Are private homes getting out of reach?

The Straits Times. Sep 19, 2009.
By Fiona Chan

When a Straits Times report last month cited an economist and a property consultant stating separately that the affordability of private homes has increased since the property boom in 1996, some readers were up in arms.

The duo used different formulas but their conclusions were the same: Singaporeans’ wealth had grown more than private home prices in the last decade, making homes more ‘affordable’ – at least in the ways they each defined the term.

Prices versus incomes

Data shows that from 1990 to last year, private home prices tripled, while household incomes only doubled marginally. This implies that private homes are significantly less affordable now than 20 years ago, since the rise in home prices has outstripped income growth by 50 per cent.

However, the median, or mid point, annual household income rose 34 per cent in the last 10 years, while median private home prices were up 36 per cent. 

Using average values, however, shows a greater disparity. Between 1998 and last year, average annual household income went up 47 per cent, but average home prices – dragged up by huge gains in luxury home values – shot up 72 per cent.

But given that probably only the top 20 per cent of income earners in Singapore opt for private housing, the formula is adjusted to include only those higher earners in the market for private housing would increase affordability, say economists.

Another widely used affordability measure divides the price of a private home by a potential buyer’s annual income. The conclusion is the same. It shows home prices last year were about 16.3 times last year’s annual income, not much different from the figure in 1998, when they were 16.1 times that of income.

However, looking at the figures of the last decade, it appears that private homes were generally more affordable last year than at almost any other time in the period.

Over the last 10 years, home prices were, on average, 18 times annual income – more costly than last year’s 16.3 times. Prices were 19.5 times income in 1999, rose to 22 times in 2000, and were down to 20.5 times in 2007.

Then again, size also matters. Private homes seem as affordable last year as they were in 1998, but using per sq ft prices rather than overall values in the formula gives a different picture.

Last year, the median annual income could buy 77 sq ft at the median price per sq ft. But in 1998, the median annual income would have bought 91 sq ft.

Looking beyond the obvious 

While prices and incomes are the most obvious factors in calculating affordability, an individual’s ability to pay for a home is complicated by interest rates, spending patterns, inflation, down payments, and how much banks are willing and able to lend, among other things, says Dr Chua Yang Liang, head of South-east Asia research at property consultancy Jones Lang LaSalle.

Interest rates play a big role in tipping the affordability balance. Rates are now near a 15-year low.

HDB prices have gone from strength to strength over the years, increasing the ‘wealth’ of potential upgraders. In fact, with the HDB resale price index at an all-time high this year.

Recent beneficiaries of collective sale windfalls are also likely to be sitting on enough cash to buy a
replacement home.

Statistically, the proportion of Singaporeans owning private properties has also increased, from 17.7 per cent in 1998 to 21 per cent last year, according to Ms Chua Chor Hoon, head of South-east Asia research at property firm DTZ Debenham Tie Leung.

So what can I afford?

It matters little to the average Singaporean that overall household incomes and gross domestic product have risen faster than overall property prices - especially when he finds his ideal home is completely out of reach.

The method of using monthly installments to calculate affordability is heavily relied on by banks, which are mainly concerned with a home buyer’s ability to repay his loan.

Assume a couple is buying their first home and has just enough savings to pay for their 20 per cent down payment. They earn the median income last year, which was about $5,000 each. If they want to pay for their monthly home loan instalment entirely through their CPF funds and not use any cash, the most they can pay every month is $2,070 in total. At an interest rate of between 1 per cent and 2 per cent, based on a 30-year loan, that works out to a loan of about $550,000. Taking that to be 80 per cent of a home’s purchase price, the couple can buy a property worth $680,000.

Another interesting back-of-envelope calculation for the affordability of a home comes from property developers. The Straits Times understands that one major local developer uses a simple formula to price its mass market projects: It takes the average resale price of HDB flats in the area and doubles it.

So, if neighbouring five-room flats are going for $400,000 on average, a similar-sized unit in the developer’s new project would be priced at $800,000. Anything more would be generally unaffordable to HDB upgraders; anything less would be too cheap.

In Singapore, an individual buyer’s sole concern is whether he can afford the home he desires. Perhaps, he needs to think again and be happy with the home he can afford.