Housing For All: The Perils of Ownership

From the Malaysian Insider:

100pc financing is not the solution — Haslinah Yacob

MARCH 10 — Prime Minister Datuk Seri Najib Razak’s announcement that he plans to launch the “My First Housing Scheme (SRP)” to enable young adults earning under RM3,000 to buy a house is well-intentioned but ill-advised.

Malaysia is indeed facing a housing crisis. The property development sector is booming. Unfortunately, property prices are so high, suitable homes are out of reach of most Malaysians. And yes, those most affected are young people looking to invest in their first home.

However, offering young adults the opportunity to “buy” a house without downpayment is not the solution...

Read the rest for her analysis, it's quite good. About the only thing I disagree with is that property development is booming - judging from the latest sales data, it's actually crashing:

Property developers have priced themselves out of the mass market. Other than that, I pretty much share the same reservations. While I don't think we've got the ingredients for a systemic crisis stemming from a housing bubble, the seeds are there – let’s not nurture them into something that’s too big too handle.

Having a roof over your head is a basic human right – but owning it isn’t a necessity, especially if there are alternative, more liquid investments around with comparative yield and less risk.

You might want to read Sakmongkol AK47's rant while you're at it.

January 2011 Industrial Production

I wasn’t expecting all that much from the January numbers – coinciding as it does with the beginning of the year and running up to CNY isn’t exactly a good combination for higher output.

Be that as it may, there’s some positive takeaway from the January figures (log annual and monthly changes; seasonally adjusted; 2000=100):

MPC Preview

Not many of my peers are expecting an increase in the Official Policy Rate (OPR) coming from tomorrow’s Monetary Policy Committee meeting at Bank Negara, and frankly neither am I:

Economists expect Bank Negara to hold key interest rate steady

PETALING JAYA: With the slower pace of economic growth this year compared with 2010, economists do not anticipate any interest rate hike in Bank Negara's monetary policy committee meeting on Friday.

However, they believe that there is a 50:50 chance that there could be a 1% hike in the statutory reserve requirement (SRR).

MIDF Research chief economist Anthony Dass said Bank Negara was likely to hold the overnight policy rate (OPR) at 2.75% for the time being, deeming it too early to be raised.

“We think it's too early to raise interest rates. However, Bank Negara may look at other administrative measures to maintain inflation, such as raising the SRR,” he told StarBiz yesterday. “There is a 50:50 chance of that going up, perhaps by 1% (to 2%).”

But I think on balance the odds are rising that there will be a 25bp hike at the next meeting or two – I consider an increase in the SRR as a given.

Household Debt: A Different Perspective

From today’s The Star (excerpt):

Malaysia's household debt on the rise...But mortgage NPLs at an all-time low

PETALING JAYA: Malaysia's household debt rose at a rapid rate of 11.1% per annum from 2004 to 2009, and from RM516.6bil at end-2009, it climbed by 8.4% to RM560.1bil as at end-August 2010, said CIMB Research.

The household debt to gross domestic product (GDP) ratio increased from 66.7% in 2004 to 76% in 2009 but is estimated to ease to 74.6% at end-2010.

The rapid growth of household borrowings is causing some worries that the excessive leveraging by households may make the economy and financial sector more vulnerable to instability and crisis...

Economic Modelling: Status Quo Ante

While there have been alternatives proposed (see for instance this post), large scale structural and stochastic models are still the bread and butter of macropolicy. Yet the inability of virtually every statistical model to provide substantive guidance on policy issues remains a problem.

This article on VoxEU provides an insight as to why (excerpt; emphasis added):

Dynamic stochastic general equilibrium models and their forecasts
Rochelle M Edge & Refet S. Gürkaynak

Dynamic stochastic general equilibrium (DSGE) models represent a major strand of the modern macroeconomics literature and are an important tool for policy analysis at central banks...

...The success of the DSGE model-based forecasts relative to other methods was viewed as evidence in favour of DSGE models’ reliably capturing the dynamics in the data…

...To see the absolute forecasting ability of the DSGE model, we run a series of standard forecast efficiency tests, where the realised inflation is regressed on forecasts made at different times in the past. A good forecast should have a zero intercept and unit slope as well as a high R-squared. Table 1 shows the efficiency tests for DSGE model forecasts of inflation at different maturities and demonstrates clearly that the forecasts are very poor. R-squareds at all horizons are essentially zero, implying no forecasting ability. All Figure 1 is therefore telling us is that all other forecasting methods perform just as poorly....

January 2011 External Trade: Back To Normal

December’s outsized trade numbers didn’t looked sustainable, as yesterday’s trade report proved:

Quantitative Easing Versus Printing Money

Ooooh, this one’s a doozy. I know quite a few people who will blow a gasket (make that: the whole engine block) reading this (excerpt):

Deflation, debt, and economic stimulus
Richard Wood

The US, Japan, and Ireland are suffering from deficient private demand, rising debt, and a tendency to deflation. This column is asks what can be done about it.

We begin by assuming that relevant authorities have decided that new money creation is necessary to work against deflationary tendencies and to stimulate the economy. The central issue explored here then is how should such new money creation best be deployed to create the required economic stimulus?

Technical And Vocational Education

I haven’t covered the ETP projects much if at all on this blog, mainly because they’re for the most part private sector investment projects with little individual economic impact however large they might be in aggregate.

But this quote from Datuk Sri Idris Jala at the PwC Global Survey Dialogue yesterday caught my eye (excerpt):

At PwC CEO Dialogue: Idris’s Take on Talent

…According to Idris, the Malaysian employment hierarchy currently suffers from a ‘broken pyramid’ situation, where we have huge numbers of people with graduate and postgraduate qualifications, and not have enough people with technical and vocational skills. Idris suggested the solution of the corporate sector coming in to set up technical colleges since the corporate sector themselves know what is needed. In his words,

“I am sitting here on behalf of the government, putting the challenge back to you CEOs here today, to unleash the talent in your workplace. You must put them in the right places and let them grow.”

Monetary Policy Strategy

This past couple of years has been a fascinating laboratory for assessing the effectiveness of alternative strategies of monetary policy. In the wake of the collapse of the Bretton Woods arrangements in the early 1970s, we’ve seen the rise and fall of monetarism (money base targeting), and the spreading hegemony of interest rate targeting (IRT), which involves using an intermediate target – typically overnight interbank rates – to influence price stability and the level of economic activity.

With the latter, successful as it has been, you can immediately see one glaring problem: you’re using one instrument (the short term interest rate) to try and target two variables which often move at odds with each other. Aim for higher growth and you’re ipso facto accepting potentially higher price increases i.e. inflation, and reaching for price stability (and especially absolute price stability) will sacrifice economic growth. There’s also the fact that you’re depending on a stable transmission mechanism between short term nominal interest rates to longer term real interest rates, which are the ones that actually matter for credit creation, consumption and investment.

January 2011 Monetary Conditions

Money supply growth was fairly steady over the course of the last half of 2010, but as we get into the Year of the Rabbit, things have changed (log annual and monthly changes; seasonally adjusted):

Seasonally adjusted M1 rose RM9.9 billion (RM 15.6 billion  unadjusted) mainly from higher demand deposits and an unseasonally high cash injection. M2 growth accelerated as well from much the same factors, with the rest of the components rising marginally or not at all.

Economic Growth And The Demographic Dividend

I’ve been sold on the idea of a “demographic dividend” for well over a year now, and here’s some more evidence from a new IMF paper (abstract):

The Demographic Dividend: Evidence from the Indian States
Aiyar, Shekhar & Ashoka Mody

Large cohorts of young adults are poised to add to the working-age population of developing economies. Despite much interest in the consequent growth dividend, the size and circumstances of the potential gains remain under-explored. This study makes progress by focusing on India, which will be the largest individual contributor to the global demographic transition ahead. It exploits the variation in the age structure of the population across Indian states to identify the demographic dividend. The main finding is that there is a large and significant growth impact of both the level and growth rate of the working age ratio. This result is robust to a variety of empirical strategies, including a correction for inter-state migration. The results imply that a substantial fraction of the growth acceleration that India has experienced since the 1980s - sometimes ascribed exclusively to economic reforms - is attributable to changes in the country’s age structure. Moreover, the demographic dividend could add about 2 percentage points per annum to India’s per capita GDP growth over the next two decades. With the future expansion of the working age ratio concentrated in some of India’s poorest states, income convergence may well speed up, a theme likely to recur on the global stage.

Inflation and Fiscal Policy

I was going to write about this issue yesterday but didn’t have time. Now William Pesek makes the same point (excerpt):

Inflation Above 9% Shows Bankers No Longer Gods
William Pesek

March 1 (Bloomberg) -- Duvvuri Subbarao knows a thing or two about inflation. India’s central-bank head defeated price gains exceeding 10 percent twice in the past two years alone.

Now, Subbarao is back at battle stations as a chorus of traders say he’s behind the curve. It’s hard to argue with the wisdom of markets with Indian inflation back above 9 percent, the highest among Asia’s 10-biggest economies.

Yet the Reserve Bank of India is the vanguard of a worrisome phenomenon in the world’s most vibrant economic region. Central banks are in over their heads and need help from politicians. Higher interest rates alone won’t cut it.