Applying the brakes – made for the short term – can be dangerous

Does the anti-lock braking system (ABS) really make driving safer? I thought so until I came across an interesting finding recently.

In his book What the Dog Saw, Malcolm Gladwell shared the result of a famous experiment conducted years ago in Germany. The experiment equipped part of a fleet of taxis in Munich with ABS. The rest of the fleet was left alone, and the two groups of drivers were placed under secret observation for three years.

Most people would expect that with the installation of the ABS in a vehicle, driving would be safer. The outcome of the experiment proved otherwise. For some drivers, ABS did not reduce their accident rates. It turned them into inferior drivers instead. They drove faster, made sharper turns, showed poorer discipline and braked harder.

The author explained this phenomenon with the theory of Risk Homeostasis which states that under certain circumstances, changes that appear to make a system or an organisation safer in fact do not. Human beings have the fundamental tendency to compensate lower risks in one area by taking greater risks in another. In that particular experiment, the drivers used the additional safety elements to drive faster and more recklessly.

Contradictions

To a large extent, this theory can be applied to many aspects of our life. While one can take the additional precautionary methods, the fundamental problems should also be addressed to achieve the desired results.

Recently there has been a proposal to raise the floor price of properties for foreigners from RM500,000 to RM1mil to curb or control the prices of houses from increasing too fast. This proposal is on top of the other “cooling off” measures such as the 70% housing loan policy for purchase of a third property, the increase of real property gains tax from 5% to 10% imposed on properties sold within two years of the sale and purchase agreement, and the new ruling on housing loan limits based on net income rather than gross.

There is no doubt that the introduced “cooling off” measures have reduced the buying spree of properties. However, the intended objective of these measures to control the price of properties has yet to be seen. Introducing measures without critically identifying the root cause of the increasing property prices may instead create situations that would not be beneficial to the industry as explained by the theory of Risk Homeostasis.

So, what determines rising prices?

We need to find the root cause of the issue in order to identify a long term solution. The basis for rising property prices now is largely due to the direct and indirect impacts of quantitative easing programmes i.e. the increase of money supply, carried out by governments around the world since the start of the global financial crisis. Value slump

When there is too much money chasing too few goods, prices will increase but not necessarily value. In reality, we are facing a situation where there is too much money in the system, causing a decrease in the real value of money and pushing up prices of goods and services including construction materials.

For example, in early to mid 2000, a condominium in Mont'Kiara which was sold around RM500,000 would now cost us about RM800,000, equal to a 60% increase. But measured in a different “currency”, that condominium would have cost us 8kg to 10kg of gold in early to mid 2000 and today, only worth about 5kg of gold. This is a sharp decline of 38% to 50% and is an illustration of how prices are going up due to the drop of currency value because of worldwide inflation and pump-priming policies.

However, if the property prices are not allowed to rise, it is not possible for developers to build below costs when the construction costs are constantly rising. This will cause a shortage of supply which will further push up prices in five to 10 years time.

Balancing act

Let us examine specifically the future supply and demand of properties in the Klang Valley.

On the demand side, the government aims to grow the population in Greater KL from the existing six million to 10 million by year 2020. Hence, an additional one million housing units (assuming four family members per home) is needed in the next eight years. It would mean that property developers need to supply 125,000 new housing units in Greater KL every year to meet the expected increase in population.

According to the statistics published by National Property Information Centre, the primary market only managed to launch 49,290 new housing units nationwide in 2011, with only 12,705 housing units in KL and Selangor. This indicates there is a demand exceeding supply scenario that can result in future severe consequences.

If the government continues to introduce more “cooling off” measures to curb or control house prices and to stifle temporarily the buying appetite of home buyers, it will slow down the rate of production of new houses by developers. The unintended consequences of stifling supply will create a massive housing bubble five to ten years later in Greater KL because of the extreme demand and supply imbalance.

The ABS experiment mentioned at the beginning taught us a valuable lesson. Understanding any long-term-unintended consequence is paramount before taking any actions. Putting measures in place that do not resolve the root cause may instead backfire on us. With that in mind, perhaps we shouldn't apply the brakes on housing need and instead look at the bigger picture to find longer-term solutions to our housing industry.

FIABCI Asia Pacific chairman, Datuk Alan Tong has over 50 years of experience in property development. He was FIABCI World president 2005/06 and was named FIABCI Property Man of the Year 2010. He is also the group chairman of Bukit Kiara Properties.

By The Star