or rental of their properties when they are completed.

ii. Examples1. Asian foreigners, especially wealthy Indonesians, China

Nationals and Malaysians, accounted for 18% of new homes sold (third quarter of 2011).

2. The proportion of China foreign buyers leapt from 7% in 2007 to 19% in 2011.

Factors Affected Supply

1. Rising consruction costs

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a. Higher building costs such as labour costs and raw materials, leading to narrower profit margins, have slowed down and reduced the extent of supply expansion.

b. Due to the high cost of production, land that is used to build landed home is costly, as supply is limited. Besides, most of the land available is reclaimed land and developers have to pay a high price for this land to build the homes. Those who are not prepared to take the risk will not take up the project to build these homes

i. Example: The government’s recent moves to tighten the supply of foreign labour by reducing Dependency Ratio Ceilings, which specify the maximum proportion of foreign workers that companies in various industries can hire, to curb foreign worker growth from 1 July 2012 is expected to result in greater competition for a limited pool of Singaporean manual labourers, resulting in the rise in construction cost of production.

2. Government policiesa. Land-scarce Singapore has to balance the various needs of the use of land.

The government has been releasing land for both public and private residential development but this has to be at managed rates due to following reasons:

i. Land is needed for other purpose e.g. commercial buildings or recreational facilities.

ii. It should not cause an over-supply problem 1. The HDB ramping up its flat supply by increasing the BTO

supply for 2011 by about 15% to 25,000 units.b. However, this increase in supply is unlikely to match the larger increase in

demand, given that most public houses launches have been facing an over-subscription issue, resulting in continued presence of upward pressure on housing prices.

3. The nature of the construction industrya. The supply of housing ends to be price-inelastic, as it takes time for housing

supply to increase, resulting in a significant extent of price increases arising from a rise in demand.

Conclusion

1. As mentioned earlier, the price of houses is increasing despite the government’s attempts to increase the supply of houses. This suggests that the increase in demand is likely to outweigh the increase in supply, resulting in the rising prices of housing.

2. Demand factors, especially government policies such as the subsidies made available, tend to be more influential in affecting the housing prices in Singapore, since it accounts for about 82% of Singaporeans.

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Elasticity ValuesElasticity used by Firms in Singapore

Luxury Houses

1. The usefulness of the price elasticity of demand depends on the number and closeness of substitutes available, as this can influence pricing policies and business development. The changes in pricing policies have different consequences on the total revenue, depending on the elasticity of demand curve for landed homes.

2. The demand for landed homes in Sentosa Cove is price-elastic because of the availability of substitutes, such as homes on the mainland. The demand on the whole appears to be price-elastic. However, demand can be made more price-inelastic by making the homes in Sentosa Cove unique and exclusive, with interesting environment and architecture as well as many facilities such as a private yacht berth for luxurious living. Also, successful marketing techniques and advertising can cause the demand to be more price-inelastic. In cases where demand is price-inelastic, prices should be raised to earn higher revenues.

3. Demand is price-inelastic because the exclusivity of the landed homes in Sentosa has few close substitutes in Asia. The hefty price only makes up a small portion of the income of the rich and famous clientele. There are also very few close substitutes.

4. The usefulness of income elasticity of demand helps the developers to target his clientele. This is because the demand for landed property on Sentosa Cove is income elastic,as such property is considered a luxurious good. Income elasticity of demand is high for the higher income group and very high for the middle-income group, as it is a super luxury good to this group. As people’s income increases, the demand for landed homes on Sentosa cove will increase more than proportionately. Informative advertising can also be engaged in countries where the econonomies are booming so as to attract people in countries where incomes are rising rapidly to buy landed property in Sentosa.

5. The usefulness of the XED is in telling the developer how close a substitute a condominium on Sentosa is to landed homes or how close a substitute a home on the mainland is to the landed home on Sentosa Cove. This will help the developer determine the PED of this landed homes and hence his pricing strategy. If the cross elasticity of demand is a high positive value, then the developer may want to make use of marketing and advertising to differentiate the landed homes on Sentosa from the rest of the homes. This is to reduce the degree of substitutability making cross elasticity of demand inelastic with respect to competitive homes.

6. Cross elasticity of demand is negative in value. The huge shopping centre, Vivocity is also accessible by sky train. Attractions include swimming facilities, running tracks, fine-dining restaurants and food centres. This will induce wealthy people to buy landed homes in Sentosa Cove.

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7. Although demand elasticity concepts are relevant when brainstorming on how to go about promoting landed homes, it only helps the developer to identify the best way to maximise revenue. There is a need to minimise the cost as well. For example, excessive advertising can lead to wastage of resources and may result in an increase in price. Also, the success of competitive strategies, which make use of demand elasticity concepts, depends on the assumption that the homes on Sentosa Cove are non-rivalrous. Otherwise, the ceteris paribus assumption of the concepts will not be met and the strategies will not work successfully.

Shopping Malls

1. The possible strategies that a new shopping mall can take to ensure its success in the market can be done with the use of price elasticity of demand, income elasticity of demand and cross elasticity of demand as possible strategies.

Marketing Strategies

1. Since shopping malls have a negative cross elasticity of demand value, it is important to use certain marketing strategies to reduce the degree of substitutability of shopping malls Massive and regular advertising are means to retain their presence, especially during saes period, festive occasions and weekends, to draw the crowds. Shopping malls can also sue sales strategies like loyalty cards, discounts, free-gift redemption, parking concessions and lucky draws. The provision of free entertainment or facilities, such as nursing rooms and better toilets, may help to increase demand if customers’ preferences are changed. However, shopping malls have to increase demand if customers’ preferences are changed. However, shopping malls have to increase demand if customers’ preferences are changed. However, shopping malls have to consider the increased costs for the mall as well. Hence, price may be raised to offset the higher costs of advertising. All these also serve to differentiate the mall from others so that customers see the mall as being more exclusive or more prestigious, or can provide them with a better shopping experience and meeting all their shopping needs. In effect, most of these malls have similar chains or types of shops selling similar goods and services.

Image of a Mall

1. Sometimes, it is the image that the mall deliberately creates in the eyes of the shoppers. For example, Orchard Road malls and Raffles City are considered prestigious shopping centres due to their location and their wider variety of tenant mix than Compass Point or Causeway Point. Junction 8 is considered to be more youth-oriented although it is jointly managed together with Plaza Singapura under the developer CapitaLand. JCube is also considered to be catering more to a youthful yet sophisticated crowd, as it is competing with popular shopping malls like 313@Somerset. Given the location of Orchard Road, which is prime land and where there is assured huge tourist and shopper traffic, it is possible for a new mall like ION Orchard to charge higher rentals due to the relatively price-inelastic supply and demand conditions. However, it cannot do so indiscriminately without keeping track

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of what its rivals are charging, especially when top anchor tenants like Cold Storage, CK Tang and Mango are also moving to locations like JCube. If ION Orchard markets itself as a more upscale shopping place, then it will be able to cater to the higher-income crowd or those who are more willing to splurge, who are more likely afford the higher-priced items given their relatively price-inelastic and income-inelastic demand.

2. A new mall can try to increase its presence by tying up with creit card companies, banks, hotels or tour agencies to reach out to more markets to tap on complementary demand. For example, some malls give discounts to shoppers who use a particular bank’s credit card.

3. The mall should also focus on trying to keep costs as low as possible as in minimising wastage through energy-saving designs or usage.

Impact on Singapore’s balance of payment

1. Singapore, being a small and open economy, is very vulnerable to external shocks. A worldwide recession can have negative effects on Singapore’s balance of payment.

2. A country’s balance of payment consists of the current account, capital account and official financing account. IT is important for the government to be able to determine the impact of events on these accounts because it affects the governments’ macroeconomic goal of balance-of-payment equilibrium. The current account of the balance of payment includes exports and imports of goods and services and net unilateral transfers. The services account records receipts and payments arising out of trade in services. This records import and export of services categorised under transportation, travel, insurance and finance.

3. During a recession, there is a global fall in incomes and this affects people’s purchasing power. The decrease in income leads to a fall in demand for most goods and services, especially normal goods, which are income-elastic. Singapore’s balance of trade is hence affected. Generally, the demand for oil products is income-inelastic, as these are used as raw materials and are a necessity in the manufacturing process. A fall in income thus leads to a less-than-proportionate fall in demand. The demand for high-end consumer products like Chanel, Shiseido and even sports cars are all products that are income-elastic, as they are deemed to be luxury products.

4. Hence, a fall in income leads to a more-than-proportionate fall in demand. The overall effect is a fall in the trade account surplus. However, a fall in demand for oil products will be lesser than the fall in demand for luxury products.

5. Singapore’s export of services is also affected as the recession may affect people’s desire to travel. The decrease in income can cause a more-than-proportionate decrease in demand for air travel since travelling is considered a luxury good. For financial services, which can be exported, declining worldwide incomes may also mean less income for personal investment .The overall effect is a deficit or a fall in the service account surplus.

Limitation of using elasticity values

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1. While the elasticity values are useful in determining if there will be a general fall in the country’s export and imports, it is not useful in determining the impact in the capital and financial account. Foreign direct investment is affected by other factors such as interest rate and political stability even though a recession may adversely affect the investors’ decisions. Portfolio investment is also affected by interest rate. Hence, the Singapore government may use YED to analyse the negative impact on the current account, which would subsequently affect the balance-of-payment equilibrium.

2. A recession does not only cause a fall in income generally but it may also cause a fall or a rise in prices of most goods and services, depending on the main cause of the recession. If the demand for a particular product is price-elastic, the changes in price level will cause a more-than-proportional change in the quantity demanded. Examples include electronic goods with many close substitutes. If the demand for a particular product is price-inelastic, the changes in price level can cause a less-than-proportionate change in the quantity demanded, for example, raw materials with no close substitutes. The changes in quantity demanded can affect the trade and service accounts in the current account. However, PED is not very useful to the Singapore government as changes in price level of most good and services may not be consistent.

Conclusion

1. The immediate and direct impact of a recession is a fall in the income level. Thus YEDD is most useful to the Singapore government in analysing the impact on the balance of payment. However, other elasticity values will not be as useful.

Macroeconomic ObjectivesElasticity values can help the government not only in times of crisis but also at other times. It can also help the government in formulating policies, as elasticity values can help to gauge if a particular policy is relevant or suitable for the Singapore economy.

Price elasticity of demand of exports and imports

1. In determining if depreciation is an appropriate policy for the Singapore economy, the PED for imports and exports are used.

2. When the price of exports falls in foreign currencies, the quantity demanded for exports increases more than proportionately, since PED>1 for Singapore. This is because we have competing trading partners and a lower export prices means that Singapore’s products are more price-competitive. Hence, export revenue increases. When the price of imports increases in terms of domestic currency ,the quantity demanded for imports falls less than proportionately since PEDm<1. This is because Singapore imports oil, which is hard to substitute with another good as it is the raw material used in many manufacturing productions. Hence, the import expenditure increases.

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3. Since the Marshall Lerner Condition is fulfilled, a depreciation of the Singapore currency leads to an overall improvement in the balance of trade.

4. Since net exports increase, aggregate demand increases and national income increases more than proportionately via the multiplier, leading to economic growth and a fall in unemployment levels.

5. Hence, the Singapore government may make use of this knowledge to depreciate the Singapore dollar whenever it wants to improve the balance of trade and assuming ceteris paribus, improving the balance of payment, economic growth and unemployment situation.

6. However, the government also needs to note that in the short run, PEDx and PEDm may be lower than 1 because time is needed for tastes and preferences to change in order to adapt to cheaper products. Information needs time to disseminate and for consumers to react, and existing trading contacts are still binding and need time to expire. Thus, a depreciation of the SGD may lead to a temporary worsening of the deficit in the balance of trade.

7. The Singapore government also needs to be aware that wit the continuous depreciation of the SGD, the cost of production will increase, as prices of imported raw materials increase. Given that majority of the raw material used in local production are imported, Singapore’s exports will eventually lose its price competiveness. Hence, export revenue may fall eventually and, assuming ceteris paribus, the balance of trade will worsen, leading to a worsening of the balance of payment, economic growth and unemployment situation.

8. Moreover, a depreciation of the SGD may lead to internal problems such as demand-pull inflation and imported inflation. Hence, the Singapore government has to weigh the possible trade-offs before it comes up with policies to counter the trade-offs.

Income Elasticity of Demand for Exports and Imports

1. As Singapore’s exports are normal goods (YED>0), whenever worldwide income increase, the demand of exports also increases. Hence export revenue increases. The extent to which export revenue increase depends on whether Singapore’s exports are necessities or luxury goods. As Singapore exports electronic parts, tourism services and pharmaceutical products, which are not needed for basic survival, its exports may be more luxurious nature, leading to a more-than-proportionate increase in demand given a change in income.

2. As Singapore’s imports are normal goods (YED>0), whenever Singapore’s income increases, the demand of imports also increases. Hence import expenditure increases. Singapore is reliant on the import of both finished goods and raw materials. Hence Singapore’s imports may be more of necessity in nature, leading to a less-than-proportionate increase in demand given a change in income.

3. If export revenue increases more than import expenditure, the balance of trade will improve, and assuming ceteris paribus, balance of payment will improve.

4. Hence for a country that is heavily dependent on exports for growth, it is important for the Singapore government to monitor the YED for exports and the national income level of their trading countries. In times of worldwide increase in income, the

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government may want to encourage the production of better quality products to suit the increase in standard of living of their trading countries. Information of YED for exports is thus useful to a government in planning and targeting possible up-rising industries. In times of worldwide recession, the government must be prepared to implement appropriate policies to counter the anticipated fall in export revenue.

Microeconomic ObjectivesPrice elasticity of demand for goods that generate negative externalities

1. Taxes placed on demerit goods such as cigarettes and alcohol can force consumers to internalise the external costs imposed on third parties and help to reduce the consumption of such goods to the socially optimum level.

2. As PED<1 for such goods, the increase in price leads to a less-than-proportionate fall in quantity demanded. Hence the tax must be sufficiently high to reduce consumption to the socially optimum level. The consequences of high taxes are discontentment and more inequity issues, especially for the lower-income workers.

Conclusion

While the elasticity values may help most of the time, it may not help if ceteris paribus condition is not fulfilled. In reality, it is difficult to analyse the economic situation of the reaction to price changes. Even if were possible, there are many other factors that affect how consumers react to such changes. Furthermore, it is difficult to get accurate EPD and YED values. There may also be unexpected changes in the economy that lead to changes in demand and supply that cannot be predicted. Despite all these limitations, elasticity values can still be useful to the government in formulating policies but it must be complemented with other types of indicators.

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