The key focus for monetary policy is always price stability. In technical terms, it is called zero inflation, zero deflation.
Make sure that prices do not change, so that people can concentrate on increasing volume to satisfy rising population in an efficient manner meaning with less use of scarce resources at each increase in scale.
In stockbroking, I was shocked that the master market players were saying to clients that there was going to be inflation and it would be good for the market. Shock for proper economists; money for stockbrokers. Technically, this means negative interest rates: inflation rate higher than interest rates. The main goal of running quantitative easing is to create negative interest rates so that savers are punished and speculators borrowing cheap money think they are making money. In real estate, every idiot bought four properties: one for the wife and one each for the three children. They thought are set for life; no need to work and only collect rent.
The famous Japanese asset bubble burst in 1992 which meant it underwent deflation for more than two decades - that was how far assets had inflated and how long it took for asset prices to come down to be affordable for ordinary people. In the meantime, the economy underwent a recession which means more unemployment and lower wages until they created a category of workers called the working poor. In recent years, there has been some price increases due to increased government tax on consumption (which makes life harder for people with fixed incomes) and the attraction of tourists as well as foreign property ownership.
In Malaysia in January 2019, the consumer price index fell by 0.5% from December 2018 and 0.7% from a year ago when compared with January 2018. This was the first time in recent history and the media was calling this deflation. Sorry, no, this was just a decline in the CPI for the month.
Technically, deflation is a persistent decline in prices over a period of time, not a flash in the pan. So we do not know yet whether we are in a deflation period. We have just to see.
It is only logical that after several decades of inflation, ie persistent price increases culminating in the escalation in prices in recent years caused by outflow of cash which led to a sharp declining in the ringgit and now the refusal for ringgit interest rates to rise accordance to the rise in US interest rates, that we can only expect deflation to follow in the coming years and even decades. We may not like it but I think it is inevitable. Think of all the smart guys with there three extra properties for their children's future education now facing tenancy problems and loan repayments especially as interest rates on their loans start to climb.
It is one thing to not to wish for bad things to happen, but it is a different thing to ignore the inevitable. It is much better to be prepared. Well, I suppose many of us just love the cosy warm sand around our heads even if our arses are still sticking out.
Friday, March 8, 2019
Thursday, February 21, 2019
EPF & Housing Mortgages
It will be one of the greatest errors of social policy if the current proposal by housing developers for individuals to use their EPF to fund the mortgage repayments of their houses.
1. If demand for housing is poor and houses are not affordable to the ordinary person in the street, the logical thing to happen is for houses prices to fall and developers to lose money. We cannot afford to ask ordinary people to pay good money to overpriced properties so that profits from real estate projects can be sustained.
2. To release the bulk of the EPF to real estate will maintain property prices higher than warranted by the market, ie the incomes of the people. By not doing so, property prices will be lower and at a level that ordinary people can afford without having to raid the bulk of their EPF.
3. If EPF is used to fund housing mortgages, when there is a crash in the property market which it surely will, then ordinary people will be the victim of real estate speculation perpetuated by real estate developers.
4. I take the view that the real estate market, not only in Malaysia but around the major cities of the world - now happening in London, Brexit not withstanding - will take a major crash - put conservatively at at least 40% down. The situation is akin to the Japan asset bubble which has taken more than 30 years to recover.
5. I think the current EPF policy on housing should stay as it is. The EPF policy is probably one of the best conceptualised schemes in the world for the ordinary person. The only problem now is that wages have been too low and inflation due to the mismanagement of the economy since 1980 has a most devastating impact on the cost of living and the standard of living of the wage earning population.
6. Why is the government bolstering the profits of corporations and not taking a more social oriented stance on relative prices in Malaysia? Time to end politicking for profits for the elite.
1. If demand for housing is poor and houses are not affordable to the ordinary person in the street, the logical thing to happen is for houses prices to fall and developers to lose money. We cannot afford to ask ordinary people to pay good money to overpriced properties so that profits from real estate projects can be sustained.
2. To release the bulk of the EPF to real estate will maintain property prices higher than warranted by the market, ie the incomes of the people. By not doing so, property prices will be lower and at a level that ordinary people can afford without having to raid the bulk of their EPF.
3. If EPF is used to fund housing mortgages, when there is a crash in the property market which it surely will, then ordinary people will be the victim of real estate speculation perpetuated by real estate developers.
4. I take the view that the real estate market, not only in Malaysia but around the major cities of the world - now happening in London, Brexit not withstanding - will take a major crash - put conservatively at at least 40% down. The situation is akin to the Japan asset bubble which has taken more than 30 years to recover.
5. I think the current EPF policy on housing should stay as it is. The EPF policy is probably one of the best conceptualised schemes in the world for the ordinary person. The only problem now is that wages have been too low and inflation due to the mismanagement of the economy since 1980 has a most devastating impact on the cost of living and the standard of living of the wage earning population.
6. Why is the government bolstering the profits of corporations and not taking a more social oriented stance on relative prices in Malaysia? Time to end politicking for profits for the elite.
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