In an interview conducted last week (13 Aug) at the Singapore Botanic Gardens, National Development Minister Khaw Boon Wan dismissed critics who feel that housing is unaffordable in Singapore.

Mr Khaw said in a straightforward response, “The bottomline is this: 80, 90 per cent of Singaporeans own their homes. If they are not affordable, then how do you achieve such an outcome?”

Nevertheless, he said, there are always people at the margins, and that is why income ceilings have to be dynamic and regularly adjusted.

During the 2011 GE, various Opposition parties zoomed in on public unhappiness over the high housing prices and limited supply of flats. Part of the public ire was also directed at the Government’s asset-enhancement policy, which some people felt had contributed to the runaway housing prices.

Mr Khaw said, “Having an appreciating asset is certainly better than not owning anything. Fifty years of continuous progress and compulsory saving through the Central Provident Fund and home ownership have put Singaporean families in an enviable position as compared to their counterparts in almost every other country. This is a legacy which we should appreciate and treasure.”

However, Singaporeans would have to adjust their expectations when looking for a new house to make sure it is within their means, keeping in mind that their wages would not go up as rapidly as in the past. He said: “That mental adjustment is something that Singaporeans may not be used to it yet.”

Stressing that economic growth is necessary for “all the nice things in life”, he said, “That’s why sometimes we are quite amazed by critics of the Government who say why are we always focused on GDP (gross domestic product) … But at the same time, we have to recognise that once the economy reaches maturity, growth rates would not be the same as in the past.”

Mr Khaw also noted that MPs have observed improvements in public sentiments towards housing issues.

Reviewing the income ceiling

When Mr Khaw announced in June the review of the income ceilings for the purchase of HDB flats, he said he would personally like to “give every Singaporean couple a chance” to live in an HDB flat even though they may have greater means and do not need Government-subsidised housing.

Policymakers are still mulling over the considerations, he said. However, market watchers told media that a higher income ceiling for buyers of new flats and executive condominiums is expected to be announced during the NDR 2015 tomorrow (23 Aug) by PM Lee so as to allow more Singaporeans to qualify for public housing. Currently, households earning a gross income of more than $10,000 cannot apply for new HDB flats, while those earning more than $12,000 cannot buy ECs.

Chances are, the government is raising the income ceilings due to the fact that even those households earning more than $12,000 can’t afford to buy private flats anymore. Take for example, in the recently launched Northpark Residences in Yishun [Link]:

2 bedroom unit – $800K – $1 million
3 bedroom unit – $1 – $1.3 million
Taking a household monthly income of $13,000 and a $1 million unit in Northpark Residences, the affordability ratio will work out to be 6.4 – that is, price of condo unit is 6.4 times of annual income, clearly showing that it is unaffordable (ratio greater than 5 is considered unaffordable, generally speaking).

80-90% of Singaporeans own homes

With regard to Mr Khaw’s comment that 80 to 90 per cent of Singaporeans own their homes, he said, “If they are not affordable, then how do you achieve such an outcome?”

In fact, Mr Khaw is correct. Over the past 50 years, HDB flats were indeed very affordable to Singaporeans so much so that most chose to buy HDB flats.

In the 70′s, a graduate’s starting pay was around $1,000 per month. Then, in Marine Parade HDB estate, the price of a new 3-room, 4-room and 5-room flat was $17,000, $20,000 and $35,000 respectively. A young graduate could easily afford a 5-room flat at an affordability ratio of slightly under 3 (i.e. 3 years of annual income to match the price of the house). Even households earning $500 a month could easily afford a 3-room flat priced at $17,000 (ratio under 3).

The World Bank considers a ratio of 5 or under as affordable for local residents, while the United Nations has set the bar lower, at 3 (see Link). In any case, anything above 5 is considered unaffordable by both the World Bank and the United Nations.

By 1990, the average price of a new 5-room flat was $70,000 and a young graduate earned about $2,000 a month. The affordability ratio then was still under 3 – very affordable.

TRE took the opportunity to examine the affordability of new HDB BTO flats launched in November last year. A total of 7,568 flats were launched by HDB for sale in a mix of mature and non-mature towns on 25 Nov 2014 [Link]. This was HDB’s final sales exercise for 2014.

For 2-room and 3-room BTO flats in Sembawang and Yishun in the November launch, they are considered affordable at 4 years of applicants’ median annual salary or less. However, for 4-room flats, the ratio is 4.7 to 4.8, coming close to 5.

For Sengkang, the situation is worse. 2-room flats are priced below ratio of 4, but 3-room and 4-room flats have ratios of 4.5 and 5.4 respectively. So, in fact, Sengkang 4-room BTO flats (ratio of 5.4) are considered unaffordable by the standards laid down by the World Bank and the United Nations. Sengkang 4-room flats, instead of selling for $270,000 (after grants), ought to be selling at $201,600 (4 x $4,200 x 12). They are overpriced by 34%.

The middle-income group appears to be squeezed by the higher new HDB flat prices for 4-room and above. For mature estates, the affordability ratio of new BTO flats would naturally be even worse.

The conclusion is that new HDB flats launched these days are considerably less affordable than those launched in yesteryear with respect to income. Singaporeans are complaining about the current prices of HDB flats.

So when Mr Khaw said that 80 to 90% of Singaporeans own their homes because they are affordable, he appears to be playing with words.

What do you think?

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