Saturday, September 19, 2009

Are private homes getting out of reach?

A hot debate has erupted among Singaporeans on whether a private home is more affordable today than a decade ago. Insight analyses the issue.

OF ALL the maxims that Singaporeans hold to be true, a key one is that condominium units here have become less affordable over the years, forcing their children and grandchildren to inhabit smaller and smaller spaces, farther and farther away in the suburbs.

So, 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.

For many readers, the conclusion was inexplicable and unacceptable.

The property market had breached unprecedented levels in 2007, and it hardly took a breather during the recession before powering ahead again this year. Incomes, they felt, could not possibly have risen more quickly than home prices.

Mr Ng Kok Lim, a polytechnic academic staff member, was among those who wrote to The Straits Times’ Forum page disagreeing with the conclusion.

The 37-year-old was upset over what he saw as ‘the same old misrepresentations and half-truths that have been told to Singaporeans all these years’.

Mr Ng also questioned the formulas that had been used to calculate affordability, saying he believed condominium apartment prices had increased more than household incomes in the last 20 years.

Prices versus incomes

AS ANY statistician would know, there are perhaps as many ways to calculate housing affordability as there are condominiums in Singapore.

One way, as Mr Ng suggests, is to take the rise in property prices over a certain period and compare that to the rise in 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.

For those with long enough memories, this undoubtedly seems the case.

However, for a nation as young as Singapore, in which major changes can take place in just five years, is it fair to use that yardstick to compare affordability between now and 20 years ago?

The Urban Redevelopment Authority’s benchmark property price index provides a clue.

It was originally set with 1990 as the base year, but this was changed in 2002, to 1998 as the base year.

Indexes are usually re-based when the information they track is considered to be outdated; when circumstances have changed so much that the original base year is no longer a good comparison with current conditions.

From 1990 to 1998, Singapore’s housing market underwent significant transformations.

For instance, condominium units made up 39 per cent of the total value of private home transactions in 1990. By 1999, this proportion had soared to 51 per cent.

Hence, it may be more relevant to date any comparison of affordability today back to 1998, rather than to 1990.

While such a move continues to show that incomes lag behind prices slightly, the difference is now negligible. 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 median and average income levels may not be the best indicators to use.

Adjusting the formula 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, these are far from being the only ones.

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.

Of these, government policies on home loans rank as a top factor.

In 1996, the Government disallowed home buyers to take loans of more than 80 per cent of the property’s price. Previously, home buyers could borrow up to 100 per cent of the home’s value, which meant they did not have to fork out a mound of cash as down payment.

So while incomes may have kept pace with property prices, Singaporeans – especially first-time home buyers – may now feel the pinch more should they lack the savings to meet the increased upfront cash requirements.

On the flip side, interest rates could play a big role in tipping the affordability balance. Rates are now near a 15-year low. They are often cited as a major reason for the recent burst of activity in private home sales, as buyers take advantage of cheap financing.

There is also the wealth effect, another key consideration. Monthly salaries are not the only means of paying for a home, as many Singaporeans have other assets.

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, flat owners looking to upgrade to private property are in a stronger position to do so than ever before. Recent beneficiaries of collective sale windfalls are also likely to be sitting on enough cash to buy a replacement home.

This enhanced buying power seems to be borne out by evidence on the ground.

The throngs at showflats testify to a demand for private property. New home sales this year are near their 2007 peak.

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.

The problem with perceptions

SO WHAT accounts for the belief that private home prices are unreasonably high?

Dr Chua of Jones Lang LaSalle believes the media could have inadvertently played a role in this.

‘Most Singaporeans get their update of property prices mainly from secondary sources like the media. For the majority, what they hear most often is new launch prices,’ he says.

Resale prices are often lower than those at new launches, but usually less well publicised unless they hit a new record.

Also fresh in Singaporeans’ memories is the 2007 property boom, which was driven by the luxury home market and hogged the headlines for its run of record-breaking prices.

In 1998, the average price of a home in the prime districts of 9 to 11 – Orchard, Tanglin, Holland and Bukit Timah – was $847,744. In 2007, this had more than tripled to $2.9 million. This year, it has declined to about $2.2 million.

The creation of super-exclusive luxury housing that attracts well-heeled foreigners, such as homes in Marina Bay and Sentosa Cove, may also have alienated Singaporeans and their wallets.

However, a large part of Singaporeans’ sense of increasing unaffordability could also stem from their own more ambitious housing aspirations.

Data shows that prices of apartments and condominium units in the northern districts of Sembawang, Yishun and Seletar – where private housing is among the cheapest in Singapore – have not risen very much in the last 10 years.

The average price of a non-landed private home in Districts 27 and 28 was about $602,900 in 1998, compared with $657,000 last year and $652,300 so far this year – less than a 10 per cent increase.

On a per sq ft basis, they were $423 in 1998 compared to about $500 now.

Real estate company DTZ’s Affordability Index, which takes into account home prices, interest rates and Central Provident Fund contribution rates, has a similar result.

Prime properties are 37 per cent less affordable now than in 1995, and 3 per cent less than in 1996. But mass market homes are 12 per cent more affordable now than in 1995, and 29 per cent more than in 1996, according to the index.

Ms Tay Huey Ying, director of research and advisory at property company Colliers International, says more Singaporeans aspire to own private property now than 10 years ago.

‘That is why the Government had to come up with varied bridging products in the form of DBSS and ECs,’ she says.

Design, Build and Sell Scheme (DBSS) flats and executive condominium (EC) units are condo-style HDB flats that are of a higher quality than ordinary public housing but cheaper than private homes.

As more people live in private housing now than in the past, their children would also be keener to live in private homes rather than HDB flats as they would have grown accustomed to the more exclusive environment, Ms Tay adds.

Property consultants say that instead of looking for properties they can afford, Singaporeans try to gauge if they can afford the properties they want – which, in an era of rising aspirations, is often a frustrating endeavour.

So what can I afford?

SINCE property and money are close to the hearts of most Singaporeans, the topic of housing affordability is often a hotly debated issue.

But ultimately, aggregate measures of affordability are largely meaningless to the individual.

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.

To calculate personal affordability, United Overseas Bank economist Ho Woei Chen suggests looking at it from a cash flow perspective, as banks do when they evaluate individual home loans.

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. CPF contributions are capped at a salary of $4,500, and only 23 per cent of that can go towards paying for a home.

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, says Ms Ho. Taking that to be 80 per cent of a home’s purchase price, the couple can buy a property worth $680,000.

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

They therefore calculate how much of a home buyer’s monthly income he can afford to spend on mortgage instalments. As a rule of thumb, this should not exceed 40 per cent of gross income.

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.

Put simply, what all this means is that there is no one correct, comprehensive way to determine housing affordability and whether it is going up or down.

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.

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

Source: Straits Times, 19 Sep 2009

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