Sunday, 25 September 2016

Noh Omar Housing Solution- asymmetrical information, Lemons Problem and Moral Hazard

A theoretical economist would look at the recent Noh Omar’s housing solution from his chosen angle. For example, he may choose to look at it as a problem of asymmetrical information or George Akerlof’s lemons problem.Finally it will lead to the case  of adverse selection. 
The problem is this- the explanation seems to excuse the only interest of the developers- sell houses and make money and invites us to accept that the ensuing results are all caused by free market forces. Greedy businessmen cant help themselves- they are molded and shaped by market forces beyond their control. 
In actual fact, the consequences- burst of housing bubble, bail outs and mounting debts are all caused by deliberate policies and politics of the reigning government, represented by Noh Omar.

Noh Omar was only interested to help developers dispose of their stock of houses masking the intention behind the noble idea of supplying affordable houses.

Maybe the developers have more information about the real worth of their unsold houses just like the lemon of a car. Then it is a case of asymmetrical information.

But he was silent on solving the lemons problem- whether the houses intended to be disposed of are good houses. Noh Omar ought to have included the idea of having all the houses evaluated and assessed by independent professionals- architects, engineers, valuers.

Look at the integrity of the houses. The houses may have been in the market for a long time.  Unused houses, if we observe can deteriorate quickly. The value of the houses must be determined first. Don’t just sell lousy houses. People who are desperate may buy these houses. Unsolved and unsorted, we have the lemons problem.

Because, the buyers do not have full information as to the worth of the houses, they may buy at the mistaken average price of the houses. The buyers may thus still end up selling at above average, while the buyer, under the mistaken idea that average price is good, ended up with lemons- bad houses.

The entire spectrum of the property industry- brokers and developers will fleece the buyers. They will push the lousy and less worth houses to buyers just to clear up their inventory.

I don’t mean to appear patronising, but I think, this is a perfectly valid tool to rationalise and explain the proposal. And I saw a good writing from a good economist on this this.

But I want to look at the issue differently; I want to look at the issue as a proposal of the 1%, by the 1% for the 1%. Noh Omar is a member of the government which creates policies favourable for big businessmen. He has a position as urban wellbeing minister to propose that. The benefits will go primarily to members of the government- the civil servants enforcing the policy, probably Noh Omar himself and the housing developers.

There is also a moral hazard problem. The developers may be aware that of the borrowers cannot pay, they can count on Noh Omar or his successor to propose the government takes over all outstanding debts. The housing developer will still be saved.

With that kind of information, they can afford to take all the risks and give out loans to undeserving borrowers without worrying about the cost of taking risks.

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