ECONOMICS IN SINGAPORE

Demand and Supply

Housing Prices in Singapore
Housing prices are determined by demand and supply. The demand for housing
is the quantity of houses consumers are willing and able to buy at differing prices
per period of time, ceteris paribus. The supply of housing is the quantity of
houses that suppliers are willing and able to sell at differing prices per period of
time, ceteris paribus. The price of housing is determined by the intersection of
the demand and supply curves.
The prices for both public and private housing have been rising in recent years.
While supply has been expanding, it has been insufficient to meet the extent of
rising demand, causing prices to rise.
Increase in Demand > Increase in Supply Increase in Housing Prices.

Factors Affecting Demand

1. Rising Income
a. Housing is a normal good and hence there is positive income
elasticity of demand, which is a positive relationship between
income and demand. There is an increase in income due to
strong economic growth in recent years upon recovery from
the economic contraction in 2009. Singaporeans are more
willing and able to take up housing loans and hence there is a
higher demand for housing. This causes the demand curve to
shift rightwards, thus causing a rise in housing prices.
2. Mortgage rate and cost of borrowing.
a. Currently, Singapore citizen households paying by instalments
are charged the HDB concessionary interest rate of 2.6% per
annum.
b. The trend of low interest rates has lowered the cost of
borrowing and made housing credits more affordable. This has
been evident from the good take-up rate of private
condominium projects. Weak global economic conditions and a
stable inflow of funds into Singapore due to its low interest
rates have also led to easy availability of credit for home
buyers. As the purchase of homes require a long-term
financial commitment, a fall in mortgage interest lowers the
financial burden of home-loan payers. This has resulted in the
higher demand for housing. Hence, the demand curve shifts
rightwards and causes a rise in housing prices.
3. Government policies
a. The government subsidises public housing0loan owners
especially first-time owners. This allows public housing to
become relatively more affordable, and leads to a higher
demand for housing, causing a rise in housing prices.
i. Singapore Housing Grant
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1. Additional Housing Grant by the CPF Board to ease

the financial burden of low-income families buying
their first flat.
2. Special Housing Grant by the CPF Board, given
over and above the regular housing and the
Additional Housing Grant, to help low-income
families purchase their first flat.
ii. Ease for first-time applicants to obtain public housing
1. These applicants are given better chances of
being shortlisted.
2. Applicants for the Married Child Priority Scheme
for first-time applicants are given better chances
of being shortlisted.
b. Government regulations on luxury or high-end housing have
been more relaxed recently. For example, there are no
restrictions on foreigners buying landed property in Sentosa
Cove. In the past, foreigners and permanent residents were
not allowed to buy Good Class Bungalows. However, this has
changed and approval is granted within a few days. This has
resulted in an increase in the number of wealthy buyers. As
the sale of such landed property is not restricted only to
locals, demand increases with the inclusion of foreigner
investors and expatriates.
4. Rising concentration of foreigners in Singapore
a. The rising number of permanent residents has contributed to
a rise in demand for both public and private housing.
b. The growing trend of Asian foreigners preferring to buy
Singapore private property, especially for the high-end private
housing resulted in a higher demand for housing, eventually
causing a rise in housing prices.
i. Speculations
1. Buyers consider buying property as a good
investment prospects. The resale price of property
is likely to be high and rental is also high.
Investors expect professionals and expatriates
coming to Singapore to work and this may be so
with the opening of the integrated resorts. People
who work in the integrated resorts are more
prepared to pay high rentals and some may even
be willing to pay high prices for high-end property.
The Sentosa Cove property has proved to be a
particularly attractive for overseas property
investors, who buy at pre-construction prices and
then find strong demand for the resale or rental of
their properties when they are completed.
ii. Examples

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1. Asian foreigners, especially wealthy Indonesians,

China Nationals and Malaysians, accounted for
18% of new homes sold (third quarter of 2011).
2. The proportion of China foreign buyers leapt from
7% in 2007 to 19% in 2011.
Factors Affected Supply
1. Rising consruction costs
a. Higher building costs such as labour costs and raw materials,
leading to narrower profit margins, have slowed down and
reduced the extent of supply expansion.
b. Due to the high cost of production, land that is used to build
landed home is costly, as supply is limited. Besides, most of
the land available is reclaimed land and developers have to
pay a high price for this land to build the homes. Those who
are not prepared to take the risk will not take up the project to
build these homes
i. Example: The governments recent moves to tighten the
supply of foreign labour by reducing Dependency Ratio
Ceilings, which specify the maximum proportion of
foreign workers that companies in various industries can
hire, to curb foreign worker growth from 1 July 2012 is
expected to result in greater competition for a limited
pool of Singaporean manual labourers, resulting in the
rise in construction cost of production.
2. Government policies
a. Land-scarce Singapore has to balance the various needs of the
use of land. The government has been releasing land for both
public and private residential development but this has to be
at managed rates due to following reasons:
i. Land is needed for other purpose e.g. commercial
buildings or recreational facilities.
ii. It should not cause an over-supply problem
1. The HDB ramping up its flat supply by increasing
the BTO supply for 2011 by about 15% to 25,000
units.
b. However, this increase in supply is unlikely to match the larger
increase in demand, given that most public houses launches
have been facing an over-subscription issue, resulting in
continued presence of upward pressure on housing prices.
3. The nature of the construction industry
a. The supply of housing ends to be price-inelastic, as it takes
time for housing supply to increase, resulting in a significant
extent of price increases arising from a rise in demand.
Conclusion

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1. As mentioned earlier, the price of houses is increasing despite the

governments attempts to increase the supply of houses. This
suggests that the increase in demand is likely to outweigh the
increase in supply, resulting in the rising prices of housing.
2. Demand factors, especially government policies such as the
subsidies made available, tend to be more influential in affecting the
housing prices in Singapore, since it accounts for about 82% of
Singaporeans.

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Elasticity Values
Elasticity used by Firms in Singapore
Luxury Houses
1. The usefulness of the price elasticity of demand depends on the
number and closeness of substitutes available, as this can influence
pricing policies and business development. The changes in pricing
policies have different consequences on the total revenue,
depending on the elasticity of demand curve for landed homes.
2. The demand for landed homes in Sentosa Cove is price-elastic
because of the availability of substitutes, such as homes on the
mainland. The demand on the whole appears to be price-elastic.
However, demand can be made more price-inelastic by making the
homes in Sentosa Cove unique and exclusive, with interesting
environment and architecture as well as many facilities such as a
private yacht berth for luxurious living. Also, successful marketing
techniques and advertising can cause the demand to be more priceinelastic. In cases where demand is price-inelastic, prices should be
raised to earn higher revenues.
3. Demand is price-inelastic because the exclusivity of the landed
homes in Sentosa has few close substitutes in Asia. The hefty price
only makes up a small portion of the income of the rich and famous
clientele. There are also very few close substitutes.
4. The usefulness of income elasticity of demand helps the developers
to target his clientele. This is because the demand for landed
property on Sentosa Cove is income elastic,as such property is
considered a luxurious good. Income elasticity of demand is high for
the higher income group and very high for the middle-income group,
as it is a super luxury good to this group. As peoples income
increases, the demand for landed homes on Sentosa cove will
increase more than proportionately. Informative advertising can also
be engaged in countries where the econonomies are booming so as
to attract people in countries where incomes are rising rapidly to
buy landed property in Sentosa.
5. The usefulness of the XED is in telling the developer how close a
substitute a condominium on Sentosa is to landed homes or how
close a substitute a home on the mainland is to the landed home on
Sentosa Cove. This will help the developer determine the PED of this
landed homes and hence his pricing strategy. If the cross elasticity
of demand is a high positive value, then the developer may want to
make use of marketing and advertising to differentiate the landed
homes on Sentosa from the rest of the homes. This is to reduce the
degree of substitutability making cross elasticity of demand inelastic
with respect to competitive homes.
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6. Cross elasticity of demand is negative in value. The huge shopping

centre, Vivocity is also accessible by sky train. Attractions include
swimming facilities, running tracks, fine-dining restaurants and food
centres. This will induce wealthy people to buy landed homes in
Sentosa Cove.
7. Although demand elasticity concepts are relevant when
brainstorming on how to go about promoting landed homes, it only
helps the developer to identify the best way to maximise revenue.
There is a need to minimise the cost as well. For example, excessive
advertising can lead to wastage of resources and may result in an
increase in price. Also, the success of competitive strategies, which
make use of demand elasticity concepts, depends on the
assumption that the homes on Sentosa Cove are non-rivalrous.
Otherwise, the ceteris paribus assumption of the concepts will not
be met and the strategies will not work successfully.
Shopping Malls
1. The possible strategies that a new shopping mall can take to ensure
its success in the market can be done with the use of price elasticity
of demand, income elasticity of demand and cross elasticity of
demand as possible strategies.
Marketing Strategies
1. Since shopping malls have a negative cross elasticity of demand
value, it is important to use certain marketing strategies to reduce
the degree of substitutability of shopping malls Massive and regular
advertising are means to retain their presence, especially during
saes period, festive occasions and weekends, to draw the crowds.
Shopping malls can also sue sales strategies like loyalty cards,
discounts, free-gift redemption, parking concessions and lucky
draws. The provision of free entertainment or facilities, such as
nursing rooms and better toilets, may help to increase demand if
customers preferences are changed. However, shopping malls have
to increase demand if customers preferences are changed.
However, shopping malls have to increase demand if customers
preferences are changed. However, shopping malls have to consider
the increased costs for the mall as well. Hence, price may be raised
to offset the higher costs of advertising. All these also serve to
differentiate the mall from others so that customers see the mall as
being more exclusive or more prestigious, or can provide them with
a better shopping experience and meeting all their shopping needs.
In effect, most of these malls have similar chains or types of shops
selling similar goods and services.
Image of a Mall

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1. Sometimes, it is the image that the mall deliberately creates in the

eyes of the shoppers. For example, Orchard Road malls and Raffles
City are considered prestigious shopping centres due to their
location and their wider variety of tenant mix than Compass Point or
Causeway Point. Junction 8 is considered to be more youth-oriented
although it is jointly managed together with Plaza Singapura under
the developer CapitaLand. JCube is also considered to be catering
more to a youthful yet sophisticated crowd, as it is competing with
popular shopping malls like 313@Somerset. Given the location of
Orchard Road, which is prime land and where there is assured huge
tourist and shopper traffic, it is possible for a new mall like ION
Orchard to charge higher rentals due to the relatively price-inelastic
supply and demand conditions. However, it cannot do so
indiscriminately without keeping track of what its rivals are
charging, especially when top anchor tenants like Cold Storage, CK
Tang and Mango are also moving to locations like JCube. If ION
Orchard markets itself as a more upscale shopping place, then it will
be able to cater to the higher-income crowd or those who are more
willing to splurge, who are more likely afford the higher-priced items
given their relatively price-inelastic and income-inelastic demand.
2. A new mall can try to increase its presence by tying up with creit
card companies, banks, hotels or tour agencies to reach out to more
markets to tap on complementary demand. For example, some
malls give discounts to shoppers who use a particular banks credit
card.
3. The mall should also focus on trying to keep costs as low as possible
as in minimising wastage through energy-saving designs or usage.
Impact on Singapores balance of payment
1. Singapore, being a small and open economy, is very vulnerable to
external shocks. A worldwide recession can have negative effects on
Singapores balance of payment.
2. A countrys balance of payment consists of the current account,
capital account and official financing account. IT is important for the
government to be able to determine the impact of events on these
accounts because it affects the governments macroeconomic goal
of balance-of-payment equilibrium. The current account of the
balance of payment includes exports and imports of goods and
services and net unilateral transfers. The services account records
receipts and payments arising out of trade in services. This records
import and export of services categorised under transportation,
travel, insurance and finance.
3. During a recession, there is a global fall in incomes and this affects
peoples purchasing power. The decrease in income leads to a fall in
demand for most goods and services, especially normal goods,
which are income-elastic. Singapores balance of trade is hence
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affected. Generally, the demand for oil products is income-inelastic,

as these are used as raw materials and are a necessity in the
manufacturing process. A fall in income thus leads to a less-thanproportionate fall in demand. The demand for high-end consumer
products like Chanel, Shiseido and even sports cars are all products
that are income-elastic, as they are deemed to be luxury products.
4. Hence, a fall in income leads to a more-than-proportionate fall in
demand. The overall effect is a fall in the trade account surplus.
However, a fall in demand for oil products will be lesser than the fall
in demand for luxury products.
5. Singapores export of services is also affected as the recession may
affect peoples desire to travel. The decrease in income can cause a
more-than-proportionate decrease in demand for air travel since
travelling is considered a luxury good. For financial services, which
can be exported, declining worldwide incomes may also mean less
income for personal investment .The overall effect is a deficit or a
fall in the service account surplus.
Limitation of using elasticity values
1. While the elasticity values are useful in determining if there will be a
general fall in the countrys export and imports, it is not useful in
determining the impact in the capital and financial account. Foreign
direct investment is affected by other factors such as interest rate
and political stability even though a recession may adversely affect
the investors decisions. Portfolio investment is also affected by
interest rate. Hence, the Singapore government may use YED to
analyse the negative impact on the current account, which would
subsequently affect the balance-of-payment equilibrium.
2. A recession does not only cause a fall in income generally but it may
also cause a fall or a rise in prices of most goods and services,
depending on the main cause of the recession. If the demand for a
particular product is price-elastic, the changes in price level will
cause a more-than-proportional change in the quantity demanded.
Examples include electronic goods with many close substitutes. If
the demand for a particular product is price-inelastic, the changes in
price level can cause a less-than-proportionate change in the
quantity demanded, for example, raw materials with no close
substitutes. The changes in quantity demanded can affect the trade
and service accounts in the current account. However, PED is not
very useful to the Singapore government as changes in price level of
most good and services may not be consistent.
Conclusion
1. The immediate and direct impact of a recession is a fall in the
income level. Thus YEDD is most useful to the Singapore

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government in analysing the impact on the balance of payment.

However, other elasticity values will not be as useful.

Macroeconomic Objectives
Elasticity values can help the government not only in times of crisis but
also at other times. It can also help the government in formulating
policies, as elasticity values can help to gauge if a particular policy is
relevant or suitable for the Singapore economy.
Price elasticity of demand of exports and imports
1. In determining if depreciation is an appropriate policy for the
Singapore economy, the PED for imports and exports are used.
2. When the price of exports falls in foreign currencies, the quantity
demanded for exports increases more than proportionately, since
PED>1 for Singapore. This is because we have competing trading
partners and a lower export prices means that Singapores products
are more price-competitive. Hence, export revenue increases. When
the price of imports increases in terms of domestic currency ,the
quantity demanded for imports falls less than proportionately since
PEDm<1. This is because Singapore imports oil, which is hard to
substitute with another good as it is the raw material used in many
manufacturing productions. Hence, the import expenditure
increases.
3. Since the Marshall Lerner Condition is fulfilled, a depreciation of the
Singapore currency leads to an overall improvement in the balance
of trade.
4. Since net exports increase, aggregate demand increases and
national income increases more than proportionately via the
multiplier, leading to economic growth and a fall in unemployment
levels.
5. Hence, the Singapore government may make use of this knowledge
to depreciate the Singapore dollar whenever it wants to improve the
balance of trade and assuming ceteris paribus, improving the
balance of payment, economic growth and unemployment situation.
6. However, the government also needs to note that in the short run,
PEDx and PEDm may be lower than 1 because time is needed for
tastes and preferences to change in order to adapt to cheaper
products. Information needs time to disseminate and for consumers
to react, and existing trading contacts are still binding and need
time to expire. Thus, a depreciation of the SGD may lead to a
temporary worsening of the deficit in the balance of trade.
7. The Singapore government also needs to be aware that wit the
continuous depreciation of the SGD, the cost of production will
increase, as prices of imported raw materials increase. Given that
majority of the raw material used in local production are imported,
Singapores exports will eventually lose its price competiveness.
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Hence, export revenue may fall eventually and, assuming ceteris

paribus, the balance of trade will worsen, leading to a worsening of
the balance of payment, economic growth and unemployment
situation.
8. Moreover, a depreciation of the SGD may lead to internal problems
such as demand-pull inflation and imported inflation. Hence, the
Singapore government has to weigh the possible trade-offs before it
comes up with policies to counter the trade-offs.
Income Elasticity of Demand for Exports and Imports
1. As Singapores exports are normal goods (YED>0), whenever
worldwide income increase, the demand of exports also increases.
Hence export revenue increases. The extent to which export
revenue increase depends on whether Singapores exports are
necessities or luxury goods. As Singapore exports electronic parts,
tourism services and pharmaceutical products, which are not
needed for basic survival, its exports may be more luxurious nature,
leading to a more-than-proportionate increase in demand given a
change in income.
2. As Singapores imports are normal goods (YED>0), whenever
Singapores income increases, the demand of imports also
increases. Hence import expenditure increases. Singapore is reliant
on the import of both finished goods and raw materials. Hence
Singapores imports may be more of necessity in nature, leading to
a less-than-proportionate increase in demand given a change in
income.
3. If export revenue increases more than import expenditure, the
balance of trade will improve, and assuming ceteris paribus, balance
of payment will improve.
4. Hence for a country that is heavily dependent on exports for growth,
it is important for the Singapore government to monitor the YED for
exports and the national income level of their trading countries. In
times of worldwide increase in income, the government may want to
encourage the production of better quality products to suit the
increase in standard of living of their trading countries. Information
of YED for exports is thus useful to a government in planning and
targeting possible up-rising industries. In times of worldwide
recession, the government must be prepared to implement
appropriate policies to counter the anticipated fall in export
revenue.

Microeconomic Objectives
Price elasticity of demand for goods that generate negative externalities
1. Taxes placed on demerit goods such as cigarettes and alcohol can
force consumers to internalise the external costs imposed on third
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parties and help to reduce the consumption of such goods to the

socially optimum level.
2. As PED<1 for such goods, the increase in price leads to a less-thanproportionate fall in quantity demanded. Hence the tax must be
sufficiently high to reduce consumption to the socially optimum
level. The consequences of high taxes are discontentment and more
inequity issues, especially for the lower-income workers.
Conclusion
While the elasticity values may help most of the time, it may not help if
ceteris paribus condition is not fulfilled. In reality, it is difficult to analyse
the economic situation of the reaction to price changes. Even if were
possible, there are many other factors that affect how consumers react to
such changes. Furthermore, it is difficult to get accurate EPD and YED
values. There may also be unexpected changes in the economy that lead
to changes in demand and supply that cannot be predicted. Despite all
these limitations, elasticity values can still be useful to the government in
formulating policies but it must be complemented with other types of
indicators.

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