In his second commentary written for Today newspaper, Minister for National Development Mah Bow Tan addressed complaints that public housing is becoming unaffordable. I wonder how many people he managed to convince when much needed data was missing and there were considerable holes in his arguments.
This essay largely focusses on issues he raised in the second of his two commentary articles.
Before proceeding, it is important to note that that there are two markets for public housing. One is that of new flats built and sold by the Housing and Development Board (HDB). The other is called the “resale market” where leaseholders (called “homeowners” in Singapore-speak) can sell their leases to others after they have lived in their flat for a minimum number of years.
For new flats, there is are income ceilings for eligibility to buy, based on the type of flats. It is currently S$8,000 monthly household income for most types of flats; S$10,000 for higher-end flats.
Mah’s three measures to ensure affordability
In the second of his two articles, Mah devoted a section on “Measures to ensure affordability” in which he spoke about three discounts or subsidies.
1. The HDB prices new flats below market value — this was discussed in greater detail in Part 1 of my essay.
2. For first-time home-owners wanting to buy flats from the resale market, there is a grant of S$30,000 to S$40,000.
3. For those whose monthly household income is below S$5,000 a month, there is an additional grant of up to $40,000. I think it’s for first-time home-owners only, but he didn’t say so. He did say, however, that this additional grant is available for purchases of both new and resale flats.
It was an unsatisfactory discussion. Nowhere did the minister set out what were the typical selling prices of various types of flats and therefore what would be the net prices after these discounts or subsidies. It’s like a salesman who keeps on telling you how wonderful the $250 discount is that he is giving you for the product he is trying to sell without ever discussing what the gross or net price would be.
I did however manage to find a table provided by Yap Chin Peng accompanying a letter he wrote to the Straits Times on 12 September 2009. Yap signed off as the Deputy Chief Executive Officer (Estates and Corporate) of the HDB. Let me reproduce that table here:
You can see from the table prices of new flats in new estates (i.e. the relatively distant ones). You can also see that only those buying 2-room (i.e. 1 bedroom) flats get the full $40,000 Additional Housing Grant that Mah boasted of. This reduces the net price of a typical 2-room flat to S$56,000. Based , I believe (by calculating backwards), on a 20-year loan (for 80 percent of $56,000) at around 2.5 percent annual interest, the buyer needs to pay $224 a month, or 17 percent of his monthly income.
However, it begs one question: How many 2-room flats does the government build?
I couldn’t find building statistics from the HDB’s FY 2009/2010 Annual Report. What I did manage to find was their sales data, which I reproduce at right. 2-room flats constituted only 1.2 percent of all new flats sold.
Yet, approximately 10 percent of households in Singapore have that level of income (S$1,350 per month). So what do the rest do? Where do they live?
Do they find themselves compelled to purchase 3-room flats, either because 2-room flats are so rare or because they can’t squeeze the family into that small a flat, even though they really can’t afford 3-room flats at their present prices? Do they then fall into arrears with mortgage payments? Do they borrow from loan sharks?
You won’t find answers from Mah Bow Tan’s essays.
House price-to-income ratios
Even more problematic was the section “Measures of affordability”. Mah listed two: House price-to-income ratio (HPI) and Debt-service ratio (DSR).
For HPI, he cited figures that compared Singapore favourably with Hong Kong and London:
In a Straits Times article in February 2010, two NUS professors, Tu Yong and Yu Shi Ming, noted that Singapore’s HPI for resale flats in non-mature estates is 5.8, compared to Hong Kong’s 19.8 and London’s 7.1. That means Singaporeans generally need 5.8 times of their annual household income to buy a resale flat in non-mature estates, whereas a Hong Kong resident needs more than three times that amount.
First of all, how is HPI calculated? This indicator is defined as the ratio of the median free-market price of a dwelling unit to the median annual household income. Source.
Then I went to the library to look up Tu Yong’s and Yu Shi Ming’s article. I found it in the 27 Feb 2010 edition of the Straits Times, published in conjunction with the HDB’s 50th anniversary. . . . which immediately made me suspicious. The HPI indices were not in the body of the text; they were in Table 2 accompanying the article:
Read the notes; your eyes will open wide. You will see that Singapore’s HPI of 5.8 is too low and Hong Kong’s 19.8 is probably too high.
Singapore’s “low” house price to income ratio (HPI) of 5.8 is arrived at by dividing the median HDB resale price of non-mature estates by the median household income of all resident households (i.e. including those in fancy private condominiums and bungalows). I checked the source of Tu and Yu’s figure of $4,950 and saw that it came from the Statistics Department — it’s right there in the second paragraph of the linked pdf page — and indeed it refers to all resident households in 2008 (yes, 2008, even though the NUS professors said 2009 in their footnotes).
Why only non-mature estates, where flats tends to be cheaper? To be meaningful, it should be all resale flats. And if we wish to compare with other cities where public housing is not as predominant, then we should use the prices of all residential units, not just HDB units.
Alternatively, the minister should confine himself to prices of new flats versus the median income of households with under $8,000 in monthly household income. That’s because $8,000 is the eligibility limit. The HPI of that segment is what the minister is directly responsible for.
The HPI for Hong Kong suffers from a different defect. It is based on the prices of flats on Hong Kong Island only. What about the vast number of cheaper flats in the satellite towns of the New Territories? Why were they excluded? Is it any surprise that Hong Kong then has a very high HPI? In any case, the lower third of Hong Kong’s households live in rental public housing, they are not in the market for purchase. If one excludes their median household incomes, then you’d likely find the median household income of those Hongkongers who are looking to purchase will be significantly higher, thereby making the HPI much lower.
Curiously, there was a table published in the Straits Times on 5 September 2009, which showed Singapore to have the 10th highest HPI in the world — at 14.35! (I reproduce the top part of the table at right.) The figure is so vastly different from the 5.8 that Mah cited, one really can’t give credence to either of them.
I also did a quick websearch of articles relating to HPI. There seems to be a consensus that financial prudence calls for an HPI not exceeding 3.0, i.e. people shouldn’t be paying more than three times their annual household income for a home. This makes sense. If we expect someone to put aside the maximum 30 percent of his annual income to service the mortgage, then over 10 years, it should add up to about 3 times his income.
Here in Singapore, we seem to be assuming that it is safe to take loans of up to 30 years’ duration. I have always thought that unsound.
Mah Bow Tan also said that another measure, the Debt-service ratio (DSR) also indicates that HDB flats are affordable. DSR is the percentage of income required to cover payments associated with housing costs:
The DSR for new HDB flats in non-mature estates, based on an industry norm of a 30-year loan, averaged 23 per cent this year. This is well within the 30-35 per cent international benchmark for affordable expenditure on housing.
Hazel Poa demolished his argument in the Reform Party’s blog VotingRP:
Next, we consider the suitability of the debt-service-ratio (DSR) as a measure of affordability for national planning purposes. There are several shortcomings, the most serious being a pre-qualified sample – the DSR is calculated based on existing home owners. These are people who can afford to buy the flat. Those who cannot afford to buy a HDB flat would not have bought one and hence would not be captured by the DSR. The loan application process would also have weeded out those whose DSR would exceed the “30-35 per cent international benchmark for affordable expenditure on housing”. Under such circumstances, it would be quite difficult for an examination of the DSR to turn out with an “unaffordable” rating, no matter what the price level. For example, if good class bungalow owners use only 15% of their income to service their mortgages, can we conclude that good class bungalows are very affordable?
The DSR is a reasonable measure to assess if a particular person/family can afford to buy a particular property, but to use that as a gauge of affordability for the general population leaves much to be desired.
She said it so well, there’s nothing more I need to add.
More data needed for each band of household income
More generally, I was disappointed that Mah continues to use an approach that looks only at broad averages. With the wide income gap in Singapore, it is necessary to disaggregate any analysis on affordability into income bands.
In the table at left you will see that the lowest ten percent of households by earned income has only an average of S$1,303 a month. The seventh decile (i.e. the seventh 10-percent group) up the income scale has an average monthly household income of $7,969 per month, which is six times more. Yet all of them fall under the HDB income eligibility limit of $8,000 per month.
With this extreme spread, is it meaningful to speak of average this and average that?
I think not. I think it is necessary for the HDB and Mah to present data to show how HDB delivers affordable housing options to each decile, based on 10-year mortgages. What flats — and how many — are built that they can afford?
Below is the same data (from the Statistics Department) presented graphically.
And one more thing: The table and graph show only households with at least one working person.
9.6 percent of resident households are not even captured in the table and graph because they have no earned income. How assured is that roof over their heads? Is it any wonder that we have an increasing number of homeless people? What does the state provide as housing options if they do not already own a fully-paid up home?