Saturday, June 9, 2012

Homes, homes everywhere, but what can you afford?


Straits Times: Sat, Jun 09
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 means a three-year wait as the build-to-order (BTO) flat near his parents is being built. That 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 benchmark known as the 'debt-to-service ratio' (DSR), but not by another known as the 'median multiple' or house price to income ratio, used in some countries.

In the 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 shorter-term 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-to-value (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 (Scape) 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 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.

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.

If interest rates remain low and property prices continue to rise, first-time buyers will continue to find property unaffordable. But we are likely to see more government intervention to prevent runaway prices, say experts...
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Martin Koh/ Sherry Tang
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