PJC 2012 H1 Prelim Exam (03 Sep 2012)

Candidate Name: __________________________ CT Group: _______ Index number: __________ ECONOMICS 8819/01 Higher 1 Paper 1 12 September 2012 3 hours Additional materials: Writing Paper READ THESE INSTRUCTIONS FIRST Write your class, index number and name on all the work you hand in. Write in dark blue or black pen on both sides of the paper. You may use a soft pencil for any diagrams, graphs or rough working. Do not use staples, paper clips, highlighters, glue or correction fluid. Section A Answer all questions. Section B Answer one question. At the end of the examination, fasten your answers for Questions 1, 2 and 3 or 4 separately. The number of marks is given in brackets [ ] at the end of each question or question part. This document consists of 8 printed pages [Turn over PIONEER JUNIOR COLLEGE JC 2 Preliminary Examination 2012

Pioneer Junior College 8819/2012 2 Section A Answer all questions in this section. Question 1 Housing Markets in China and Singapore Extract 1: The effects of falling house prices The problems in housing usually have important implications outside the construction industry. For example, a decline in housing wealth reduces households’ ability and willingness to spend. Lower sales of goods and services also reduce the incentives for firms to invest and hire. These consumer-related effects are on top of the direct consequences of low rates of home construction for job creation and income. In short, housing problems affect not just the homebuilding industry, but also the vitality of the economy as a whole. Source: Adapted from a speech by Chairman Ben S. Bernanke for 2012 National Association of Homebuilders International Builders' Show, Orlando, Florida, 10 Feb 2012 Extract 2: Singapore’s housing market Prices for property in Singapore have reached a record high. Singapore’s low crime rate, good schools and low taxes mean that expatriates and investors are increasingly attracted to the property market. Alvin Tan, director of residential sales for Savills' Singapore’s office said: “A firmer economic recovery, the continued robust GDP growth, and optimism surrounding the two new [casino] integrated resorts could be possible factors that continue to draw buyers into the market, lending support for the current prices.” Officials have promised to release more government land this year for real estate development. Peter Evans, sales director at property consultants Forbes Le Brock, said that Singapore’s high prices had also been driven by its small size, which restricts the amount of development possible. “Investing in Singapore, despite its high prices, is therefore a good opportunity, as there will be a more limited supply of land in the future.” Source: Adapted from The Telegraph, 16 Jul 2010 Extract 3: China's Property: Bubble, Bubble, Toil and Trouble In 2009, total investment accounted for more than 90% of China's overall growth; residential and commercial real estate investment comprised nearly a quarter of that. Given that it was a huge property bust in the US that caused the world to fall into recession in 2008, many analysts are now beginning to fear the worst. "China's property market," says independent Shanghai economist Andy Xie, "is a massive bubble." During his opening address to the National People's Congress, Premier Wen said that 2010 was going to be a year of unprecedented economic complexity. A real estate downturn, perhaps a severe one, will hit China sooner or later if the government is unable to manage this ballooning bubble. The problem is that if it arrives sooner, the world's fastest-growing economy doesn't have a whole lot to fall back on. Its export markets are still weak and its capacity to increase infrastructure spending again, after the massive increases of the past two years, is limited. With the rest of the world still trying to regain its economic footing, the authorities in Beijing are hoping they can shrink a bubble without bursting it entirely. Source: Adapted from Time Magazine, 22 Mar 2010

Pioneer Junior College 8819/2012 3 Extract 4: China's housing bubble It's not a surprise that China is worried about a potential housing bubble. House prices rose by 7.7% in November, despite the government prohibiting mortgages (housing loans) for third homes and announcing plans to introduce a property tax. In fact, sales volume jumped 14.5% from a year earlier. Even though China's central bank raised interest rates in October for the first time in three years to stem the flow of credit, the problem is that savers still face negative real interest rates (inflation is 5.1% while the deposit rate is 2.5%). Savers would rather buy assets since they are losing money by depositing their cash in banks. And, as China has capital controls that limit overseas investment and an underdeveloped financial sector, the assets of choice are the stock markets and real estate. Source: Adapted from The Guardian, 22 Dec 2010 Extract 5: Singapore Budget 2010: Expenditure in Public Housing Public housing has played a critical role in promoting rootedness and social cohesion among Singaporeans. It has given our people a tangible stake in the country and has facilitated upward social mobility. It has also given Singaporean households an asset that they can monetise to meet retirement needs. The Ministry of National Development will continue to provide affordable and quality public housing that meets the needs and aspirations of Singaporeans, and promote home ownership for the vast majority who can afford it. $534 million will be allocated to Housing Development Board as an operating grant for this purpose. Source: Singapore Budget 2010 Expenditure Overview, www.mof.gov.sg, 12 Mar 2010 Extract 6: Singapore Tightens Loan Limits to Cool Housing Market Singapore increased down payments for second mortgages and imposed a stamp duty on property held for less than three years to curb speculation after home prices surged 38 percent in the second quarter. Singapore joins China in introducing measures this year to cool their property markets amid concerns that asset bubbles are forming as home prices surge. The government is taking a preemptive approach to target repeat buyers and speculators who buy and sell over the short term, which is now defined as within three years. Previously, the government in February said it will levy a seller’s stamp duty - a form of tax - on all residential properties and land that are sold within one year from the date of purchase. The city-state then also lowered the loan-to-value limit to 80% from 90% for all housing loans provided by financial institutions regulated by the Monetary Authority of Singapore. These new measures were implemented as previous measures failed to keep prices in check and the government believes that Singapore’s property market would form a bubble if the current momentum continued. Source: Adapted from Bloomberg, 30 Aug 2010 [Turn over

Pioneer Junior College 8819/2012 4 Figure 1: House prices in Singapore and China Source: The Economist, accessed 30 Aug 2012 Questions (a) (i) Using Figure 1, compare the trend in house prices of Singapore and China from 2006 to 2010. [2] (ii) Extract 2 states that prices for property in Singapore have reached a record high. Using a diagram, account for the change in house prices in Singapore. [6] (b) “A real estate downturn, perhaps a severe one, will hit China sooner or later if t