Are homes affordable

About a year ago, in a special report, I waded into the debate over the affordability of public flats.

The issue had been sparked by the relaunch of Pinnacle@Duxton last September. With prices of its five-room units reaching $645,000, the Pinnacle has become Singapore's costliest public housing project.

At that time as well, condo-style flats under the HDB's Design, Build, and Sell Scheme (DBSS) were going for over $700,000 for the bigger units.

Indignant home buyers flooded The Straits Times Forum with letters on what they saw as an 'upwards price spiral' of HDB flats. Netizens also weighed in.

But the buzz faded with the global downturn. Jobs were lost, and the property market fizzled.

Today, the decibels are back, and with a vengeance. Not surprising, considering the recession-defying property boom in the last six months, with HDB resale flat prices soaring to a historic record and surpassing the peak of 1997.

From recent reports in The Straits Times, developers - riding on the momentum - are raising prices at DBSS projects such as Natura Loft at Bishan and The Peak@Toa Payoh by up to $20,000.

Property analysts predict that when the HDB launches the remaining Pinnacle@ Duxton flats, prices may hit $700,000 due to the prime Tanjong Pagar location.

The upset voices over the affordability issue are now louder, with some questioning the HDB's method of measuring affordability. Some pointed to tables showing that homes here cost more than in Tokyo and New York.

'HDB is not building enough new flats where Singaporeans want them,' said a Forum letter writer. Ramp up the supply or ban the cash-over-valuation (COV) practice, a few urged.

One popular complaint: HDB prices rose quicker than wage increases.

Is there a basis for such claims?

A simple analysis shows this: A new four-room flat in 2000 cost about $150,000. Today, a new four-roomer averages $265,000, based on HDB figures. The price increase is roughly 77 per cent.

In comparison, the Department of Statistics put the median income for a resident household at $3,640 in 2000. Last year, this was $4,950, roughly a 36 per cent increase.

So yes, buyers are right: HDB flats have become more expensive, rising quicker than wages.

But real estate experts at the National University of Singapore point out that the quality and attributes of flats have also gone up from a decade ago, and buyers cannot expect to pay the same prices for improvements in design and to the surrounding environment.

The experts also say that housing prices in 2000 were dampened by the post-1998 Asian financial crisis.

Prices have since risen, reflecting the growth of Singapore's economy in the last decade, buoyed by demand from new permanent residents (PRs) and citizens.

So, yes, prices have risen quicker than wages but are public flats still affordable?

Again, yes, it seems.

When the affordability issue was debated in Parliament recently, National Development Minister Mah Bow Tan took pains to address it.

From figures he unveiled, the monthly median income of a household seeking a new three-room $150,000 flat is $2,000, and $460 monthly is needed to service a home loan. This includes an additional housing grant of $35,000.

This monthly payment is 23 per cent of the household income - below the 30 per cent to 40 per cent benchmark of debt service to income ratio - what the HDB and real estate academics peg to be the international standard for housing affordability.

Even at the higher-income level of a household that makes $8,000 monthly, it can afford to buy a $660,000 resale flat at the 30 per cent benchmark. At this price, the household can get five-room flats in all towns, said Mr Mah.

So why the unabated uproar over home prices?

The truth is that there is a 'sandwiched' middle-income group of buyers. Their feeling of resentment runs high because they face what the real estate experts call 'liquidity constraints'.

This group, having exceeded the decade-old $8,000 income ceiling, cannot apply for new flats or enjoy housing grants in the resale market. They also find private homes too pricey now.

They turn to the HDB resale market but simply cannot stump up the high COV premium demanded by sellers in today's rising market.

This situation arises because, in a rapidly rising market, the valuation of a flat will tend to lag behind the market price.

As historical pricing is a key determinant in a flat's valuation, the gap between the market price and the valuation amount may be considerable.

One wonders: Can affordability be improved by tackling the above scenarios? It is not so straightforward.

Moving from a market-pricing mechanism to a cost-based one that many have called for - like in Singapore's early years - will unfairly give a cash windfall to lucky owners who ballot successfully for new flats in a mature estate. It makes applying for HDB flats in popular estates like a lucky draw.

Worse, it may affect the demand for new flats in non-mature estates as first-time buyers will want to wait it out and crowd queues for the twice-yearly HDB ballots for new flats in mature estates.

Also, cost-pricing makes buyers vulnerable to volatility in construction costs, and will suppress the market value of existing resale flats.

This might provide short-term relief to buyers but what of the 885,000 HDB flat owners who look forward to capital appreciation when they sell their only home?

Banning COV is not practical either; this will mean flats can sell only at valuation price. No seller will agree to let a valuer decide the final selling price of his home, not to mention that too much power now goes into the hands of the valuer.

Making banks cover COV as part of the home loan will increase loan risks as this is not part of the flat's valuation; buyers may also over-commit themselves and banks are unlikely to budge on this.

So it comes to this: Buyers say HDB flats are becoming unaffordable but HDB says that is untrue. Who is right?

Perhaps both sides are, and what we need are more data points to give more insight. Real estate experts affirm that the 30 per cent benchmark is not wrongly used and is indeed applied internationally by many countries to compare housing affordability. Banks also use this threshold to evaluate home loan risks.

But there is not enough data to determine the affordability of different income groups; say, is a prime HDB flat really affordable to a family in the corresponding income bracket? If not, should the $8,000 income ceiling be raised so that more households can enjoy the housing grant?

More independent studies should be done to include attributes such as distance to city and quality of amenities in the affordability indexes. People may more readily accept such findings, rather than rely on HDB's assurances alone.

Currently, only limited data is available to match housing data to income groups, say experts.

If such information is made more available to researchers, their studies may provide insight into where housing shortfalls are, and for which income categories.

Then, both policymakers and buyers may have a better idea of how to improve the current situation - and hopefully, the chorus of voices would finally be appeased

Source: Sunday Times, 27 Sep 2009