Redefining Affordability of Homes

The most contentious issue in the recent General Election was the affordability of housing. Opposition politicians argued that the government had allowed property price to rise beyond the affordability of the masses. And the ruling People's Action Party re-butted with figures from the housing board proving otherwise, especially for first-time buyers.

The proof is centered around the proportion of monthly income going to repay the mortgage called the Debt-to-service-ratio (DSR) . For first-time buyers in the non-mature estates ,the DSR average is 23% which is well below the nationally recognized threshold of 30% for affordability. But this might not be entirely the whole picture as there are the sandwiched middle class whom are caught in between.

HDB resale flat prices had risen nearly 65% in the last 3 years, while  the average household income remained stagnant. Younger familes with a combined income of $10,000 are having a hard time because they cannot really afford a private property and they don’t qualify for a new HDB flat. But looking at the resale market can be quite a big challenge as the cash over valuation (COV) Outlay is too much for them to afford too.

The housing loan repayment have lengthened to 30 years with the existing mortgage loan but by shorten the length of payment will means the monthly repayment will be quite high. There are 2 main factors to determined the affordability of the current housing issue. First, the total income earn till retirement and second the average price of HDB. Currently the prices are still affordable as the international standard is still below 0.3 or below with the total income over the average price of HDB.

The current level of low interest rate in Singapore plays an important deciding factor too. Should the interest rate rise, HDB owners will have to pay more toward the loan, especailly if they have taken up bank loans instead of the concessionary loan.

The NUS study looks at essetntially two issues: (i) housing accessibility and (ii) long-run affordability. Housing accessibility is simply the ratio of mandatory upfront payments to available savings. A ratio less than or equal to unity indicates that the buyer has enough savings for the upfront payments.  Long-run affordability is the ratio of house price including transaction cost to lifetime income or financial wealth. The latter is the sum of available savings and the discounted present value of the projected future income stream. A ratio less than or equal to 0.3 or 30% of income is usually taken to indicate an affordable house.

The finding or complilation of the research of the caveat and their studies have many flaws which did not take into considerations housing subsidy , grants, and resale for capital gain upgrading to another flat. The analysis covers only first time new HDB owners typically buying cheaper than a resale flat. After taking all the other possible counts ,it will further increases the affordability index.

Thus, after the debate , the DSR is still proved to be a simpler and conservative way to point out how affordable is the HDB to the masses. The information that is being presented is just a rough guidelines for future policymaking and whether individuals can afford the HDB.

The study also shown a very interesting trend as the median price of a condominium is around $1.15Million. During the 1970s the median household income could afford 5 private homes but now it dipped below 2.

In Singapore an absence of a cheaper and quality living suburbs option , downgrading option ,Singapore residents are experience the housing wealth effect. The study finding provided one measure for affordability and decision making information which allows home buyers to compare their lifetimne income to current home price .

Author's Comments:

Buying a house can be the biggest asset which most people will purchase in life and a life time commitment with huge implication financially. Many have not consider the future implication they have on their life which at the end of day salve to their house.

Its best to have a clear picture of your financial position before choose their dream home.

1. Their budget for the house
2. Home repayment for only 25yrs or within their working ife span
3. Debt servicing ratio of less then 40%
4. Stress test when the interet rate hike to a higher percentage.
5. Reconcile with the opportunity costs to wealth accumulation and retirement planning

Original Source: Stratis Times 14 Jul 2011, Redefining Affordability of Homes