Wednesday, August 26, 2009

Affordability of homes

Let's do the comparisons right

I REFER to last Saturday's report, 'Homes more affordable as incomes rise'.

It is meaningless to compare the current property boom with the peak of 1996 and then conclude that things are better now compared to then. This is akin to comparing the current sub-prime financial crisis with the Great Depression of the 1930s and concluding that things are not so bad.

Likewise, it is meaningless for Citigroup economist Kit Wei Zheng to conclude that things are better now than in 1996. The fact that the current property boom is not the worst does not imply that it isn't bad.

For a better appreciation of our current situation, we should note that from 1990 to last year, condominium prices increased threefold, whereas during the same period, median household income grew by only 2.1 times.

In other words, there has been a 50 per cent increase in condominium prices over and above salary increases over this period. So we are indeed worse off now compared to 1990.

Jones Lang LaSalle head of research Chua Yang Liang's affordability calculations are misleading too.

First, it is wrong to just use per capita gross domestic product (GDP) as only about 40 per cent of our GDP is attributable to wages.

Furthermore, in absolute terms, the 22 per cent increase in last year's per capita GDP over its 15-year average is only $9,156, whereas the 38 per cent increase in condo prices over its 15-year average of say $700,000 amounts to $266,000. So even before considering interest, it will take an extra 29 years for the extra income to pay for the increase in condominium prices.

Mr Kit's statement that out of the past 11 years, growth in wages has outpaced growth in property prices is also incorrect. Comparing median income and property prices for the past nine years, there were five years when property prices outgrew income.

Source, Straits Times, 26 Aug 2009

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