MYTH #2: HDB flats are affordable.
TRUTH: HDB flats are affordable only to a minority of Singaporeans and is increasingly priced out of the reach of the average worker.
In spite of the relentless rise in HDB prices lately, the government insists that HDB flats remain affordable to the masses.
Recent pronouncements by the Minister of National Development Mah Bow Tan and HDB officers in replies to concerned citizens in the Straits Times Forum have largely sticked to the official stance: that the government will not intervene in the market to bring the prices down.
Minister in the Prime Minister’s Office Lim Hwee Hua maintained that HDB flats are affordable to ordinary Singaporeans as they cost no more than 30% of their monthly pay.
HDB’s deputy director Mr Ignatius Lourdesamy wrote to the Straits Times Forum lately that HDB flats remain affordable to eligible first-time households as they use between 21 to 25 per cent of their monthly income to service their loans on new and resale HDB flats which are well below the international affordability benchmark of 30 per cent. (read letter here)
Though he did not state it explicitly, he is likely to be referring to the average shelter-cost-to-income ratio (STIR) or the proportion of total before-tax household income spent on shelter. The shelter-cost-to-income ratio is calculated for each household individually by dividing its total annual shelter cost by its total annual income. A STIR higher than 30 per cent is conventionally taken as indicating a serious housing affordability.
As I was unable to obtain any international studies published online using the STIR to assess housing affordability in different countries including Singapore, I have to use the Median Multiple which is used widely by international organizations such as World Bank and United Nation to assess housing affordability.
[Please read the addenum to this "HDB flats will be unaffordable using the Median Multiple as benchmark for housing affordability" here]
According to the International Housing Affordability Survey which studies the affordability of housing in Australia, Canada, Ireland, New Zealand, U.K. and U.S.A, the “median house price to median household income multiple” or median index is used to judge housing affordability. (read article here)
Under its rating categories, a median multiple of 5.1 and over is considered as “severely unaffordable” while affordable housing is kept by a median multiple of 3 and below. The annual median income of a Singapore household is $65,760 in 2008 (source: singstat) which means that the upper limit is only $197,280 which is far exceeded by current prices of new and resale flats.
[The above figure is calculated based on the Median Multiple and not STIR which is used by HDB. I was unable to find out how HDB arrived at its figures of 21 and 25 per cent]
The prevailing sentiment on the ground is that HDB flats are becoming increasingly out of reach to the lower income group. Even the middle class will be stretched to their limits to finance the flats at today’s prices.
The crux of the issue is not whether HDB flats are “affordable”, but if they are “easily affordable” to the average Singaporean.
Let us examine the price of a 3-room HDB flat in the 1970s, 1980s and now based on anecdotal evidence (readers in their 40s and 50s will be able to attest to the veracity of these figures).
A new 3-room flat in Toa Payoh cost about $8,000 in the 1970s. The median pay of a graduate then was $1,000 a month. (8 times)
A similiar flat in Ang Mo Kio will fetch about $40,000 in the 1980s. The median pay of a graduate then was $1,600 a month. (25 times)
Now, a new 3 room resale flat in Ang Mo Kio can cost as much as $270,000. The median pay of a graduate now is around $2,700 a month (100 times).
As we can see from the above figures, the prices of HDB flats have sky-rocketed to more than 30 times while the median salaries of a graduate has only risen by 2.7 times. Are HDB flats becoming more expensive or affordable to ordinary Singaporeans? Maybe they are still affordable by the government’s standards, but definitely not more affordable by the common man in the streets.
The median pay of a Singapore worker is $4,500. 30% of $4,500 is $1,350 which will enable him to afford a flat c0sting costing up to $450,000 assuming a bank interest not more than 2% and 30-year replayment period.
Of course using this figure as the limit is deceptive as a majority of the population will be able to finance the 30 year loan even if they are earning less than $3,000 monthly.
Still, most flats under HDB’s Design, Build and Order scheme have already breached this upper limit. City View at Boon Keng was launched at prices of between $390,000 and $700,000 last year.
Again, the crux of the matter does not lie solely in the affordability of the flats, but whether Singapore households are plunged into greater debts as a result of financing over-priced HDB flats thereby leaving very little savings for retirement needs.
Anything can happen during the thirty year tenure. Retrenchment, unemployment and unexpected death can lead to an abrupt stop in the mortage payments.
A study conducted by NUS shows that housing affordability has decreased over the years, more so for private properties (source: NUS SCAPE)
In 1975, lifetime income of middle-income households with heads aged 30 was nearly 4 times the amount they would have paid for an average-sized private property.
By mid 1980s, their lifetime income was only sufficient to purchase one private property. The trend continued and during the 1994 – 1996 property price escalation, median income households would be in debt if they purchased an average-priced private property during this period. Price escalation since the late 2007 has brought down affordability again.
Comparing median income and property prices for the past nine years, there were five years when property prices outgrew income.
The prices of HDB flats have now reached or exceeded that of the last property peak in 1996 after which the market crashed, plunging many households into debts. Are we seeing another bubble in the formation?
Current prices are unsustainable in the long run due to combination of a few factors: the economy is expected to be sluggish in the near future, rental income has dropped by more than 30%, salaries are not going up by much and companies may have to retrench more workers if the economy does not pick by the end of year. It is kept high by the influx of new citizens and PRs who may sell off their flats should they leave Singapore later thereby increasing the supply of flats.
There will always be demand for HDB flats in Singapore as housing is a basic necessity. As such, leaving their prices entirely to free market forces will only lead to continuous inflation till the market is unable to support the prices any further leading to a precipitous crash.
The government should undertake a comprehensive study to examine the impact on the rising HDB prices on the savings and standards of living of ordinary Singaporeans.
If one has to work 70 hours a week without rest to finance the HDB mortage loan, even if one is able to “afford” the flat, there will be no quality of life to speak of. What’s the purpose of “owning” a flat at the end of one’s working life when one’s savings and CPF have been depleted by the mortage loans leaving very little for retirement needs? Do Singaporeans really want to work beyond the age of 80 till they drop dead?
The predicament of these Singaporeans had led to HDB to introduce a buy-back lease scheme lately for those living in 2 to 3 room flats in which HDB will purchase the flat from the owner at market rate and pay the sum to them in monthly installments over thirty years while the household continue to live in the flat which they now “lease” from HDB.
Affordability is not just an empty figure and more consideration should be given to its wider social implications and impact on the populace such as maintaining sufficient savings in the bank abnd CPF for retirement, domestic spending power, adequate work-life balance and most importantly, the standard of living.
HDB flats are definitely becoming less and less affordable to the masses and it is imperative that the government takes action now to reduce the prices so as to fulfill the original mission of HDB to provide cheap and affordable public housing to the people of Singapore.
Note: This article was first published in the old Temasek Review in September 2009