The (Un)affordability of Housing

I’ve been planning on posting this for a while now, but came across this article this past weekend, which provides the perfect entree (excerpt):

Property market bubble set to burst, says think tank

PETALING JAYA: The property bubble in Malaysia is set to burst, but the government must resist the temptation to intervene and allow market forces to coordinate supply and demand, says a think tank.

In an interview with FMT, the Institute for Democracy and Economic Affairs’ (IDEAS) senior fellow, Carmelo Ferlito explained the two “economic dynamics” which have resulted in the current property situation in the country, where the prices of homes are beyond the reach of most and the oversupply of such homes, has led to many being left unsold.

Figures from the National Property Information Centre (Napic) have indicated that as of the first quarter of 2017, some RM10.08 billion worth of residential units are unsold in Malaysia. This figure does not include serviced apartments, which have since 2015, been classified as commercial properties.

Housing Watch

BNM has a new microsite dedicated to providing info on the housing market, including info on the market, financing stats, and policy measures. Check it out here.

Chart of the Week: Healthcare Costs

The Edge has an article on medical inflation, citing a source claiming it will rise at a double digit pace this year. I hate to break it to people, but this has been the norm, both for Malaysia as well as globally.

Here’s the data, up to 2014 (in RM):

The Costs and Benefits of Immigration

Nick Rowe provides a concise framework for thinking through the issues (excerpt):

Thinking about Costs and Benefits of Immigration

I find this a useful way to organise my thoughts about the costs and benefits of immigration. It may work for you too. I start out with a neutral benchmark, where immigration has neither costs nor benefits for the original population. Then I think of different ways in which that neutral benchmark could be wrong. This post is just a list (no doubt incomplete) of things that might create costs or benefits from immigration. I make no attempt to say which is bigger. It depends.

I am writing this mostly for non-economists. I should warn you that the economics of migration is not my area. I'm a macroeconomist, and most economists who specialise in immigration are microeconomists. This may give me a different perspective.

In case you think it matters: I migrated to Canada from the UK 40 years ago (and to Quebec from Ontario 30 years ago). This may influence my perspective.

And for what it's worth: I think that Canadian immigration policy is probably in the same ballpark as the right immigration policy for Canada. Though it is probably different for different countries….

The situation in Malaysia is a little different – we have mainly guest workers, rather than immigrants, though this nuance requires little modification to the framework offered above. Worth a read.

Cognitive Dissonance: Singapore Fiscal Policy

I kept getting this promoted tweet on my Twitter feed over the last couple of days, from the Lee Kuan Yew School:

2 principles shape SG's fiscal policy: balancing the budget and keeping government small. #SG52 #SGpublicpolicy https://t.co/VLrH1Sg2Ud pic.twitter.com/mJzJRc0Uny

— Lee Kuan Yew School (@LKYSch) August 8, 2017

I usually don’t bother with promoted tweets, but curiosity eventually won over and I read the article. It’s a fair description of Singapore’s fiscal policy framework, although the part on the management of past reserves could have been expanded for clarity (there’s no mention of GIC or Temasek in there for example, or the endowment funds the government set up).

There is however, one part I’m in violent disagreement with (excerpt; emphasis added):

Ringgit Futures in Singapore

BNM is upset:

BNM Stance on Ringgit Currency Derivatives Products in Offshore Market

The recent introduction of the ringgit futures at the Singapore Stock Exchange (SGX) and the Intercontinental Exchange (ICE) or ICE Futures Singapore is inconsistent with Malaysia’s foreign exchange administration (FEA) policy and rules.

The Malaysian ringgit is a non-internationalised currency and thus, offshore trading of ringgit, in any form whether as a non-deliverable forward traded out of offshore financial centres or as a futures, options and other derivative contracts on exchanges outside of Malaysia, is against Malaysia’s policy.

Bank Negara Malaysia (BNM) would like to remind all market participants to observe the existing FEA rules. Contravention of the FEA is an offence under the Financial Services Act 2013 and Islamic Financial Services Act 2013. Appropriate action under the law will be taken against any person that does not comply with prevailing rules and regulations. Foreign participants should access the onshore ringgit foreign exchange market to meet their financial needs, either directly with onshore licensed financial institutions or their Appointed Overseas Office (AOO).

Chart of the Week: RON95 Petrol Price Vs Volume

Malaysian consumers mostly responding to price signals (quarterly MYR average prices, log annual and quarterly changes):

When the administered RON95 price was raised in 2013, there was little change in demand growth. It was still running at roughly 5% per annum. However, when the oil price drop in 2014 started feeding through into retail petrol prices, there was a steep rise in demand. A bit of an oddity, considering that the economic situation was less than ideal – or maybe it was because outbound tourism became more expensive, so people took to domestic travelling more.

In any case, the volume has lately become much more sensitive to prices (a signalling effect from monthly/weekly price volatility? worth keeping track of). For 1Q17, there was a sharp drop-off in purchases of petrol. From my point of view that’s ideal – a Pigovian tax on petrol (like tacking on GST) would then have the desired effect on consumer behaviour.

One thing the charts above don’t show however, is just how much petrol Malaysians are consuming. It’s sobering (index numbers; 2010=100):

Consumption of petrol is 70% higher than it was in 2010, and 2/3rds of the increase has come over the past three years alone.

Technical Notes:

1. RON95 retail prices from Galvin Tan’s blog and press anouncements
2. Retail fuel volume data from the Quarterly Distributive Trade Index reports from the Department of Statistics

Food Stamps Don’t Work

I remember, when the debate over BR1M was getting started years ago, some people thought that food stamps or vouchers would be preferred. Two reasons were given for this: first that any assistance should be in a form that directly assists the poor, and second so that they don’t spend it on anything else (such as cigarettes or worse).

I preferred a cash transfer – conditional if possible, but unconditional if that couldn’t be done. My suggestion at the time (in response to the criticisms) was to only give cash to the women of the households. Obviously, that suggestion won’t fly in our society. An alternative would be to make food vouchers (or any other kind of vouchers) freely tradeable or convertible into cash. That didn’t get any kind of reception either.

But having read the following (the first is a working paper, the second is a book on US poverty), I’m now convinced more than ever that food stamps were a bad idea, and possibly worse than no assistance at all (abstract):

Effective Exchange Rate Indexes: July 2017 Update

The NEER and REER page has been updated, as has the Google Docs version.

Summary

After two months of gains, the Ringgit has reversed course, seeing declines across all six indexes. The REER is roughly where it was back in December, though the NEER managed to hold on to some gains, and is only slightly below November’s level. Overall, most of the indexes lost about -0.80% for July versus June, except for the narrow REER, which lost a little over -1.03%.

On a bilateral basis, losses were recorded against 12 out of the 15 currencies tracked. The biggest losses were against the AUD (-3.44%), the EUR (-2.85%) and the GBP (-1.73%), with the only gains recorded against the PHP (1.16%), the JPY (1.04%) and the TWD (a marginal 0.13%).

Changelog:

1. Indexes have been updated to July 2017
2. CPI deflators and forecasts have been updated for June/July 2017

More Reserve Gibberish

Scenario 1:

I borrow $100 from my neighbour Adam for a month and give him an IOU. In my books, I’ll have $100 in liabilities to Adam that I have pay back in 30 days, while Adam has an asset of $100 that he can claim from me. Adam is however short of cash, and sells my IOU to Chong across the street a week later. In my books, I still owe $100 in 3 weeks time, but this time to Chong. From my point of view, it hardly matters where the money came from – I still have to pay it back based on the IOU. The important point here is that the debt outstanding remains $100. The transfer of the debt liability from Adam to Chong doesn’t constitute an increase in my borrowing.

Scenario 2:

Muthu is going on holiday and wants my help to take care of his cat. So for a week, I will have a cat around the house that I’m responsible for, at the end of which I’ll have to return it to him. During that week, my balance sheet will show that I have a “debt” of 1 cat to Muthu (it shows as an asset on his balance sheet). He’ll be very upset if I don’t have it when he returns.

EIS estimation

Funny numbers (except):

Employers: Why collect RM1.6b in jobless benefits when retrenchment costs RM300m?

KUALA LUMPUR, Aug 2 — The Malaysian Employers Federation (MEF) has questioned the rationale of collecting an estimated RM1.6 billion annually for the Employment Insurance System (EIS) or over 5 times the compensation for all workers retrenched in the Asian Financial Crisis.

MEF executive director Datuk Shamsuddin Bardan based his calculations on contributions of 1 per cent from both the employer and employee (0.5 per cent each) for an average monthly salary of RM2,000 from 6.8 million private sector workers.

This would amount to about RM1.6 billion a year, while he estimated that unemployment benefits for 50,000 Malaysian workers retrenched during the 1997 crisis would total RM300 million assuming that they received half-month wages based on a RM2,000 salary for six months.

I don’t know where this figure of 50,000 job losses during the AFC comes from. One of the weaknesses of the retrenchment data is that it relies on self-reporting by employers, who don’t exactly have an incentive to report job losses.

So let me just take two industries for which we have detailed data from the economic census. Between 1996 and 2000, the construction sector lost 169k jobs, while manufacturing lost 90k jobs between 1996 and 1999, for a total of 259k jobs. That’s more than five times greater than the MEF estimate, and nearly wipes out the annual inflow.

There’s probably a good argument here for adjusting the contribution to something more realistic, but the difference is not as extreme as MEF thinks.

Reserves and Reserve Cover

This is really tiresome (excerpt):

Malaysia's Bond Recovery Is Under Threat

Malaysia’s bonds are coming back in favor but the respite may be brief. The level of the nation’s foreign reserves is coming under scrutiny as investors brace for outflows from emerging markets.

The lowest reserve adequacy in Asia is sapping demand for the securities just as they are recovering from the longest selloff by foreign investors in eight years. Relatively high foreign ownership and an acceleration in inflation from last year are adding to risks as major central banks sound increasingly hawkish on interest rates….

…Malaysia’s reserves are sufficient to finance 6.5 months of imports, according to data compiled by Commerzbank AG using a 12-month moving average. That compares with 9.9 months for Indonesia, 10.8 for Thailand, 11.2 months for the Philippines, and 21.6 for China.

Bank Negara Malaysia’s reserves amount to just 1.1 times the amount of short-term debt on issue, Commerzbank estimates. The corresponding ratio is 2.8 for Indonesia, 3.7 for the Philippines and 4.3 for India….