Homes, homes everywhere, but what can you
afford?
With property prices at record highs,
buyers worry about earning enough to buy their own homes. What is
the extent of the problem and is it likely to ease? Political
correspondents Jessica Cheam and Robin Chan find
out.
TWENTY-TWO months' pay, or $121,500 to be precise.
For IT executive Jeffrey Chua, 31, and his partner, that
is the price difference between buying a new five-room flat from
the Housing Board (HDB) in Bukit Panjang, and an equivalent flat in
the HDB resale market instead.
The first costs $365,000, the second $486,500.
Of course, buying direct from HDB mean a three-year wait
as the build-to-order (BTO) flat near his parent is being buit.
This is on top of the two years the couple have already waited in
the queue, during which they failed twice to ballot for their first
home.
But it cannot be helped, as the couple, who have a
combined monthly income of $5,600, can afford only the five-roomer
bought directly from the HDB.
Mr Chua is relieved that things have worked out. "I'm
glad we finally managed to get a new flat, and prices seemed stable
in the past year. At least we can still afford to buy that. If you
look at the resale market, prices are still very unaffordable," he
says.
A year after a shortage of affordable homes became a hot
issue during the 2011 General Election, the anxieties of first-time
home buyers like Mr Chua have been soothed, thanks to a sharp
increase in the supply of BTO flats.
The move shortened the wait for new flats and stabilised
prices.
The income ceiling was also raised to allow more buyers
to buy directly from HDB.
Still, housing affordability remains a concern because
not all Singaporeans are willing to wait for a BTO flat, and not
all are eligible for such flats to begin with.
Singles, for example, can buy only on the resale market.
The same applies to couples where one spouse is neither a
permanent resident nor a citizen, or whose combined incomes
exceed the $10,000 a month threshold for new flats.
These exclusions matter in a market in which resale and
private property price growth has far outpaced income growth.
Prices, incomes and
access
THE gap between income and home prices has widened in recent
years due to a confluence of factors.
Rapid population growth without commensurate investment
in housing has led to an imbalance in demand and supply, putting
upward pressure on prices.
Global liquidity and record low interest rates have also
encouraged investors to park money in property - further fuelling
price escalation.
As a result, HDB resale flat prices rose 87 per cent from
2006 to last year. The prices of private residential homes shot up
by 75 per cent in that period.
In comparison, median monthly household income for
resident employed households rose at half that rate - by 42
per cent from $4,952 to $7,037.
Many young home buyers have found themselves priced out
of the resale HDB market, where prices are determined by
market forces and buyers have to cough up a cash premium set by
sellers above a flat's valuation, known as cash over valuation
(COV).
The Government's antidote has been to offer more BTO
flats, whose prices it has managed to stabilise in the year since
the GE.
SLP International research head Nicholas Mak conducted a
recent analysis of BTO flat prices in five HDB estates. He found
that prices in most of the new projects rose marginally by 1 per
cent or 2 per cent in the year since the GE, even as HDB resale
flat prices rose by close to 10 per cent in the first quarter of
this year from a year ago. That is a marked change from the
price trajectory in the year before the GE, when BTO flat prices
corresponded more closely to the movement of resale HDB flat
prices.
With the change, BTO flats have been kept affordable for
first-time buyers.
The HDB cited the example of a four-room flat at Fajar
Hills in Bukit Panjang, a March BTO project. It costs $255,000,
after a $10,000 government grant.
At that price, a household with the median monthly income
of $4,200 pays a monthly mortgage of $915 with a 30-year loan
that is 90 per cent of the purchase price and at the current
HDB interest rate of 2.6 per cent.
Based on these numbers, new HDB flats are considered
affordable by one international bench-mark known as the
"debt-toservice ratio" (DSR), but not by another known as the
"median multiple" or house price to income ratio, used in some
countries.
In case of the four-room BTO flat in Fajar Hills, the DSR
on a 30-year loan is 22 per cent.
The DSR looks at the proportion of monthly income used to
pay the home loan, and the internationally recognised threshold for
affordability is 30 per cent.
But some home buyers complain that a 30-year loan is too
burdensome. So looking at shorter loans, a 25-year term works out
to a monthly payment of $1,040, or a DSR of 25 per cent; for a
20-year loan, it is $1,230 or a DSR of 29 per cent - both still
affordable.
However, that is not so with the "median multiple"
method.
The "median multiple" is derived by dividing the median
house price by the annual median household income. In markets such
as the United States, a median multiple of less than three is
considered affordable, and anything above three is not.
Using this method, the same four-room HDB flat has a
median multiple of five - which is unaffordable by these
standards.
Some real estate academics are of the view that this
method is a "cruder" way of looking at affordability because it
does not take into account mortgage terms and interest rates.
Associate Professor Sing Tien Foo of the National
University of Singapore's (NUS) department of real estate
notes that DSR is a "more direct indicator to measure the ability
to pay for housing".
Banks widely use the DSR to assess the credit risks of
borrowers and would keep this ratio between 30 per cent and 40 per
cent.
He also points out that affordability indicators are more
relevant compared over time rather than comparing them across
different housing markets and countries.
This begs the question whether the median multiple of
three is as acceptable a threshold for affordability here as it is
in the US.
"It cannot be applied directly into different markets,
and it would give a distorted comparison without taking into
consideration the heterogeneity in different housing markets," he
says.
Some factors that may increase the housing price to
income multiple in markets like Singapore, Hong Kong, Beijing and
Shanghai include population size, density of land, housing
preference, scarcity of land and interest rates, among others, he
says.
There is yet another way to look at affordability, Called
"housing accessibility", it is a shorterterm measure defined
by the ratio of the cash a buyer needs to make all the upfront
payments for a new home to his household savings at that
point in time.
Factors influencing this include the COV needed to buy
HDB resale flats and the loan-tovalue (LTV) ratio allowed for bank
loans - which is now 80 per cent for the first mortgage, and
60 per cent for the second.
A study by the NUS Singapore Centre for Applied and
Policy Economics (Soape) has found that housing
accessibility for young buyers aged around 30 of a median-priced
four-room HDB resale flat worsened from the second quarter of last
year to the fourth quarter.
In the second quarter of last year, four-room resale
flats were inaccessible to the bottom 20 per cent of
income earners. By the fourth quarter, that increased
to the bottom 30 per cent of income earners.
For this same group of buyers, private property remained
largely inaccessible. Only the top 20 per cent of income earners
could afford a median-priced condominium unit of about $1.1 million
- for both the second quarter and the last quarter.
Using these definitions, we can draw some
conclusions:
Compared to five years ago, affordability has eroded -
for obvious reasons in a rising market.
But even at today's prices, BTO flats are largely
affordable, going by the DSR measure. Prices have also remained
largely stable in the past year. HDB resale flats and private
homes, in contrast, are largely unaffordable, going by the
same DSR definition for young buyers.
Using the median multiple definition, the majority of
flat types are largely unaffordable to most buyers.
What lies ahead?
SO HOW will the affordability picture change in the years ahead?
Analysts have painted three broad scenarios which will affect both
home buyers and home owners in different ways.
The first is that the property market crashes due to a
combination of a global economic recession and a a supply glut in
the market.
Wing Tai chairman Cheng Wai Keung warned in a recent
interview with The Business Times that home buyers could be
bringing forward their purchases, causing demand to be much lower
in subsequent years.
"This will create an even bigger supply and demand
inequilibrium; it will create an oversupply more than we think," he
says.
One benefit, says Mr Colin Tan, research head at
Chesterton Suntec International, is that this would help bring
public housing price levels "back to normalcy".
A sharp correction of 30 per cent to 40 per cent would
bring the gap between household income and HDB resale and private
home prices back down to 2006 levels.
But while the affordability picture for first-time home
buyers would dramatically improve, such a sharp correction would
also plunge many home owners into negative equity, especially those
who bought in recent years at the height of the boom.
A global recession of this scale would also likely lead
to a fall in wages and an increase in unemployment as businesses
downsize. So it is unclear if affordability would really
improve.
Credo Real Estate executive director Ong Teck Hui says:
"If we experience a recession, the price corrections could be
significant."
A second scenario is that the the US and Europe continue
to keep interest rates low, while the Singapore economy keeps
growing, supporting demand for homes. Property prices would
continue to climb steadily.
Among those who think this scenario is the most likely
are the property analysts at Standard Chartered. They said in an
April report: "As we expect interest rates to stay low till 2014,
mass market sales and prices could stay strong for the next
two to three years."
If interest rates remain low and property prices continue
to rise, first-time buyers will continue to find property
unaffordable. But there will likely be more government intervention
to prevent runaway prices, say experts.
Analyst Vikrant Pandey of UOB Kay Hian says possible
measures include even more supply of new homes, further lowering of
the loan-to-value ratio, an increase in cash down payment levels;
additional stamp duties and an effective increase in mortgage
rates, such as putting a limit on how low the additional interest
charged over the benchmark rate can be.
The third and most ideal scenario is therefore for
home prices to continue to ease gradually while incomes rise.
PropNex chief executive Mohamed Ismail says one possible
outcome could be that wages grow 5 per cent per year in the
next few years, and property prices ease by 5 per cent to 10
per cent, narrowing the gap.
This gradual easing is what the Government hopes to
achieve, National Development Minister Khaw Boon Wan said in a
recent interview with The Straits Times.
He added that the Government would be wary of causing
major market corrections due to policy changes.
It made that mistake once in 1996 when it introduced
drastic measures, including a broad capital gains tax to calm the
red hot market. But they were implemented just as the 1997 Asian
financial crisis hit and caused the property market to crash,
leaving home owners bleeding cash.
So while analysts have predicted anything from a 5 per
cent to a 30 per cent fall in property prices in the next few
years, whether that actually leads to increased affordability also
depends on which way the global economy moves and its impact on
incomes and interest rates.
To keep the local property market finely balanced between
the needs and interests of both home buyers and owners,
policymakers will need a good reading of the economy and a deft
touch.
Balancing act
RECENT moves to boost and cool housing demand:
1980s
• Opened up the resale flat market to permanent residents (PRs),
removed income ceilings for resale flat buyers, and allowed resale
flat owners to buy private homes for investment while living in
their public flats.
1990-1995
• Relaxed rules to permit singles aged 35 and above to buy
resale flats.
• Allowed buyers to take larger HDB mortgage loans.
1996-1997
(Asian financial crisis)
• Amid a frothy property market, the Government slapped a
capital gains tax and an additional stamp duty on sales of
residential property within three years of purchase.
• Placed an 80 per cent financing limit on mortgage loans and
banned foreigners from taking Singapore dollar loans to buy
homes.
• Raised resale levies and extended time bar from five years to
10, for those in the market for a second public flat direct from
HDB.
1998-1999
(Crisis and recovery)
• The Government later suspended the stamp duty imposed on
sellers and introduced several other measures to support the market
as the tighter rules had coincided with the Asian financial crisis
that struck in 1997 and caused the market to slump.
2000-2004
• In the years after the dot.com bust and the Sars crisis, the
Government lifted the capital gains tax on property, and allowed
buyers to use CPF savings to pay for 10 per cent of their initial
down payment on private property.
• Lowered the minimum occupation period (MOP) to one year from
2.5 years for owners who bought resale flats without subsidies.
2005-2008
• Lifted the loan-to-value (LTV) limit for housing loans to 90
per cent from 80 per cent and allowed non-related singles to use
their CPF savings to buy private homes.
• Later withdrew a concession allowing property buyers to defer
stamp duty payment in 2006, and scrapped the deferred payment
scheme in 2007, as the property market started to run up.
2009-2010
• Scrapped the interest absorption scheme as the property market
remained frothy and further cooling measures were needed.
• Imposed stamp duty on those who flip their property within a
year, cut the LTV limit back to 80 per cent and raised the MOP for
non-subsidised resale flats to three years.
• Extended the holding period for the seller's stamp duty to
three years.
• Cut LTV limit further to 70 per cent for those with
outstanding home loans.
• Required private property owners who buy non-subsidised HDB
flats to sell their private property within six months of the
purchase whether it is here or abroad.
• Non-subsidised flat owners have to stay at least five years in
their units before they can buy private property.
2011
• As property prices continued to rise, the Government raised
seller's stamp duty for private homes to as high as 16 per cent,
from up to 3 per cent.
• Tightened mortgage restrictions.
• Slapped a 10 per cent additional buyer's stamp duty on
foreigners buying first home, 3 per cent on PRs buying their second
or more, and 3 per cent on Singaporeans buying their third or
more.
Insight, The Straits Times, Saturday, June 9 2012, Pg
D1-D3
