<TABLE border=0 cellSpacing=0 cellPadding=0 width="100%"><TBODY><TR>Wrong way to determine if there's a bubble in property market
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<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to Mr Kit Wei Zheng's letter, "Why 1996 was used as a reference point", last Saturday.
Essentially, Mr Kit was comparing the current high property prices with the peak of 1996 to determine if we are indeed having a bubble now. This is akin to comparing K2 with Mount Everest to determine if K2 is indeed a mountain. The fact that K2 is shorter than Everest does not mean that it isn't a mountain.
Similarly, the fact that the current situation isn't as bad as that in 1996 does not mean that it isn't a bubble. It is only from the perspective of those years of stable property prices that we are able to appreciate the current boom and the peak of 1996 for what they are - bubbles. So even though the current boom has not reached the levels of 1996 yet, it is close enough to warrant concern and should not be dismissed as being not near enough.
Mr Kit should also know that average income is easily influenced by rising income gaps, so the median income is a better gauge of the average person's earnings.
Also, compared to individual income, household income is a better gauge of home affordability because it is mostly the household that buys properties rather than the individual. Furthermore, since individual income is lower than household income, using it to calculate home affordability would paint a bleaker picture. So it is surprising that Mr Kit used individual income but ended up with more rosy conclusions. But whether average or median income is used, the conclusion is the same: In five of the last nine years, property prices outpaced income.
While Mr Kit is right to say that the average condo buyer will have higher than average income, this was true in 1996 too.
The fact that households have seen a significant increase in financial assets does not mean anything for new households or future generations who have nothing to fall back on and would have to bear the burden of any property price increases that creep in over the years.
Mr Kit has, in effect, justified the current boom as being within the tolerable limits of the previous bubble. This is like someone who says that even though he is only 20kg overweight, there is no cause for concern because he used to be 50kg overweight.
Ng Kok Lim
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<!-- START OF : div id="storytext"--><!-- more than 4 paragraphs -->I REFER to Mr Kit Wei Zheng's letter, "Why 1996 was used as a reference point", last Saturday.
Essentially, Mr Kit was comparing the current high property prices with the peak of 1996 to determine if we are indeed having a bubble now. This is akin to comparing K2 with Mount Everest to determine if K2 is indeed a mountain. The fact that K2 is shorter than Everest does not mean that it isn't a mountain.
Similarly, the fact that the current situation isn't as bad as that in 1996 does not mean that it isn't a bubble. It is only from the perspective of those years of stable property prices that we are able to appreciate the current boom and the peak of 1996 for what they are - bubbles. So even though the current boom has not reached the levels of 1996 yet, it is close enough to warrant concern and should not be dismissed as being not near enough.
Mr Kit should also know that average income is easily influenced by rising income gaps, so the median income is a better gauge of the average person's earnings.
Also, compared to individual income, household income is a better gauge of home affordability because it is mostly the household that buys properties rather than the individual. Furthermore, since individual income is lower than household income, using it to calculate home affordability would paint a bleaker picture. So it is surprising that Mr Kit used individual income but ended up with more rosy conclusions. But whether average or median income is used, the conclusion is the same: In five of the last nine years, property prices outpaced income.
While Mr Kit is right to say that the average condo buyer will have higher than average income, this was true in 1996 too.
The fact that households have seen a significant increase in financial assets does not mean anything for new households or future generations who have nothing to fall back on and would have to bear the burden of any property price increases that creep in over the years.
Mr Kit has, in effect, justified the current boom as being within the tolerable limits of the previous bubble. This is like someone who says that even though he is only 20kg overweight, there is no cause for concern because he used to be 50kg overweight.
Ng Kok Lim
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