Why 1996 was used as a reference point

I REFER to Wednesday’s letter, ‘Affordability of homes: Let’s do the comparisons right’. When it comes to the appropriate base year of comparison, there is always room for debate. Using 1996 as a reference point is in response to a question of whether the current property rally represents a bubble. Looking at affordability during the bubble years would help to answer this question, and it is in this context that the comparison should be viewed.There are also various definitions of income. The measure referenced in the original article (’Homes more affordable as incomes rise’, Aug 22) was based on average annual wage, computed from the average monthly earnings of individuals compiled by the Department of Statistics.

This is based on earnings of Central Provident Fund contributors obtained from the CPF Board administrative records, and includes all remuneration received before deductions of employee’s CPF contributions and personal income tax. This measure of income differs from median household incomes which, apart fromgrowth in individual wages, is also affected by the number of working members per household.Using this measure, average wage growth had outpaced growth in average condominium prices in nine of the past 11 years. The average condo price, as a multiple of annual wage, was close to the 10-year average which excludes the bubble peaks) as of June. This simple measure of affordability does not take into account current low interest rates, or the probability that the average condo buyer is likely to have a higher-than-average income – both of which would have increased affordability.

Our studies also showed that households have seen a significant increase in their financial assets since the start of the decade, which would have also improved overall affordability from a stock (as opposed to just a flow) perspective. Comments in the original article should not be misconstrued as implying that prices can continue rising indefinitely.

Indeed, as indicated, there is uncertainty about whether current demand will be sufficiently sustained to absorb the considerable pipeline of new supply in the coming years, especially if interest rates rise, or when prices rise to the point where they become substantially less affordable.

Kit Wei Zheng

Source: Straits Times, 29 Aug 2009