couple buying a house

Home sellers have been bringing down their asking prices to accommodate buyers’ budgets.

While we anticipate a market recovery in 2018, we need to remember that increases in prices need to be tempered by an understanding of home buyers’ affordability – how much individuals are able to commit to their real estate purchases.

By Chang Hui Chew

As the real estate market holds its breath for an anticipated increase in prices in 2018, it might be an opportune time for us to look at housing affordability. After all, measures curbing affordability were a contributing factor to the property market moving downwards.

With housing supply looking to push their prices further upwards in 2018 on the back of increasingly exuberant activity in collective and land sales, it is important to maintain a view on how buyers are constrained by how much they can spend on their real estate purchases.

Recent history

By imposing limits to the amount that home buyers could use to service their loans, the Monetary Authority of Singapore (MAS) effectively brought down the demand for properties in Singapore, with many realising that the properties they wanted to purchase were now effectively out of reach. As a result, sellers, including real estate developers, had to “right price” their properties, focusing on reducing overall quantums, in order to move units.

The primary measures that MAS used to curb affordability was the Total Debt Servicing Ratio (TDSR) for the purchase of private properties, and Mortgage Servicing Ratio (MSR) for HDB resale flats and executive condominiums. The former capped the total amount that home buyers could use to service their loans at 60 percent of their incomes per month, while the latter imposed a ceiling of 30 percent.

Despite some mild tweaks in the early half of 2017, MAS has said that these particular measures which enforce financial prudence will remain. This is because mortgages were often the largest source of household debt in Singapore, which these measures have effectively brought down.

In the most recent Financial Stability Review, released at the end of 2016, MAS strikes a note of optimism, highlighting that “the mortgage servicing burden for the median household remains below 50 percent under a severe stress scenario of a 10 to 20 percent decline in household income, on top of a three percentage point increase in mortgage rates”.

Property affordability sentiment among Singaporeans is weaker compared to other regional countries due to higher home prices here.

Median multiples

When comparing housing affordability across countries, most economies look at a particular statistic – the median multiple. This is the ratio of median house price in the country or city, by the median annual household income.

Singapore’s median multiple, as calculated by the think tank Demographia in its latest report, is 4.8, or “seriously unaffordable” (refer to Figure 1).

In comparison, Hong Kong, one of the most expensive housing markets in the world, stands at 18.1. Singapore is also better placed than Sydney, at 12.2, and even San Francisco, which saw a median multiple of 9.2.

Singapore’s median multiple might seem lower than expected, given our perception that we are one of the most expensive real estate markets in the world. Indeed, Singapore’s median multiple has improved, as we saw a ratio of 5.1 in 2013, classified as “severely unaffordable”, the first year that our island’s property market was included in the report.

Demographia’s report calls the Singapore government out for the “unique public commitment to keeping house prices under control”. Demographia however, does not take into account government grants and subsidies, nor does HDB share the full extent of pricing for Build to Order flats. Both data points could potentially improve Singapore’s median multiple even further.

Housing affordability

Perception is reality

Singaporeans however, have a far more pessimistic perception of our own affordability.

In PropertyGuru’s recent Consumer Sentiment Survey, our housing market saw an index score of 29, the lowest amongst the four countries (Malaysia, Indonesia, Thailand and Singapore) surveyed.

One of the key reasons for this low perception of affordability is that property prices are too high, with 71 percent of respondents echoing this sentiment. At the same time, respondents also called out government policies as “restrictive or unfavourable”, suggesting that affordability curbs or higher Additional Buyer Stamp Duties (ABSD) were impacting their ability to purchase properties for investments.

29 percent of respondents also indicated that prices are likely to increase, compared to 15 percent in 2016’s survey. Meanwhile, overall satisfaction with the real estate market also remained pretty low, at 34 percent (refer to Figure 2), a two percent decline from previous.

Compared to our neighbours

In comparison, respondents from Indonesia were the most optimistic about their affordability, with an Index score of 52, while Malaysia and Thailand stood at 38 and 34 respectively. Singaporeans therefore perceive their affordability to be even lower than our neighbours in the region.

Indonesians were also the most satisfied with their real estate climate, with 63 percent indicating positive sentiments towards it.

Consumers across the region however, expressed similar sentiments. The chief reason for dissatisfaction with their respective real estate markets are a perception of high property prices, but indicated that they felt positively about the prospects for capital appreciation in the long term.

This reflects an interesting dilemma of course. When investing, people often follow the adage of buying low and selling high, but this implies that there must be another party who is willing to buy at the elevated prices, who will then look forward to selling at an even higher price in the future.

PropertyGuru’s Consumer Sentiment Survey is conducted twice a year, with over 600 respondents in Singapore, and more than 3,000 across the region.

Guru View Issue 118

  The PropertyGuru News & Views   This article was first published in the print version PropertyGuru News & Views. Download PDFs of full print issues or read more stories now!