THE RESIDENTIAL PROPERTY PRICE INDEX : PROBLEMS AND POLICY ISSUES

Abstract

Government policies have played a major role in determining prices in the housing market. In recent years, the government's objective has been to stabilize housing price fluctuations so that the wealth of Singaporeans will not be unsettled by large swings in prices. In the light of this, an accurate methodology for measuring housing prices is essential for the purpose of sound policy making. Unfortunately, the present residential property price index (RPPI) computed by the Urban Redevelopment Authority is not adjusted for quality changes and hence, subjected to flaws which undermine its ability to accurately measure price changes. Given that policy makers track this index closely, the timing of policies becomes a crucial problem. Despite the importance of a constant quality housing price index, no existing urban economics literature on Singapore has offered any valuable insights to this issue. This thesis fulfills the urgent need for a critical analysis of the current housing price index. It explores the advantages and disadvantages of an alternative measurement using the constant quality price index. With a better measurement tool, inaccuracies pertaining to the timing of government policies will be minimized and hence better market performance will result. An evaluation of the methodology for computing the RPPI reveals its inability to accurately measure constant quality house price movements. To emphasize the need for an accurate index for policy purposes, a hypothetical graph illustrating the price trends of a constant and a non-constant quality index is set up. Analysis reveals that the timing of government policies which follows the RPPI trend may result in unexpected outcomes given that the two price trends are not synchronized. In addition, this thesis addresses the issue of intervention versus a 'hands off' approach to stabilizing price fluctuations in the housing market. By applying the arguments of the well known macroeconomics debate on discretionary policy versus rules in stabilizing income to the Singapore housing market, the pros and cons of the two alternative approaches are evaluated. We arrive at the conclusion that the 'activist' approach works better given the peculiarities of the Singapore context. The realistic hypothetical graph established here can be used for future research into areas which probe the relationship between constant quality and a non-constant quality price trends and the policy implications of using an expenditure index rather than a constant quality price index.