HDB flats will be “severely unaffordable” using the Median Multiple as a benchmark of housing affordability
September 2nd, 2009 | 
Author: By Eugene Yeo, Consultant Editor (Editing by Jeremy Yau)
[This article is an addendum to Part 2 of the Trilogy - "Debunking official myths of HDB flats: HDB flats are affordable to most Singaporeans"]
In a letter published in the Straits Times forum on 31 August 2009, HDB Deputy Director Mr Ignatius Lourdesamy wrote 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 correlates closely to the STIR. It is used by the “Demographia International Housing Affordability Survey” whose extremely detailed and comprehensive report is available online in pdf format. (read report here)
The 5th annual Demographia International Housing Affordability Survey covers urban housing markets in Australia, Canada, Ireland, New Zealand, the United Kingdom and the United States. It is unique in providing standardized comparisons of housing affordability between international housing markets. (Note: the study does not include Singapore and the median house prices use are that of private, and not public housing)
The Demographia International Housing Affordability Survey uses the “Median Multiple” (median house price divided by median annual household income) to assess housing affordability. The Median Multiple is widely used for evaluating urban markets, for example being recommended by the World Bank and the United Nation. It is an easily understood indicator of the structural health of residential markets and facilitates meaningful housing affordability comparisons.
In recent decades, the Median Multiple has been remarkably similar among the nations surveyed, with median house prices generally being 3.0 or less times median household incomes where demand and supply are balanced.
Housing affordability ratings are assigned based on the Median Multiple. If the subject of the Survey were valuation, rather than housing affordability, the same Median Multiple categories could be used to evaluate markets as appropriately valued, moderately overvalued, seriously overvalued and severely overvalued.
Demographia Housing Affordability Rating Categories:
Rating Median Multiple
Severely Unaffordable: 5.1 and over
Seriously Unaffordable: 4.1 to 5.0
Moderately Unaffordable: 3.1 to 4.0
Affordable: 3.o or less
Let us compute the Median Multiple of Singapore’s HDB flats based on our median household income and the median price of the latest flats launched by HDB, Punggol Residences.
According to the latest figures published by the Singapore Department of Statistics in January 2009, the monthly median income of employed households living in 4-room HDB or larger flats is S$5,600. This translates to an annual median income of S$67,200. (Source: Singstat page 5)
The prices of Punggol Residences, the latest launch by HDB range from $264,000 to $322,000 for four-room flats and from $344,000 to $409,000 for the five-room flats. (Source: HDB Infoweb)
Let us now compute the individual Median Multiples using the annual median income of S$67,200:
Cost of HDB flat Median Multiple
$264,000 3.92
$322,000 4.79
$344,000 5.12
$409,000 6.09
As we can see from the above figures, all the flats lie in the “unaffordable” category according to the Demographia Housing Affordability Rating Categories with flats costing $344,000 lying in the “severely unaffordable” category.
Since the Demographia International Housing Affordability Survey study the affordability of private housing in first world developed countries, this means that public housing in Singapore costs more than private housing in these countries.
Furthermore, the annual household income used in the calculations is only a median which means that HDB flats are definitely unaffordable to half the number of households whose annual income are below the median figure of $67,200.
Using STIR as a benchmark
Though I do not know how HDB arrived at its figures of 21 and 25 percents, let me attempt to use the STIR to make an estimated calculation based on the limited information available.
Assuming the annual shelter cost to is derived by the total shelter cost divided by 30 years excluding the bank interests rates for simplicity of calculations, then the cut-off price for affordabilty will be (0.3 x 67,200 x 30) = $604,800. HDB flats will be affordable to those households living in 4-room flats with a median annual income of $67,200.
Even this benchmark of $604,800 is exceeded by new flats built under the Design, Built and Order scheme. 4 and 5 room units at City View (Boon Keng) launched in 2008 fetched on average more than $600,000 with the units on the top-storey selling at almost $800,000.
If we use the median annual income of employed households living in 3-room flats (which is $38,760), the cut-off price for affordability will be (0.3 x 38,760 x 30) = $348,840 which will effectively make new and resale flats unaffordable.
Conclusion
Both the STIR and Median Multiple have their limitations in assessing household affordability as they do not take into account varying mortage rates as well as social and economic circumstances unique to each country.
The Affordability index measures the ratio of the actual monthly cost of the mortgage to take-home income and offers a much more realistic measure of the ability of households to afford housing. However it is more difficult to calculate and for the purpose of discussion here, the Median Multiple is used.
The Median Multiple appears to have set a lower threshold than the STIR for housing affordability. For a median annual income of $67,200, a house is considered “affordable” if it cost less than $201,600 while for the STIR, the affordability ceiling is as high as $604,800.
Using the Median Multiple of 3.0 as a cut-off for affordability of HDB flats, the median price of a four-room HDB flat should cost no more than $201,600. As this is a median price only for those earning a median income of $67,200, the figure is higher for those who earn a higer than median income.
Though eighty per cent of Singaporeans qualify for housing subsidies and afford the mortage loan, it doesn’t take away the fact that they are paying much more than they should for public housing which should be heavily subsidized by the government in the first place.
Not only should HDB flats be affordable, they must also be “easily” affordable which means the ideal Median Multiple for HDB flats should have a lower threshold than 3.0, perhaps at 2.o of less. If we use 2.0 as the cut-off, the median price of a HDB flat should be at $134,400 or less.
The rising costs of HDB flats kept artificially high by a limited supply of flats, constant demand from an increasing population due to influx of foreigners and outdated HDB policies such as the cap of $8,000 to qualify for housing subsidy introduced way back in 1994 will continue to impose an ever greater financial burden on Singaporeans, especially the younger generation who do not own any property from which they can capitalize on its asset value.
DISCLAIMER:
[This article is merely a simple exercise to show that housing affordability varies depending on the benchmark used and not to refute HDB's claims that public housing is affordable. There must be reasons why HDB prefers the STIR over the Median Multiple which is widely used to assess housing affordability in the United States, Canada, Australia and New Zealand. More research needs to be done to discover the strengths and drawbacks on both benchmarks
Other articles in the series:
>> Part 1: Singaporeans own their HDB flats
>> Part 2: HDB flats are affordable to most Singaporeans
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The government has to be very careful to ensure hdb flat prices do not get out of hand. I am already hearing many male Singaporeans who could not find local Singapore wives because they are too expensive to maintain now opt for foreign wives. Many of them who bought new flats direct from hdb are very happy that their flat prices are escalating. Example, one guy who bought his four-room flat from hdb at $100K plus now hopes his flat price can go up to half a million dollar. He would then sell his flat and get the money to settle in Vietnam with his fmaily. As for the PRs, I also overhead conversations in MRT trains that they hope to dispose their hdb flat for the money and build nice landed houses in China.
How about middle income group, I am sure they will find themselves better off to sell their flats for the money and migrate to countries like Toronto where houses are so much cheaper.
The escalating property prices can only cause more genuine Singaporeans to consider emmigration. Thus, the government must act before Signapore suffer more serious brain drain.
statistics are like a bikini, What they reveal is suggestive but what they conceal is vital.
always view stats with healthy sceptism.
If you cannot afford a flat
dont cry
You can rent a room
or a bed from your fellow singaporeans or PRs
and don’t need to live on the streets, under the sun and the rain
and don’t let the foreign workers laugh at you for having no place to stay..
excuse me richie…you are either masqurading yourself as a human being or you are actually something worse.
You are not being constructive here. And you basically show no empathy.
You are actually gloating over others pain and suffering.
And you are trying too hard also to show others in the forum that you have no self-respect for yourself and respect for others..or you are seeking some kind of sick attention?
What are you trying to prove?…that you are a real humane feeling human being or you are actually some kind of a real sick joker who enjoys others pain and suffering.
Sturmtruppen, you simply don’t understand…
It is the gov that implements the policies and not me..
So how can I be inhumane to your suffering when I don’t cause it at all?
you are blaming the wrong guy here..!!
Yes, it is indeed more difficult for more savings when we retire. Most of the CPF savings would be used for housing loan. When I retire, I am sure to be staying within one of the pigeon hole that is lease from the higher authorities, otherwise where can I go? Under the highway flyovers?
I have to add burden to my children to ensure enough resources for daily expenses and healthcare.
You might ask what about the cash savings acculumated throughout the years? Yes there is, however chances are they will be thin out for family requirements, for example education of my children. Especially for those lower income families.
In short, I and my spouse have to die upon retirement to ensure the value of the pigeon hole can offset some of my children future financial burdens.
very interesting analysis. thank you!
Even if the real price is really half of what it is now. They will never reveal it, the hole is dug too deep. If they announced HDB flats will have a price drop, all the average Singaporeans who have purchased their HDB will have half their assets vaporised.
They will be asking for rebates or refunds in which the government will not be able to support. HDB/Government have painted themselves into a corner.
I have always thought that even though we have lower taxes than a lot of countries, our HDB housing has always acted like our supplementary “tax”
yea. Ive got to agree. The income of an average citizen will NOT be able to afford an averaged priced HDB. let alone other payments like taxes, CPF, support family, transport.
now sg cost of living getting higher and higher, and gst % also. but income never go up proportionally. jia lat…
and gahment can say 1st world country? Well, i dont think so. whats a 1st world country when even the own citizens are NOT even protected?
to work for gahment in the PM cabinet, you need to have a PHD in robbery.
Yes, everyone is hoping that their HDB price will escalate. To have an increase in demand for flats, a few things have to happen:
(1) Continue population growth. In this case, only mass immigration can make it happen ans that is what PAP is doing.
(2) More marriages. Not sure if people will marry just for flats during my time, circa 80s – 90s.
[...] >> HDB flats will be “severely unaffordable using the Median Multiple as a benchmark for housing … [...]
Leong Sze Hian calculates that HDB’s average building cost per flat is $120,602.
This seems to show that the HDB makes a whopping profit, instead of trying to keep public housing affordable.
Is there a solution? Yes. It’s time to have a new government willing to make changes.
Hi Eugene,
The HDB guy was saying that based on STIR, Singaporeans were paying 21-25% of their monthly income as compared to international benchmark of 30%. He never really elaborate more.
Could this disparity be due to the number of repayment years? Generally speaking, HDB flats generally needs a 30 yrs repayment period to finance the loan. What about the international benchmark? What if the number of repayment years is entirely different? The end results will be totally different!
//Yes, everyone is hoping that their HDB price will escalate. To have an increase in demand for flats, a few things have to happen:
Really?
Since when?
//catherine goh
This is a joke.
We have people wanting the prices of flats to explode and then move over to some third world country.
They don’t like to stay in Singapore at all?
//richie
if only he dares to say this to the ministers:
If you cannot afford to be an MP
dont cry
You can still serve in the RCs
or give free services on the internet.
and don’t need to join the PAP and ask for million dollars salaries
and don’t let the foreign countries like Malaysia laugh at you for having no moral integrity and is robbing the Singaporeans.
Guys, I am one of those who is married and without a place to call home. Let’s just say this, who wants to wait 3 to 4 yrs for a home after they get married? I don’t understand how people can book a hdb as well as a wedding date and just put life on hold for 3 yrs. Another thing, even if u want to buy a new flat and wait out that 3 yrs because you simply can’t afford the crazy resale market, you are not guaranteed of a unit in even these bloody punggol developments because the demand is far outstripping supply and we have to compete in a ballot of ratio 7 applications to 1 flat !
If the analysis above was done using the resale market, which is invariably very old flats asking crazy prices, it will reveal that our housing affordability does not take a calculator to reveal that it is way out of this planet.
I need to think of a way to emigrate…absolutely need to. Else my wife and I will be shackled to this mortgage and this lousy lifestyle for the next 30 yrs.
Hi Fievel,
Thanks for your comments.
If you and your wife can afford it, buy a private apartment even if it is a leasehold project instead of waiting 3 years for a new HDB flat or pay for over-priced resale flats.
The price difference between HDB resale flats and condominiums in the suburbs has narrowed over the last 2 years.
A 4 room resale flat in Bishan now fetches between $350K and $400K.
Fork out $200K more and you can get a 3-room condominium in Yishun, Jurong and Bukit Batok. There are still affordable condominiums around if you are patient enough to hunt for it.
The good thing about private property is that it will always have a base value, especially if it is freehold.
3x annual household salary is the prudence mark for me. Even if I go to 4x annual household salary, it’ll only be at the resale market’s 3 room flats in good locations or 4 room flats in lousy locations.
Condos’ quantum are simply too expensive. It doesn’t leave us with room to manoever in bad times.
there is a ready spread of various housing types that will suit one’s affordability level but being singaporean, they want dirt cheap and want green or new and which government in the world can meet that kind of aspiration from her people?
the way i see it, buy high is ok as long as it doesn’t fall when you need to sell. if the gahmen can ensure a stable market, i think we should be contented.
but if you buy high and force to sell low because our gahmen has mismanaged the property market, you may have to find another quick exit because the mrt will soon be installed with new glass barrier.
Online Petition to urge govt. to lower HDB prices and increase new flat supply.
http://www.thepetitionsite.com/1/lower-hdb-valuations-or-build-more-affordable-hdb-housing-for-singaporeans
i seriously think it’s just another measure to deplete our CPFs, in line with so many others policies now. Age limit to withdraw CPF cannot be raised further now, so they have to look for more creative ways.
If you still have something left to squeeze in CPF, they are now forcing you to take annuity.
we can’t even retire with dignity around here. after lugging most of our CPF for overpriced housing, we will have nothing left for our sunset years.
who seriously wants to work until they’re 80?!?
[...] >> HDB flats will be “severely unaffordable using the Median Multiple as a benchmark for housing affo… [...]
http://web.mit.edu/cre/research/hai/
MIT centre for real estate has a good critique of the cost:income measure of affordability and proposes and alternative; extract below:
How is Affordability Measured in the HAI Index?
“In determining whether individual households can afford adequate housing, there are three dimensions of affordability that are considered in the current literature: adequate structural quality, the specific needs of varying types of households (especially differences in size), and commuting costs.
Many of the existing measures of housing affordability are indicators of so-called “rent burdens”—a ratio of monthly housing costs to incomes—computed using a simple ratio of median rents or house prices to median incomes. This approach, while mathematically simple and based on readily available data, obscures the true questions of affordability.
Reports using medians fail to identify an acceptable level of housing quality or town level public amenities (such as school systems). In addition, the median house price in many well-to-do areas is likely to reveal little about the distribution of acceptable housing units that cost less than the median in that town. Furthermore, households eligible for affordable units neither earn the median nor seek the median housing unit.
Some of the median-ratio statistics are also created by using an individual town’s median house price and the same town’s median income. Those who already live in the town can most likely afford to live there. It is more appropriate to consider a metropolitan-wide distribution of households who need to live somewhere. Finally, because the median measures fail to incorporate structural characteristics they provide little useable information to households of different sizes.
The HAI Housing Affordability Index is a powerful alternative to previous measures of affordability. One of its greatest strengths is its ability to capture the Total Cost of Ownership of individuals’ housing choices. In computing the index the obvious cost of rents and mortgage payments are modified by the hidden costs of those choices. The Housing Affordability Index adjusts the nominal Total Cost of Ownership by factoring in the opportunity costs associated with access to employment, the quality of public schools, and environmental conditions. Inexpensive housing built with little or no access to employment imposes high commuting costs on households with less capacity to absorb those costs. The Index’s innovation in affordability measurement is its incorporation of job accessibility as an important aspect of the economic health of the region. Likewise, poor schools and environmentally fraught neighborhoods also impose costs on residents that are not entirely reflected in the price of housing. The Index modifies each community’s rents and housing values to reflect these costs using a sophisticated multivariable regression to generate an adjusted distribution of the housing stock.
In addition to more accurately describing the total cost of housing in a town within its local metropolitan region, the Index allows for the varying needs of different sized households and imposes a minimum standard for structural quality. Different indexes can be computed for specific household incomes and household sizes, taking into account the variety of groups who have a stake in area affordability. The flexibility and rigorous approach of the HAI Index make it a powerful tool for helping to address the current challenges to providing affordable housing.”
Insightful analysis of the current housing situation.
True to say, the price gap between the private and HBD housing has narrowed over the years, but there are still substantial differences when it comes to buying a priviate house, e.g. 20% upfront deposit, monthly maintainence fees, leasing issues.
How many middle-income singaporean can fork up a good 100k – 200k of cold hard cash for that 20% down deposit?
My fiance and I have been sourcing for private home for quite a while now (our monthly income >8000, but 8,000 monthly. Right now, albeit a slow and ardously painful income increment over the years, there are increasing proportion of middle income family that found themselves stuck nowhere. Ironically, those on the streets are well-off singapore who aren’t eligible for subsidies/grants from government and yet not wealthy enough to fend for themselves!
Compounded by influx of foreigners who inevitable stresses the housing situation, we also find a certain group of singaporean turning to snapping up new private properties to earn extra quick cash from rentals. Not only this spurs the property market, it creates a disillusion that singaporeans are more wealthy but in fact majority of those occupying the private estates are foreigners.
My fiance and I are professionals, trying to create a family in Singapore. The proposal of migrating was once a distant thought but has gradually present as a viable solution to our problem. Indeed right now is not the right time, but after our careers finally take off, chances are migration would be an attractive option. Grass is not necessary greener over the other side, but we are seeing more weeds here, whether we like it or not. It really doesn’t matter anymore, if Singapore suffers from a brain drain in the future, as the situation is currently correcting itself with the foreign talents. No, I am not lamenting or complaining about the foreign talents, but such a decision came about from a wider perspective which I would not indulge here but surely housing is a major consideration.
Perhaps in the future when Singapore sees more doctors/lawyers/engineers/executives leaving for greener pastures or rather leaving a barren land, it would look back and say … ‘maybe houses then are a tad too ex…’
Hi All Singaporeans,
I am in singapore for the past 8 years, even though Singaporeans are quiet brilliant in job they build to be blind in the govt issues. Here what i see as i am not build blind !
1. Singapore is very very different from other country for real estate. The TRUTH is its not a Real Market, its just pretend to be real market only.
2. What is meant by real market ? Real Market will obey fundamental laws of supply and demand and will adjust automatically for the market situation.
3. Why singapore is not real market? Singapore almost all housing have supply by govt and demand also is from govt only. They can control demand by controlling number incoming foreign talents. If govt want to increase or decrease the price they can easily do it. So its just a blind game to say real estate investment in singapore.
4. Example: why the HDB price went up crazy for the past three years ? Because govt increased its demand by pumping huge number of people inside singapore… but its just kept its supply very low (purposely) ..so nothing wonder the price will be of course crazy.
5. As singapore is not a Real market that’s why it didn’t even react for the world recession
Melody from Jingle Bells:
Marbok Tan, Marbok Tan, he is having fun.
Regardless of the board he goes, he’s bound to make it rich…hey!
COE, ERP, now is HDB,
Affordable is the word he loves,
He don’t give a damn abt you..
(Chorus)
COE’s affordable
ERP’s affordable
COV is so cheap cheap cheap,
You just need time to find…
COE’s affordable
ERP’s affordable
HDB is so cheap cheap cheap,
Just pay until the day you die…Hey~!
[...] >> HDB flats will be “severely unaffordable using the Median Multiple as a benchmark for housing affo… [...]