Chitchat Why Jamus Lim join Workers' Party ?

[jw5]

Jamus Lim​

7h ·
I’m away this week and part of next, accompanying residents from #Anchorvale and #Buangkok for a tour of Hokkaido. But I seized the opportunity to fly in a couple of days earlier, as I managed to wrangle a seminar at the Institute of Monetary and Economic Studies at the Bank of Japan (the country’s central bank), kindly arranged by an old PhD mate, Ryota.
I won’t bore you with details about the paper I presented—for what it’s worth, it was on the implications of dollar liquidity on economic growth in third countries—but since I went on a morning run around the Imperial Palace, I thought it would be helpful to share some thoughts about the place.
The park is located in the heart of Tokyo, close to the financial district. The residence was built around Edo Castle (Edo is the historical name of Tokyo), and isn’t very large at all; the entire area amounts to just a little more than 3.4 square kilometers. From an economic perspective, however, this land holds a fascinating story.
See, at the height of the great Japanese asset price bubble in 1991, the land on which the palace sat was valued at an insane price: as much as all the real estate in the state of California. While the royal grounds were, of course, never for sale, comparable prices around the vicinity (in the Ginza district) went for amounts as high as $1.5 million USD per square meter. Doing the calculations, the palace would have been worth $5.1 trillion, just a little less than the entirety of Japanese GDP at the time, and not far from estimates of California’s on-market real estate (appropriately rebased; you can see one version of the computations here: https://amaral.northwestern.edu/.../how-much-was-japanese...).
All this is, for me, a reminder that land valuations can go out of whack, and when they do, they may do so badly. As an economist, I’m inclined to believe in the overall efficiency of markets, in general. But economists also know that certain ones—especially in labor, health, the environment, housing, and finance—are more prone to failure. Real estate markets, which combines elements of both finance and housing, are especially vulnerable to bubbles. We saw it in Japan in the late 80s and early 90s, Spain/Ireland/the Western U.S. in the mid-noughties, and China in the 2010s (and beyond).
It’s hazardous to try to bet on (or even call) a bubble; it’s one of those things where hindsight is often far more prescient. Still, I fear that our own approach to inferring land valuations—typically from a residual of transaction prices for comparables, after netting out construction costs and developer profit (with some site-specific adjustments)—implicitly assumes that market-led real estate prices reflect true value.
Regardless of whether we’re talking about private or public housing, this methodology relies on a belief that transacted prices aren’t subject to some sort of self-reinforcing bubble dynamics: when I am willing to pay a price higher than fundamentals would justify, so long as I can offload it to someone else at an even more inflated price. If, however, a bubble component gets embedded in prices, the self-referential nature of this approach runs a greater risk that all this comes crashing down, eroding a major source of Singaporeans’ savings and wealth.
Personally, I’d prefer if we adopt a land pricing strategy that decides that land for public housing shouldn’t be inferred from market prices, but from a predetermined base price, closely tied to either median incomes or per capita GDP. HDB effectively targets this anyway, and makes up the difference with grants and subsidies to keep public housing affordable. But this is circular, since losses that HDB incurs are made up by draws on the budget, where surpluses go into reserves anyway. Easier, in my view, not to introduce this artificial “protect-the-reserves” constraint, with the side benefit that we keep land pricing, especially for public housing, much closer to true fundamentals.
Postscript: for those who might be interested in how deviations from covered interest parity can serve as a proxy for dollar liquidity constraints—and what what this means for macroeconomic variables like GDP growth, inflation, and the exchange rate—you may find a draft of the working paper here (it’s currently being revised for resubmission to an academic journal): http://jamus.name/research/if13.pdf