Money for Nothing, and Asset Inflation for Free

We currently have been in the surreal COVID-19 era for over 18 months, with our economic activity and lives severely disrupted. There have been a few unexpected winners, but some important industries have come to a literal standstill, while most companies have registered a severe decline in productivity and profitability. There is no doubt that Singapore’s gross domestic product (GDP) has dropped by 5% in 2020 according to government statistics¹ (we avoided much worse thanks to the proper and timely use of reserves). 2021’s outcome is still much at play, but apart from the recent progress in our vaccination rates, we would be lucky to regain previous levels by the end of this year and achieve catch-up statistical anomalies. 

If you looked at real estate prices, you would think that this is a perfect world. Why? An estimated 200 HDB units will trade over the million-dollar benchmark in 2021. The HDB sale value has over a 10% increase since the crisis began, and the same can be said about landed properties. Condominium prices are only up by 5%, its relative lower increase possibly due to the many expats that are leaving – which is hardly a good sign. All this with a sustained number of real estate transactions, except during the ‘circuit breaker’ and ‘lockdown’ blips. How can that be? How can we simultaneously produce less and yet be wealthier? 

The short answer is that it is impossible. So, what happened? Just like the rest of the world, money supply in Singapore has increased, as the Central Bank took – understandably given the circumstances – an accommodative stance. In short, there is more quantitative easing (QE) as the Central Bank is printing money. M2 increased by over 15% from beginning 2020 to mid 2021². However, the money printed, just like during the previous QE, did not translate into consumer inflation – which will be flat for 2020 and 2021. It instead shifted to assets, where we observed what can best be described as ‘assets inflation’. 

This asset inflation is by no means a Singaporean phenomenon. In the US, the S&P 500 stock market index is up by more than 30% since the beginning of 2021³ and real estate prices are reaching a new high. What is unique about Singapore is that the asset gain is in the commonly owned HDB market, with 8PROP computing over a S$20,000,000,000 increase in market cap from January to July 2021 alone. That is a good thing as it means that the gains are spread among the population, rather than just concentrated among the most affluent as seen in the Western countries. It may just be as an artificial a gain, but it is – at least in Singapore – widely shared. 

Nevertheless, how can such a gain be sustained if the economy is not actually doing well? In reality, it cannot. How it will be corrected is still unknown. We could have a worldwide assets correction where the money artificially created disappears as magically as it was printed, leading to an asset price drop. It could, at some point in the future, also spill into consumer inflation where the new money now stored in assets is being used for consumption. The outcome for the individual real estate owner would vary significantly, but one way or another, nominal value and economic reality will have to reconcile. For there is no free lunch and real wealth, and economic prosperity cannot be printed, not even in these pandemic times.