Mah Bow Tan exposes reason for low birthrate

Responding to recent cries that prices for Housing and Development Board flats on the resale market have surged, Minister for National Development Mah Bow Tan told Parliament last Monday that prices for new flats still remain affordable. I believe his point is was that there was no need to look to the resale market for a roof over one’s head.

“Ultimately, what matters is whether at all times, first-time home buyers are able to afford HDB flats,” the Straits Times quoted him as saying (27 April 2010, New HDB flats still affordable: Mah).

To “prove” his assertion, Mah referred to a formula called the debt service ratio (DSR), which compares a household’s monthly mortgage instalment to its household income. The average DSR for new flats launched in the last six months when property prices surged ranged from 17 per cent to 25 per cent.

The table below was published in the Straits Times accompanying its report:

Do note that these figures were based on new flats in non-mature estates. For those in more central locations and mature estates, the DSR is around 30 per cent.

Mah said that these DSR figures were within the international benchmark for housing affordability, which ranges from 30 per cent to 35 per cent.

I think that’s a really big chunk of household income. Families may feel so hardpressed about servicing loans that a feeling of financial insecurity sets in. This especially as Singapore’s economy moves in quite dizzy boom and bust cycles. Your DSR may be an “affordable” 25 percent today, but next year when you lose your job, it’s a different matter.The result is that couples will put off having children. We know, for example, that probably the chief reason why couples do not have more than one child is that they feel they cannot afford to do so.

We should ask all ministries to indicate what percentage of household income they expect a typical household to spend on goods and services under their purview assuming they have 2.1 children per family — the population replacement rate — and factoring in the reality that they also need to take care of aged parents. How much does the Health Ministry expect Singaporeans to spend monthly (as a percent of household income) on health services for themselves, their aging parents, and 2.1 children? How much does the Manpower ministry expect households to spend on hiring maids to look after aged parents and young children since the same ministry generally expects both parents to work? How much does the Transport Ministry expect households to set aside for mobility? How much does the Education Ministry expect households to devote to current schooling for their expected 2.1 children, plus saving for higher education. And so on.

Don’t be surprised if all these add up to something approaching 100 percent of household income. What money will be left for food, clothes and the occasional entertainment or holiday?

Something’s got to give, and it is pretty obvious what.

What about the international benchmark then? I’d like to know where that comes from. How many countries with below-replacement birthrates contributed to that figure?

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Mah also said: “I have to emphasise that buying an HDB flat is not an expenditure, it is an investment…because when you buy an HDB flat, at the end of the tenure of the flat or towards your retirement, that HDB flat is a very significant store of value.”

He then cited a Department of Statistics survey, the newspaper said, to show that on average a Singaporean family has more than $100,000 in asset value in their flat. If that asset is monetised, they need not fear using up their CPF savings to pay for it.

If.

Is there an efficient market for monetising a flat while the owner is still alive?

Is the $100,000 figure relevant to context? If a person has bought one flat and lived in it for most of his life, by his retirement, the flat would be approaching the end of its 99-year leasehold period. What would be its valuation by then? What market would there be for such a flat?

If the person has repeatedly sold and bought new or resale flats through his life, then he would also have likely topped up repeatedly his expenditure (e.g. taking on new loans). His last flat might be further from the end of the leasehold period, being newer, and may therefore command more market value, but he would have spent more money over his lifetime for housing compared to someone who has lived in the same flat for decades.

This is an area where Mah’s glib response is inadequate. We need a more detailed analysis, sensitive to different income groups, in order to understand our policy implications.