Thursday, March 25, 2010

The TRUTH about Housing affordability in Singapore.....

In a recent parliament speech, Minister Mah spoke again about HDB flats being 'affordable'. To support his assertion he gave a few examples to illustrate what affordable means:

"In the case of new HDB flats in non-mature estates, the average mortgage payment for new flats in non-mature estates sold in 2009 was 22% of monthly household income, which translates to a DSR of 22%. This is 1-2% marginally higher than the level seen in the last decade, but well within the affordability benchmark of 30-35%. This also means that about 80% of Singaporean new flat buyers are able to service their housing loans entirely from CPF without any cash payment. In my opinion, this is a significant fact and a very real measure of affordability" - Minister Mah's Speech in Parliament 5 March 2010[Link].

Do go through the other examples in his speech to fully understand what he means by affordability. He is basically saying if you can service your 30 yr mortgage loan today, things are okay...the HDB has done its job well and there are no real issues here. You noticed he used 'average' mortgage payment ...hmm so what happens to the 500,000 families who are below average? What happens to the bottom 20-30% where income has fallen off steeply due to the income gap? Public housing is for everyone right? Not just the average and above average families. His choice of using the average to demonstrate affordability is just a small spin ....I'll show you why this whole affordability argument from Minister Mah is bogus. Our public housing is the most expensive in the world and it causes Singaporean households to be deep in debt putting them at risk - 8% of HDB loans were in default in late 2008 even before the recession started[Link:HDB Mortgage Defaults Up 33,000 in October]. The need to service a debt over 3 decades make Singaporean households financially vulnerable - but there is something that make such loans even more dangerous......

How did people buy homes in the past anyway? My grandfather his home by leasing a piece of land from a landlord and he paid a house builder to build the attap house. I lived in it for 15 years - my grandpa was a baker, he had 6 children and never spent one day in debt. My father bought his HDB 4 room HDB flat in the early 80s. Those days HDB build 4 room flats the size of an $800K-$900K condo today. My dad paid of his housing debt in 7 years. His CPF was intact because they did not allow CPF to be used for housing in those days. Some time in the later half of the 1980s the CPF was liberalised for use in housing and this was what happened:


The surge in property prices was caused by the CPF liberalisation (according to this research paper[Link]. The housing loans to GNP ratio went up from 0.1 in 1980 to a whopping 0.49 in 1997 [Link]- a 500% jump! So CPF was emptied for purpose of buying homes and households became highly indebted - now housing becomes intertwined with retirement.

...Some of you may be asking what is wrong with debt anyway? You have a steady job, you make more than enough to cover your monthly instalments ...so what is the big deal about borrowing $300K to buy a flat or $500K to buy a condo if you're making $5-8K a month...30 yrs later you will be off the hook and along the way there is a good chance you can off-load to some other person for a profit of $100-200K if the timing is right. What is the problem...everyone else is doing it anyway....besides job loss, falling prices, illness, etc, there is something sinister I find most young people don't take into account when they take up, say, a $500K loan - its seems so routine these days given the high cost of housing....let me tell you a story...

Late 1998 during the Asian crisis, prices for property fell and I was persuaded to buy one. After I selected my property and booked it, I went around to shop for a loan. I found a bank advertising an 'unbelievably low rate of interest'. The offer was so good, the bank kept its doors opened on Saturday to deal with surge in loan applications. I went to the bank very early but found a long queue of people ahead of me. I waited for 5 hours before my turn. When the officer saw me, she said, "Mister, this type of good deal for housing loan you will probably never see again in your lifetime". So what was this good deal? The bank was offering an interest rate of 5.25% for housing loans - the lowest in recent years. Many people today taking up housing loans forget that the 3-4% housing loan interest we see now is artificially low and not the norm if you look at interest rates in the past 3 decades. During the Asian crisis, housing loan interest rates went up to 8% i.e. if you have a housing loan of $500K you will be paying $40K a year or $3.3K a month on interest along without reduction in principal. One of my friend paid close to $200K in total instalments to service a $700K housing loan in 1996-1998 only to see the principal fall by $50K as interest ranged from 5.5-8% during that period.

Talking a 30 year loan is not a trivial thing - during the 30 years, many things can happen include the high likelihood of interest rates going up, job loss, illness, etc and Minister Mah is incorrect to say it is affordable and okay for people to take up these loans when we were already seeing a default rate of 8% in 2008 when the interest rate and job environment was relatively benign. Debt = risk and a public housing program that requires buyers to take up 30 yr mortgages to stretch their loan so they can afford the month instalments puts the ordinary people at risk while it maximises the govt revenue by putting heavy burdens on Singaporean households.

39 comments:

jamesneo said...

I agree totally, the low interest rate of easy money will be the downfall of US and will rise when US keep print money leading to hyperinflation setting in US. The real depression that will start in US or EU in 2011-2012 will definitely affect singapore. With lowered liquidity and money supply, Banks may start to increase interest rates tremendously. There are instances of interest rate reaching 17% in the 70s in the UK.At such high interest rate, the money to pay the interest will exceed the principal in no time. This problem will affect the people unable to get a HDB loan tremendously.

One thing i have asked before: Are we sure that the government can afford to give us 2.6% interest rate for HDB loan forever or the whole ponzi scheme will collapse and the they will suddenly have to increase the interest rate.

Anonymous said...

better not walk out of the house, sekali kenna car langar.

rialce said...

Well, I think the housing bubble in Singapore is threatening ordinary singaporean. I am afraid we will become Japan, the lost decade they say. When the housing bubble burst, I think Singapore will be in a turmoil. But I can't think of anyway to prevent this from happening, it is simply irreversible

Anonymous said...

No need to burst lah. Is whether want to protect from bursting or not.Goverment powerful position can control lah if want to.

Anonymous said...

affordability is a matter of perception. and pap is very good at managing perceptions/expectations of SG peasants.

i remember way back in 90s when a graduate's starting pay was $2000, we were already complaining that hdb flats were so expensive.

now 10 to 20 years later, graduates' starting pay is about $500 more, but hdb pigeon holes cost twice as much.

if we let pap rule over us for another 10 years, pap will convince us that the japanese way of having two/three generations paying for the same roof is the "correct and inevitable" way to go...

Anonymous said...

But Minister Mah is not worried. He even said HDB prices will remain high and may even increase some more. Of course as minister he can make it happen.

As long as peasants bo pian, everything will be OK. Unless migrate lah, bcos to be realistic, PAP unlikely to be voted out.

Anonymous said...

Vote Wisely.Vote for the strongest team

Anonymous said...

aiyoh...you pay so much already, burst how can. if burst, garmen really no conscience liao and mah shld get shooted. furhtermore, who want be the next japan ? since big burst, japan cannot get the thing up for like 20 yrs already. suay man

Anonymous said...

IMHO, the current rise in asset prices is driven by myopic expectations and greed on the government part. Many things are out of wack in the country. And even with almost a hundred ministers in the cabinet, the long term problem will be almost impossible to juggle.

Anonymous said...

"When the housing bubble burst, I think Singapore will be in a turmoil. But I can't think of anyway to prevent this from happening, it is simply irreversible"



It is not irreversible. Think of where the money is flowing from where to where and ends up where. And then reverse it.

Anonymous said...

From many of the above comments, looks like most are quite young, or didn't buy property during our Tiger years in the mid-90s. Many who bought in 1996 are still waiting for their house price to be higher than in 1996. Many cannot tahan already and let go in 2006, lose money after factoring all the mortgage interest payments, conservancy and maintenance etc. Those who really over extended themselves no choice declared bankrupt from 1998 to 2004, or downgrade to HDB 3-rm flats.

I bet many readers here don't even know what is the proportion of their salary going into OA, SA and MA. Do you know that the OA portion will be reduced as you get older? The first reduction comes when you hit 35 yr old. So if you max out your OA to service the mortgage, by 35 yr old you will have to start topping up with cash. And this will get worse when you hit 45, 50, 55, etc. as OA portion becomes smaller and smaller.

At the end of the day, Mr Horse is saying that your OA is a big FAT ZERO after 30 years. Only got SA which you probably cannot take out because less than Minimum Sum and can only be used to buy CPF Life for miserable payout. Your MA cannot touch at all, except if you check into hospital for holiday.

So you are on your own to save a big portion of your take-home pay if you want to stop working by 65 yr old, else become ultra-senior worker. You think you can monetise your home like Mr Horse wants you to believe? In just 20 years time, 1 out of 5 people you see will be 65yr-old or older. In 30 years time, at least 1 out of 4 people will be elderly. So all of you in same boat, all want to monetise the apartment, want to downsize, downgrade, rent out etc etc. The BIG QUESTION is Who gonna be interested? The supply will be >>> than the demand! Simple demographics. Home prices will be depressed and stagnant at best. So even if HDB and the banks willing to offer reverse mortgage, what you get will be crappy deals.

See how smart PAPy is? They lock you into a lifetime of servitude. It is legalised slavery. Best part is they don't even need to feed you or house you. Your type of slavery you need to buy everything yourself!

Anonymous said...

They are trying to squeeze from the people through every legal means in order to plug the big loss made by that 'suay' woman.

Reported biggest loss so far was $58b loss. And that's reported only.

half empty said...

Anon 00:30,

Based on your reasoning, it seems perfectly logical that the government is reluctant to build more public housing as 20 years down the road, if the current demographic cannot be fixed with massive immigration of young people, there will be a glut of HDB with few takers. The current shortage is but a blip in a 30 year time horizon. Too bad for those who desperately need houses in the next 10 years. Perhaps in 10 years time, prices will come back to more reasonable levels as older folks cash out to pay for their living expenses. If I were one of those who currently own their precious HDBs, I'd watch the demographic and immigration trend carefully over the next 10 years. You may want to cash out while there is still capital gains and buy back into the market at a lower price a few years down the road. Today, housing affordability is the big issue with the general populace. In 20 years time, surviving retirement will be the main headache. And I believe the latter is a harder problem to solve then the former. And please don't wait for the government to provide the solution. Figure it out yourself. Start planning today.

Anonymous said...

Wow ! Windfalls for land and house owners.

And all the land, houses and owners are owned by Sg Inc.

Huat ah ! For everybody but not anybody.

Anonymous said...

asia growth is expanding. many have yet to be lifted from the poverty cycle. everyone is looking towards tapping this huge market. meanwhile, those with the capital will continue to opportune,grow their base and build infrastructure in anticipation of new business opportunities.

the ones that have their infrastructure established will gain an ascendancy and be assured of a "roof over one's head"?

how foolish?

Anonymous said...

excellent article.
Mah has got no clue on hardship of singaporeans cause he only go to places like Botanic Gardens for walks (saw him there) and see mostly rich foreigners.

Anonymous said...

"In the case of new HDB flats in non-mature estates, the average mortgage payment for new flats in non-mature estates sold in 2009 was 22% of monthly household income, which translates to a DSR of 22%."

you know that old saw, there are lies, damned lies and statistics.

first, the statistic that mah quotes is for non-mature estates, where prices are in fact lower than "average", since the average must take into account more expensive, centrally located property. why doesn't mah just come right out and say that you have to be rich to afford 'subsidised' public housing in the central areas, since that is the unspoken subtext.

second, total household income is factored into the mortgage payments stated above. single income families are no longer viable economic entities in the government's calculus.

third, it's not clear what mah meant by "average" mortgage payment or monthly household income. is that a mean or a median? this is highly pertinent when we boast one of the world's highest gini coefficients. the mean will skew higher than the median when income inequality is high.

fourth, what exactly does "average mortgage payment constituted only 22% of household income" actually mean? if i were a truthful statistician wanting to shed light on housing affordability, i would report a figure such as of families residing in non-central regions, those in the 50-51st percentile income bracket of this group spent a mean X% of their total household income on their mortgage.

if i instead wanted to deflect away criticism, that's done easily enough. take the lowest "average" measure (could be mean, mode or median) of income for the population living in non-central hdb flats, and then divide that by the MEAN of the total household income for the whole island (which of course includes people living in districts 9,10,11). i can still pass off that figure as, say 22%, and conclude housing is affordable. and i technically wouldn't be lying.

Anonymous said...

Finally! The best article I have seen written on the plight of the HDB market. Well researched and thought out, instead of plucking numbers from the air. Lets fight for affordable housing, or else when it comes to our children, they need to fork out a million dollars for a 80sqm 4 room flat.

Anonymous said...

Hi Lucky,

Although I agree with the gist of what you have written, this little bit may not be correct.

"My dad paid of his housing debt in 7 years. His CPF was intact because they did not allow CPF to be used for housing in those days. "

I am sure that CPF can be used for servicing HDB flat purchased in the 80s. Perhaps, you may wish to clarify.

LuckySingaporean said...

anon 8:17,

CPF was fully liberalised for private flats only in 1988 and for HDB flats in 1991. There was partial liberalisation in 1981 for private property. The reason for the liberalisation in the late 80s was the slump in the property market. I always believed that was a key policy error that led to what we see today.


You can find some write up here on the effects of liberalisation & changes to CPF for property purchases:

Link

Anonymous said...

Many PRs paid top $$ for HDB resale pigeon holes in choice areas, eg in city areas (Bain St) and Queenstown.

What is there to stop them? So of course due to market forces, HDB resale prices will rise.

But I think PAP has somehow calculated and very sure that at elections, there will be about 66% for various reasons, who are not affected or bothered by all these and what not. And this 66% has been consistent and unchanged for decades.

PAP will win again and their policies will continue for many more years, thanks to the magical 66%. This is the beauty of the Singapore system.

By the way, not much has been discussed or analysed on the internet about this 66%. Who are they and why they remain so constant throughout the years.

Anonymous said...

Do not forget if borrow till 65 years old but once reach 50 years old CPF contribution drop & medisave contribution up leave very little CPF & not enough to cover instalment loan. Previously, CPF contribution is same & no pay cut regardless of age if they still want to continue being employed. In 1988, I bought an EM at $126k (include 10% levy) 2nd time. Thus in 1998, I have to buy over the share and transfer $70k to my ex CPF but being penalized to re-loan at $190k with Monthly loan increased to about $660/- and interest at market rate instead of subsidized rate though I am 2nd timer but they say that it is 3rd time without sympathy that I am a single parent with 2 kids. Right now, I am still struggling to paying and my CPF will diminish in another 5 months. If CPF rates still remain the same regardless of age and not penalized for market rate,
I believe that I will not face this problem can't service my instalment in 5 months time. Annoymous

Anonymous said...

eh.. lemme do it in point form:

1. Someone took CPF money
2. Someone invested CPF money
3. Someone squandered CPF money
4. Someone think of plan not to return CPF money
5. Someone say use CPF to pay house so no need to return CPF money
6. Someone say u now work longer so u dun need the CPF money until later
7. Someone say not enuf, so increase housing cost so u pay more thru CPF money and increase housing cost also can win election because someone increased the value of your house

Anonymous said...

fully agreed, best part is they dont whip you like former slavery in south america, you work till your death like it or not...

older generation - half slave
middle generation - full slave
younger generation - super slave
(like japan, housing debt pay 2 generations also dont know whether can service finish...)

Bless our middle and younger generations, which will affect our older generation who is not so rich, lots of social problems will come, then the national leading "heros" will come and "help", saying that they would give rebates, grants, job opportunities(low and underpaid job which hard to survive), training(where they would make money from it also), subsided housing(Resales so high price with COV, BTO also very expensive), COE will reduce(they will mentioned their new COE formula did a good job) yet mrt and bus prices keeps on rising and rising(watch it, oil price rising, they would say economy is better, can rise), money is getting smaller due to over-printing, yet they use that to raise prices of housing, cars, etc to make more money for themselves...

Anonymous said...

Their votes will diminish for some reasons less than 66%:

1) internet population getting more views
2)unemployment of the age 20s especially is really serious(they did not include those who stopped to find jobs already)
3)elderly seeing problems of housing and cars can do harm to next generations
4) prices always escalate
5) PRs dont give a damn actually, at most pack up and LEAVE!!!!!! Even converted citizen dont give a damn as they have enough money to flee.................
6) most importantly, they more and more dont care about the country, just want to make money(like bank, finance analysts and researchers and ntu/nts analyst to announce gdp, economy, exports, oil price, gold price, etc commodities like food goes up, so that these scholars have BIG fat year end bonus)
7) making our middle age and younger generations bear more and more debts, some older owners mentioned they are debt FREE now, hdb full paid up(they are known as half slaves)
8) taxing in various ways, like COE, ERP, Public transports, utilities, etc etc
9) monopoly of various industries like smrt, psa, sia...(some companies are just accessories to show that they liberalized, in fact worse than america where 190X anti-monopoly laws is implemented)
10) etc etc etc, long lists...

Anonymous said...

well SAID!!!!!!!!!!!!!!!!!!!!

long live democracy...!!

The day the ruling party is complacent and dont improve lives for people(not just in terms of housing, but the quality of live), they will lose their dynasty eventually...

keep improving and be humble please this ruling party, too arrogant and too cocky...!

need to be taught a lesson so they can wake up though they wont die... but their votes will dimish even more if people vote neutral or even oppositions

Anonymous said...

Well our beloved minister has all the right things on his side. High salary, good house, confirm job..of course everything looks good.

In Term of politics, i am no professional so i will not comment. But what i know is..i am single and 33 yet cannot buy a HDB flat just because i am not married.

How come our policies is so good to help foreigners to save and invest in property and and discriminated against single Singaporean from saving and investing by buying an asset.

Yet when war comes, as true blue Singaporean, we will have to defend the property and jobs of 55% Singaporean and 45% foreigner. What's the motivation to defend Singapore ?

If we win the war, those foreigner can come back happy that we did a good job to safeguard their assets and then come back to buy the assets of those Singaporean who died in the war.

Anonymous said...

To see how unusually low interest rates are these days, check out the official statistics from MAS (Monetary Authority of Singapore).

http://www.mas.gov.sg/data_room/msb/domestic_interest_rates.html

Choose "Interbank Overnight" (same as SIBOR?) with a time range from 1988 to the present.

Because interest rates are so low at the moment, home buyers can afford the current mortgage payments on enormous loans, but presumably that will change when/if interest rates rise on all the variable rate mortgages.

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Marcus XA said...

Have u read about people who don't pay a cents for installments and HDB still allow them to stay on? These people gambled and lost money but arrogantly tell the housing agent "I have stayed in HDB all my life but I have never paid a cents!". We only see those who suffered. What about those who find leak holes and exploited our system?

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