Mark to market and asset bubbles

There is an accounting principle called "mark to market". It is generally recognized that the most recent transaction represents the best indication of the current value of a specific asset and that it is better for the financial accounts to share the "fair values" of these assets.

This accounting principle works well when there is a true market with many transactions or where the prices are not driven by manipulation, speculation, gambling, greed and fear.  Unfortunately, the imperfect situation occurs more commonly than the true market situation.

Many property transactions do not reflect the true market as they are big ticket items, and are driven by manipulation and fear. These transacted prices are then used to create an impression of the market values. This is how bubbles are created.

Bubbles will create wealth for the speculators, but will eventually have to burst, giving a lot of economic pain for ordinary people who are caught with the over-priced assets that have to be paid over a lifetime. This does not create a sound economic or social foundation.

I hope that the "mark to market" rule can be modified to recognize its undesired role in creating bubbles in properties. I also hope that effective measures be taken to prevent future bubbles, such as the recent measures taken in Singapore and now being applied in China. It recognizes that property prices cannot be left to the market and have to be better controlled.

Tan Kin Lian