Need to be wary of brewing asset bubble

THESE days a mere few months will make a lot of difference and this is obvious even in the property market.

The stronger economic rebound in the region is once again threatening asset bubbles in various Asian cities.

One of the obvious reasons for the jump in residential property prices is the big movement of people around the globe these days. Foreigners are making up a big group of the buyers in major Asian cities from Shanghai to Singapore.

It will be just a matter of time before the trend catches up in the other cities, including Kuala Lumpur.

Penang's popularity as the choice for foreign participants of Malaysia, My Second Home programme is already seeing a big jump in foreign buying interest in its property market.

The high savings rate among Asians and their yearn for property as an investment asset is also another factor.

The under-performing equity markets and low bank savings rates are also not providing people with spare cash to invest with other better viable choice.

To the layman, creeping property prices mean more expensive homes and higher costs of living. The lower-income group will be the most hard hit by fly-away property prices.

To curb overheating, China and Singapore have already imposed higher downpayment requirements for mortgages.

There is a high correlation between property prices and liquidity, and to avoid excess liquidity in the system, their governments have no choice but to tighten credit lending and raise interest rates. These measures will also aid in stabilising inflation.

China has recently raised downpayment for first-time homebuyers to 30% (from 20% previously), while second-home borrowers have to pay a 50% downpayment. To curb speculative activities, it has also re-imposed the 5.5% transaction tax for properties held for less than five years.

Malaysia also has to be wary of the possibility of an asset bubble brewing although the Government had also acted by imposing a 5% real properties gains tax.

Given the strong surge in property demand in the last six months or so, this has not acted as a big deterrent to curb buying and selling activities.

As developers are still continuing with their housing packages and allowing low downpayment of between 5% and 10%, entry cost is still very low for property buyers.

Moreover, they will only have to start servicing their loan only upon vacant possession of the property.
While those who have built up a comfortable portfolio of property assets will benefit from the value appreciation of their assets, many Malaysians are finding it hard to buy reasonably-priced landed property these days.

Kuala Lumpur and Klang Valley folks are certainly among those feeling the pinch. Penangites have also seen one of the more pronounced property price increases as land on the island is really getting scarce and the number of landed housing projects is getting fewer.

New condominiums there are averaging RM600 to RM700 per sq ft, semi-detached houses and even terraced houses with some land are priced at more than RM1mil while bungalows are from RM3.5mil to RM4mil.

No wonder many island folks have no choice but to opt for medium-cost apartments. The liberalisation of the local property market has opened up a bigger catchment customer base and created more opportunities for industry players.

In the process, there have been many new developments and project launches that are mostly targeted at the high-end market.

There are fewer affordably-priced properties unless one is prepared to travel as they are mostly located in places further away from the city centres.

To assist those who find private housing way beyond their means, the Government should work towards a holistic and concerted plan to appoint a dedicated agency to undertake the overall planning on the actual need for affordable public housing in the country and have them built in easily-accessible places.

The Singapore model, where all the public housing projects with good community facilities are within a stone's throw from the mass rail transit stations, is a sure winner.

It will overcome the problem faced in the country where many low-cost housing projects are not occupied because they are located in very far-away places that do not have convenient public transport link.

THE REAL ESTATE BY ANGIE NG

·Deputy news editor Angie Ng believes all Malaysians deserve to live in secure, well planned and managed housing estates, whether they are private or public housing.

Legacy of an organised man

From receipts to official documents, Tun H.S. Lee left a priceless hoard that will serve as a window to a historic era.

DURING his lifetime, Tun H.S. Lee methodically filed away every little scrap of paper. As eldest son Douglas says, “Our father was a hoarder. He never threw away anything and saw value in everything, even a 20-cent car park receipt.”

Tun Lee, one of the founders of the MCA and the Alliance Party, lived in momentous times. Surprising then that he did not write his autobiography.

Another son, Thomas, adds: “We offered to engage a writer for him and to tape record his conversations and memories. He never gave a reason but simply would not do it.”

Tun H.S. Lee (left) with Tun Tan Siew Sin, the man who would take over from him as Finance Minister in 1959. 

 

All is not lost though. Now, 22 years after his death, 180,000 private papers of Tun Lee are finally available for public viewing. His sons, Datuk Douglas Lee, 87, and Datuk Thomas Lee, 72, handed over the papers to the Institute of Southeast Asian Studies (Iseas) in Singapore on May 5. A third son, George, could not attend the ceremony.

With the donation, Douglas says, a burden has been lifted from the family’s shoulders as they did not know what to do with their father’s vast collection, kept in over 140 boxes in a storeroom at his home in Kuala Lumpur.

A meeting in 2003 set in motion a series of events which culminated in the papers being put in Iseas for safe-keeping.

Historian Dr Lee Kam Hing recounts how he advised Douglas against throwing away any of his father’s less important documents such as bills and receipts. “I told the family that every shred of information was important as things like club receipts and bills tell us what the cost of living and social life were like then.”

Dr Lee put Douglas in touch with Iseas librarian Ch’ng Kim See, who flew to Malaysia to advise the family on indexing the documents.

Iseas Board of Trustees chairman Prof Wang Gungwu says the Lee family’s generosity will help fill a lot of gaps in our understanding of a critical period of the country’s history, from 1945 to 1960. “Tun H.S. Lee’s life story has not been fully told.”

A liquor receipt from India dating back to 1942 forms part of the Tun H.S. Lee collection.

 

An international conference on Lee is planned for next year at Iseas.

From tin to politics

Henry Lee Hau Sik was born in Hong Kong in 1901 and studied in Cambridge, Britain, where he came to know the future King George VI.

Lee came to then Malaya in 1924 to pursue business opportunities, in particular mining.

His years in Malaya were very eventful. He was involved in Kuomintang politics and anti-Japanese activities. During WWII Lee escaped to India with his family as the Japanese had put a price on his head. He had the distinction of being appointed a colonel in the Chinese army, then based in Burma. He was also made a colonel of the British army in India during the war years, when he liaised btween the two Allies.

Lee played a key part in forging an electoral alliance with Umno in 1952 that later became the Alliance Party (now Barisan Nasional). He was part of the Alliance team led by Tunku Abdul Rahman that held independence talks in 1956 in London and was the only Chinese signatory to the Malayan independence agreement.

He was Transport Minister from 1953 to 1956 and was appointed the first Finance Minister of an independent Federation of Malaya in 1957. Two years later, he resigned his post due to ill health.
Lee’s other major role was helping to set up the Malayan (later Malaysian) Chinese Association in 1949, with the support of Chinese business groups and educationists.

Lee was also the recognised leader of the Guangdong and Gaozhou community, says Thomas.

“I was amazed when someone came up to me and identified himself as being from Guangdong. He said his family came from Raub, which was full of Gaozhou people. He told me that even today, the people there know of Lee Hau Shik.”

Lee founded or was actively involved in many institutions and organisations, including Bank Negara Malaysia, the Lady Templer Hospital, China Press, the Olympic Council of Malaysia, and the Malaysian Golf Association, just to name a few.

After retiring in 1959, Lee started the Development and Commercial Bank, now known as RHB Bank.

Datuk Thomas Lee (left) and Datuk Douglas Lee looking at some of their father’s documents at Iseas in Singapore.

 

He died in 1988 in Kuala Lumpur. Jalan Bandar – originally known as High Street – was renamed Jalan Tun H.S. Lee in his honour.

A son’s memories

Thomas reveals that his father played golf until ill health stopped him. He would end his game at the 19th hole, for drinks.

“Even in old age, he enjoyed his drink. The secret, he told me, is to alternate your drinks. Whisky one day, brandy the next.”

Thomas says he and his late brother Alex hardly saw their father before they left for further studies in England in 1952.

“My father never had time to visit us in England but we did see him on two occasions in London, when he went for government talks. He wrote us a letter about once a month but it was always quite formal,” Thomas recalls.

Lee was also a workaholic and a stickler for punctuality. As the oldest child in his family, he had a strict upbringing in China.

Thomas recounts an incident that illustrates Lee’s character. He had reported for work in his first job as a government servant, only to find his boss playing mahjong and not wanting to be disturbed. “After this continued for three days, my father quit government service and found a job with a bank in Hong Kong.”

He adds that one of Lee’s bitterest moments was his defeat in the Selangor MCA presidential election, a loss he attributed to friends turning against him.

“My father was not one of those politicians who would bend or adapt as the wind blew. He was unable to deal with people who schemed against him. He was of the heroic mould and would rather be knocked down than change. He never spoke again to those friends who betrayed him.’’

Thomas saw more of his father after the latter quit politics. In fact, he served on the boards of China Press and D&C Bank when his father was the chairman.

Thomas shares his father’s passion for golf, and recalls that “some of the happiest times we had with him were during family reunions in Cameron Highlands.

“He was a very organised person. We were all told, breakfast at 7, golf at 8, lunch at 1, tea at 4, cocktails at 7 and dinner at 8.”

Stories by SIMRIT KAUR
starmag-feedback@thestar.com.my

Related Story:
A painstaking effort

Commodity and asset prices are up

Can inflation be far behind?

IN a previous column, I wrote on how ironically the sovereign-risk “shoe” is now on the other foot (“The Kiss of Debt”, Feb 27). Historically, sovereign-risk concerns reflected profligacy in emerging market economies - Russia, Argentina and Pakistan were notable examples. Today, the money printing machines in the United States, Euro-zone, UK and Japan are running overtime to assume the “crown.” We all know there is no such thing as a free lunch. This time, severe crisis took their toll on those with a history of high living and fiscal indiscretion, ignoring reforms in good times. What a difference a generation makes.

The contrast is provided by BRIICs (Brazil, Russia, India, Indonesia & China). A year ago, with their fiscal and financial houses in good order, BRIICs were busy stimulating their economies. Their main worry then was to push for a “fairer global economic order.”

But, one year on, their situation is ironic: they share 3 things - they are big and growing fast, they have inflation, and they have strengthening currencies thrust upon them. These days, their concerns are on rising commodity prices, overheating, asset bubbles and inflation.

Workers dry cocoa beans in Makassar, Indonesia's South Sulawesi province. Last year, cocoa prices were at a 30-year high. - Reuters

 

Paradox of a symmetrical recovery

Now more than ever, the Greek tragedy points to gathering risks in the global economic outlook. As of now, global recovery remains anaemic, uneven, and in need of policy support. It is as though the world is still dichotomised but with a big twist. In developed economies, recovery is there but growth remains modest with high unemployment and large fiscal deficits. Having been at the epicentre, sluggish growth in the US can gather strength, but Europe will now come out of recession more slowly.

Of concern is excess global liquidity which will now grow even more, lifting commodity prices, bloating risky assets, and adding to inflationary pressure. Worse, scars of battered consumers remain in the face of strained and stressed fiscal dilemmas.

In emerging economies, especially BRIICs, the picture is amazingly different. Most are in a V-shaped recovery and many approaching normalcy. Asia ex-Japan is slated to grow 8% this year and prospects are for good times to continue. Despite it all, they have recovered with impressive speed.

China persisted and grew by 8.7% in 2009 (13% in '07); and by the 1Q'10, growth was already back up to 11.9%, prompting concerns of over-heating. India - the more self-contained of the lot, managed 7.2% in '09 and should comfortably clear 8% this year. As a result, inflation is gathering strength in many parts of Asia ex-Japan and in other BRIICs. Inflation in India is already up 10%; China, 3%; Brazil, 10%; Russia, 8%; Indonesia, 4%. Asset prices have also surged, earning the attention of policymakers especially in China and India. China would do well to keep inflation no higher than 5% in '10, and India, less than 8%.

Yet, in the lead-up to recession, emerging economies were already becoming increasingly hitched up to the US and European “shopping cart.” Asia's exports share of output rose to 47% (from 37%) over 10 years pre-crisis. This shows their growing dependence on external demand, not less. When much of this demand disappeared overnight at end '08, it didn't take Asia too long to be back exporting again. So much for decoupling. But this time, Asia found options.

Commodity exporters like Brazil, Indonesia, Russia & Australia, and commodity-importers, China, Japan, Europe and South Korea, found opportunities to reinforce one another. Such feed-back loops built greater interdependence. It seems Asia was only unruffled - not shaken, just stirred.

Commodities

Commodities posted in 2009 the biggest annual gains in four decades, led by doubling in copper, sugar and lead prices. Oil prices gained 78%. The S&P Index of 24 raw materials rose 50% in 2009, the highest since at least 1971. Many attribute this rapid price rise to the “super-cycle”, fanned by abundant global liquidity & strong demand from China and India in the face of 20 years of under-investment in raw materials production. The weak US dollar also played a part. Good times ended abruptly with the financial crisis. But the conundrum became more complicated when prices rebounded strongly, lifted by higher production costs and strong economic growth in BRIICs.

Prices of food commodities were also higher. According to experts, the food crisis has moved, from lunch and dinner to breakfast. Among the “breakfast commodities” only milk prices remained low. Last year saw tea prices at all time high; cocoa at 30-year high; sugar, 29-year high; coffee, near 11-year high; and orange juice, highest in 18 months. Sharp increases in these “soft commodity” prices contrast with relatively depressed prices for most agricultural commodities, including wheat, rice, soyabean and corn. Price divergences reflected fundamentals at play. Supply disruptions, not demand, were driving the rally. But longer term, food prices are on a rising trend, driven by compelling fundamentals: years of under-investment because of low prices prior to early 2000s; structural rise in demand because increased population demanded a diet richer in meat; and onslaught of biofuels.

With economic recovery, high food prices are here to stay. Unlike oil and base metals, supply response of agricultural commodities to high prices is speedy: farmers react each planting season. Farmers say there is no better fertiliser than high prices. In 2008, farmers prompt response was aided by good weather; consequently wheat, corn and soyabean output expanded and prices halved!

Until May this year, the Economist's overall commodity price index was up 22%, with food prices staying quite flat. Industrial commodities had risen 61%, non-food agriculture, 74%, and metals, 56%. The Greece crisis temporarily halted the rising trend. Experts say that over the next 18 months, commodity prices will resume rising with economic recovery, lots of cheap money, and rapid BRIIC growth. Like it or not, high commodity prices will persist.

Asset bubbles

In emerging countries, there is growing concern about too much liquidity (domestic and global) driving asset prices, which can lead to bubbles and inflation. So much so Brazil and Taiwan introduced capital controls to better manage capital inflows. The International Monetary Fund (IMF) had since concluded advanced countries may be responsible for creating bubbles in stock markets in emerging nations: its studies found (i) a positive link between domestic liquidity (money) and stock values; and (ii) an even stronger relationship between stock values and global liquidity (hot money). There is also a strong link between liquidity (money) and house prices in all countries. However, role of foreign money inflows doesn't appear significant. Hot money has little to do with China's frothy property market; it's homemade, it seems.

As someone who knows the going-ons in China, my friend Prof Fan Gang (National Economic Research Institute, Beijing) expressed concern about rising commodity prices and food supply disruptions, even though he views the inflation outlook with limited immediate risk. Consumer prices rose 2.2% in 1Q'10 and 2.8% in April. But real estate prices are more worrisome - land prices more than doubled in 2009 and property prices, up 12.8% in April 2010. China's massive stimulus plus explosive credit expansion resulted in a 31% rise in money supply in April. Even so, liquidity conditions are expected to remain easy. Simply because balance sheets of consumers and enterprises remain healthy, with prudent leverage, even though more savings have moved into real estate. Most observers regard properties as not yet bubbly.

Even so, Chinese authorities raised banks' reserve requirements (ratio of deposits kept at central bank) three times to moderate bank lending. Also, directives were issued to calm markets, including prohibiting developers from accepting deposits on uncompleted properties. China is not alone in this. Countries like Canada, Australia, India and Singapore have similar concerns. In emerging economies, central banks readily use non-traditional “macro-prudential tools” to do the job, including credit allocation, arm-twisting (moral suasion), and favouring some with credit and discriminating against others. There is no shortage of ideas to fix property bubbles.

Inflation and the quantity theory of money

Over the past 30 months, the global economy has been subject to two major shocks: (i) the build-up of enormous unutilised capacity. Global output had fallen by 5%-6% since 2008. As expected, inflation in developed nations fell from about 4% in '08 to less than 1% in '09. It has since started to act up with rises in commodity prices. IMF still thinks global inflation will remain low in '10. (ii) But, the crisis also injected enormous amounts of low-cost liquidity (money) into the global system. Fiscal stimuli and quantitative easing (printing money) in the United States, Europe, Japan, China and India together pumped-in liquidity estimated at 4%-5% of global GDP. Isn't all this money inflationary?

Many are familiar with the Quantity Theory of Money (QTM) - this principle states simply that the general price level will rise in proportion to the increase in supply of money (i.e. cash and bank deposits in private hands). So if money supply rose by (say) 5% last year, inflation is likely to increase by about 5% this year (i.e. with a lag). But Lord Skidelsky (a noted Keynes biographer) reminds us that QTM only works at full employment. If there is unutilised productive capacity, part of the rise in money supply is absorbed to produce new goods and services, instead of spending on existing output. That is non-inflationary.

Furthermore, flooding the economy with lots of central bank money does not necessarily mean private deposits (generated from spending or bank lending) will rise by the same proportion. Japan in the 1990s had lots of money pumped into the economy; yet, money supply rose by only 7%-8%. Hence, the lost decade of no growth and no inflation (even deflation). We see similar trends in recent experience with quantitative easing in the United States and Europe.

The lesson is clear: what matters is not the printing of money but spending it. Once spent, the bundle of paper money is activated to produce goods and services. Any central bank can create money but it can't ensure money will be spent or loan-out. Private money locked up in banks doesn't increase the needed money supply; new money simply replaces the old sterilised by recession. So, pump priming should be allowed sufficient time to work through the real economy; first, to use up existing capacity (hence, little or no inflation) and then, build new capacity to propel new growth. That is why any premature exit of fiscal stimuli just damages the recovery process.

We already see results of successful money creation in BRIICs and many others. Asymmetrical recovery demonstrated that, away from the epicentre, emerging economies were able to translate money they print into money spent. At this stage of the growth cycle, presence of significant output gaps means there is little pressure on resources, since firms can readily raise output and look to higher volumes instead of prices. Rising Asia is experiencing the “sweet spot” of the cycle as output and profits rise, while inflation remains under wrap.

As recovery proceeds, monetary policy needs to tighten, removing loose policy settings put into place during recession. Rising interest rates should not constrain the performance of risk assets driven in an improving economy. As I see it, risk of policy error tends to be “too little too late,” erring on the side of policy that is too loose for fear of choking off recovery prematurely, or unsettling markets (and vested interests) ill equipped to handle change.

WHAT ARE WE TO DO 
BY TAN SRI LIN SEE-YAN
>Former banker Dr Lin is a Harvard educated economist and a British chartered scientist who now spends time writing, teaching & promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.