Market fundamentals, public policy and private gain: House price dynamics in Singapore

Abstract

This paper presents new evidence on the impact of market fundamentals and public policy variables on house price behaviour in the Singapore private housing market. It develops a structural model of house price determination that focuses on government policies in two areas: deregulatory regime shifts in the public housing market and a land supply programme aimed at dampening house price inflation by releasing state land for private residential development. Using data from 1975 to 1995, the empirical strategy applies the Johansen cointegration approach for estimating a reduced form error correction model of long-run price determination and short-run dynamics. While demand and supply fundamentals are important determinants of long-run equilibrium house prices, short-run dynamics are significantly affected by policy changes in the public housing market and by the release of state land. Private house prices adjust slowly and shocks can have long-lasting disequilibrating effects. A key implication of the results is the importance of explicitly recognizing the linkages between a state-controlled public housing sector and a market-driven private housing market in the design and implementation of government policies with respect to land and housing.