TJC H1 ECONS CSQ1 Ans

TJC Prelims 2017 CSQ Answers (H1) (a) (i) From Figure 1, describe the trend in Singapore’s r esidential property prices from 2010 to 2016. [2] Singapore’s residential property prices generally increased from 2010 to 2016. [1] Prices increased steadily from 2010 to reach a peak in late 2013 and have been on a gradual decline since. [1] (ii) Suggest two possible reasons for the trend identified in (i) [2] Explain reason for general trend - general increase in prices [1]: “Very low interest rate environment” (Extract 3) in dicates a low cost of borrowing, encouraging borrowing to buy big ticket items such as houses, thus boosting demand for property. OR “Continued income growth in Singapore” (Extract 3) leads to higher purchasing power and therefore higher demand for property. Higher demand for property thus explains the genera l price increase from 2010 to 2016. Explain reason for refinement - gradual decline since late 2013 [1]: The gradual decline in prices since late 2013 can b e attributed to government’s measures to “cool demand and expand supply, so as t o moderate the increase in housing prices” (Extract 3). Dampened demand and in creased supply thus led to prices slowing down after 2013. Note: 1 mark for explaining general increase and 1 mark for explaining gradual decline since 2013. (b) (i) Explain why public housing is not a public good. [4 ] A public good is a good which is both non-excludabl e and non-rivalrous, resulting in total market failure and non-provision of the good. Non-excludable means it is impossible to prevent a person who has not paid from consuming the good. [1] Public housing not a public good as it is excludabl e. An HDB flat-owner has to first purchase the flat befor e being given the key to his apartment. HDB can also evict those who fail to mak e payments for their apartments.[1] Non-rivalrous means consumption of the good by one individual does not diminish the quantity and quality enjoyed by others. [1] Pub lic housing is not a public good as it is rivalrous. When one HDB flat has been sold to a family, there is one less HDB flat available for other families. It is imposs ible to house the entire community in an HDB flat without creating intolerable overcrowding. [1] Hence, public housing is not a public good. (ii) Explain why the government provides subsidies for public housing in Singapore. [4 ]

The consumption of public housing generates positiv e externalities as home- ownership “promotes rootedness and a sense of belon ging among Singaporeans, thus contributing to the overall economic, social a nd political stability of Singapore”, benefitting other Singaporeans. [1] [1m for diagram] Figure 1 shows the market for public housing. Margi nal Social Benefit (MSB), which is the benefit derived by society, exceeds Ma rginal Private Benefit (MPB) by Marginal External Benefit (MEB), which represents the positive spillover effects on other people, ie political and social stability for everyone. Consumers only take into account their own MPB, ie the enjoyment of own ing a house, and fails to take into account the benefit to others. Assuming no ext ernal costs, the private outcome Qp occurs where MPB=MPC and is lower than t he socially optimal outcome of Qs which occurs where MSB=MSC, leading t o underconsumption. This results in a deadweight loss of the shaded tri angle area, and an allocatively inefficient outcome. [1] Therefore, there is market failure and this may jus tify government intervention in the form of subsidies. Giving producers a per unit subsidy that is equal to the MEB lowers their production cost and shifts the MPC dow n to MPC'. The new private equilibrium output of Qp’ where MPC' = MPB now coin cides with the social equilibrium output of Qs where MSC = MSB. Allocati ve efficiency is achieved as output is raised to the socially optimal level. [1] Note: Alternative reasons would be to improve equit y in the distribution of public housing or to address underconsumption of merit goo ds - on top of the problem positive externalities, there is also an element of imperfect information as individuals are not fully aware of the benefits tha t public housing-ownership might bring to themselves, such as being financially secure as an asset-owner. (c) Explain the possible impact of a bursting of the re al estate bubble in China on Singapore’s balance of payments. [4] A bursting of the real estate bubble in China would mean a sharp drop in the DD = MPB Costs, Benefits Quantity of Housing SS = MPC = MSC Qp Qs MSB Figure 1: Positive Externalities in the Market For Housing MEB 0 MPC’

property prices, leading to a fall in the level of wealth. This causes individuals and firms to feel poorer and hence cut back on their co nsumption and investment respectively. [1] As consumers in China cut back on their spending on both domestically and imported goods and services, their demand for Singapore’s exports is likely to fall, because China is a significant export market for Si ngapore. Therefore, Singapore’s export revenue is likely to fall, causi ng the trade balance and hence current account to deteriorate. [1] “Excessive bubble expansion in the property sector” are associated with higher debt levels, and “analysts are sounding the alarm a bout growing Chinese debt loads”. A subsequent sharp correction of property p rices may trigger a banking crisis as banks become increasingly saddled with ba d loans that were used to finance the purchases of these assets. Banks may find difficulty in lending to other business, which hampers production and investment. There may also be bank failures, lowering business and consumer confidence. [1] Therefore, China’s investments abroad, including to Singapore, is likely to be greatly reduced due to troubles at home. With long- term capital inflows sharply reduced, Singapore’s capital account could deteriorate too. [1] With both current account and capital account deter iorating, a bursting of China’s property bubble is likely to cause Singapore’s Balance of Payments to worsen. Note: Answers which argue that capital account coul d improve if “hot money” flows into Singapore due to its safe-haven reputation are acceptable. (d) Using an economic framework, analyse how the factor s mentioned in Extract 4 affect the market for housing in Singapore. [6] The market for housing in Singapore is affected by various demand and supply factors. The demand factors include “very low inter est rate environment and continued income growth in Singapore ” as well as macro-prudential cooling measures by the government aimed at preventing the formation of a property bubble. On the supply side, “a large supply of publ ic and private housing – up to 200,000 units in total – will be completed in the c oming years”. The overall impact on equilibrium price and quantity depends on the ex tent of the shift in demand compared to the shift in supply, as well as the pri ce-elasticity of demand (PED) and price-elasticity of supply (PES) for housing. Examining demand factors The demand factors mentioned in the extracts work i n opposing ways. Low interest rates indicates low cost of borrowing for home-buyers. Households are more willing to borrow to consume big-ticket items such as housing and hence, demand for housing increases. [1] This is coupled with continued income growth, which boosts households’ purchasing power and hence demand for housing. [1] However, the macro-prudential cooling measures on “ property ownership for investments as well as on foreign buyers” reduces s peculative demand for property, raising expectations of a price fall, causing demand to fall. [1]

Whether overall demand increases or falls depends o n which factor has a stronger impact. It is