Friday, April 29, 2011

Singapore Property Index and Bubbles

Peter C.B. Phillips and and Jun Yu from SMU (Singapore Management University) has developed a statistical diagnostic tool to signal asset bubble in a given data. They have recently published an article in The Straits Times (Warning For The Future Asset Bubbles) in which they have applied this tool to Singapore property index to look for a clue of asset bubble in Singapore property.

There is a chart in the news (follow the article link you will see the chart named "Singapore Real Estate Index and Bubbles") signalling a recent asset bubble developed since 2009:

In the chart, the blue line shows the monthly Singapore Residential Price Index. The green line which tracks market exuberance is derived from the blue line by using a sophisticated statistical tool. The red line is the threshold. When the green line crosses above the red line, the diagnostic test signals the presence of
market exuberance. As shown in the chart, there was real estate, exuberance for most of 2007 and 2Q08 (the first shaded area). Interestingly; some evidence of another bubble emerged in late 2009 (the second shaded area) and was still ongoing in January this year. The latest reports indicate some market softening following the new stamp duty charges and loan to valuation limitations introduced on Jan 14.
We expect the empirical effects of these changes to become evident in our test indicator when the data is available."

The writers say that stability in world financial system is a valuable public international good. But it seems like until bright finance guys accept the losses they have made due to their persistent bad judgement, we will ride from one asset bubble to another and lack the stability.

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