Part 2 of “The Big Singapore Market Upgrade of 2017?”: Income Growth and Housing Affordability

by Ku Swee Yong, Co-founder of HugProperty and Shannon Aw Qian Tong, undergraduate from the Department of Real Estate, National University of Singapore, a three part series on “The Big Singapore Market Upgrade of 2017?”.

Key Point 2: Medium-term potential GDP growth for Singapore at 3.0% per annum over 2016–2030. Income growth of 4.0% per annum.

A doubling of dollar per sqft prices in the residential market from 2016–2030 implies an average of 5% per annum increase in prices. To make up the 5% growth, the authors “believe Singapore can achieve 4% growth in nominal GDP per capita over the long term based on 5% nominal GDP growth and 1% population growth”. The 4% “per capita GDP growth” or income growth of the population implies that housing affordability will improve by 4% per year. Coupled with a 1% per annum decrease in the average sizes of homes, it means that a 5% dollar per sqft price growth per year is sustainable. The 5% nominal GDP growth assumption came with a “1.5–2.0% medium-term headline inflation”. (Reference is made to page 27 of the report.)

Our questions:

Does a 10% income growth mean that a household will be able to afford to buy homes that cost 10% more? Housing affordability for renters could increase in tandem with income growth, that is, if wages increased by 10% a tenant could increase his rental budget by 10% to rent a bigger home or a home in a better location. But for home ownership, the correlation is debatable.

While each working household may achieve a consistent 4% per annum income growth, they still need to deal with inflationary pressures of 1.5–2.0% per annum and may not be able to afford homes which are getting pricier by 4% every year.

Flipping the question around, we ask if income growth and improved affordability will necessarily mean that housing prices will increase? In a market that is oversupplied with homes, with 31,000 vacant private residences and Executive Condominium units at the end of 1Q2017, and with rentals continuing to slide, income growth will not necessarily lead to home price growth.

Fact 3: The correlation between income growth and home price growth was negative, at least for 2016 anyway. Singapore’s median household income in 2016 increased by 2.6% over 2015. However, over the same period, private residential rentals dropped 4.0% and private home prices dropped 3.1%. Income growth does not necessarily translate to home price growth. Not when we are in a multi-year oversupply situation.

Fact 4: A key contributor of the 2.6% household income growth in 2016 is a 15% increase in households with zero income. The table below shows that in 2016, the proportion of households with income from work grew by 1.8% over 2015 while the proportion of households with no working persons increased by 15%! The shrinking employment market in the past two years were mainly attributed to the lower income jobs in sectors such as offshore and marine, oil and gas, construction and retail services. When the lower income households fall into zero income, the remaining families with stable income will lift the nationwide average income. We recognise that there are families whose household incomes have indeed risen and that Singapore continues to accept new Permanent Residents and new citizens who have high income. Therefore we are not attributing the entire 2.6% income growth to the large 15% increase in households which have stopped earning. We simply want readers to be mindful about how statistics may be reported.

Source: SingStat, IPA

Notes: a) A resident household refers to a household headed by a Singapore citizen or permanent resident. b) For statistical purposes, “retiree households” are defined as those comprising solely non-working persons aged 60 years and over. “Retiree households” are included in the category of “Households with no working persons”.

In view of the large increase in households without income, the 2.6% household income growth in 2016 is nothing to celebrate about. It is akin to a school reporting an improvement in students’ average grades from B to B+ simply by sacking all the students with C and D grades. Will the school make a celebration about that?

Fact 5: GDP growth amidst employment decline will be the new normal. To top off this discussion, the first quarter 2017 GDP growth came in at 2.7% against: a) an overall reduction of 6,800 jobs, b) a 0.9% decline in residential rentals and c) a 0.4% decline in private home prices. Since mid-2013, Singapore has experienced steady GDP growth amidst 15 continuous quarters of home price declines. The report scarcely considered the large number of vacant homes and oversupply of housing stock that are depressing the market even while economic growth stayed positive. The total number of jobs and employment opportunities will impact the population growth and taken together, those indicators are more meaningfully correlated to housing demand than the actual value of our GDP.

The report further stated that historically, a 7% per annum dollar per sqft price growth was achieved in the period of 1975 to 2016 and therefore, “we believe home prices will double by 2030 and offer an average 5% in annual appreciation per year. We believe a 5% long-term growth rate will keep pace with income growth, keeping affordability levels (as measured by home price to income) stable.”

Our questions are simple: is it reasonable to use historical growth to justify the forward growth? Are the economic factors and policy levers available in the last 40 years still available in the next 14 years?

The 7% per annum growth over the period of 1975 to 2016 started from a very low base. The private residential price index, normalised at 100 points in 1Q2009, was a mere 10 points in 1975 and 137 points at the end of 2016. Growing 7% per annum from a base of 10 index points is probably a little easier to achieve than growing 5% per annum from a base of 137 index points.

Over those 40 years, population growth was rapid, from about 2.2 million to 5.6 million, with high annual growth rates achieved in several years such as 4.8% in 1981, 4.2% in 1996, 4.3% in 2007 and 5.5% in 2008. That growth boosted the demand for housing and, over a smaller base of residential stock, that demand translated into price growth.

Several other factors added to the increase of home prices in the past decades:

  1. a) the strong government push for home ownership which, in our best estimates drawn from HDB reports, rose from below 50% in 1975 to 90% in 2016,
  2. b) the accumulation of CPF monies in the earlier years and a subsequent relaxation of rules around the use of CPF for purchasing homes,
  3. c) increased plot ratios for housing developments and higher quality homes built with better material and specifications, both contributed to home values, and
  4. d) a young workforce in the 1980s to 2010s (comprising of the baby boomers) with increasingly better education, the majority of whom are employed by multi-national companies and a growing public service with attractive salaries.

Fact 6: Population growth will be low, at 1.5% per annum. Looking forward, in the period of 2017 to 2030, assuming that we can achieve the population target of 6.9 million in 2030, the annual population growth rate will average at 1.5%. This growth is strongly premised on the ability to create jobs while sustaining GDP growth at between 2–4% per annum till 2030. However, as discussed in the paragraphs above, Singapore achieved positive GDP growth amidst a decline in employment in 1Q17. The future of jobs creation is a question mark given the rapid advancement of robotics, more powerful software and new technology. In the next ten years, it is conceivable that redundancies will outpace new jobs even while GDP grows. So where will demand for residential properties come from? Not robots for sure!

Fact 7: Home ownership has hit a peak. Home ownership has hovered around 90% for the last 20 years and no matter despite policy makers’ push for 100% home ownership, there will be families who are not able to, or choose not to, own their homes. If we are not able to create sufficient jobs to bring about an increase of foreign workers, there are only two ways to increase home purchases: splitting household units and getting more investors to buy (but will they buy knowing that rentals are not looking up?).

Fact 8: There are few policy levers that can mitigate old age and death. Our population is aging and the workforce is no longer young. The number of “retiree households” increased from 54,000 in 2008 to 95,000 in 2016, a 76% increase over 8 years. The size of this group will only increase further: in the 10 year period from 2017 to 2026, about 558,000 Singaporean baby boomers will cross into retirement age of 60 (based on Department of Statistics’ definition in tabulating household incomes). In contrast, only 461,000 young Singaporeans will “graduate” past the average first-time home-buying age of 25. Whilst we agree that there will be new home sales and new family formation, we have to be mindful that many retirees also need to cash out of their homes for retirement. Further, we need to note that the total number of deaths due to old age will increase over the next 15 years as the 1 million baby boomers (who are between 51–69 years of age today) approach the median life expectancy of about 85 years.

Part 1 of “The Big Singapore Market Upgrade of 2017”: Downsized Properties
Part 3 of “The Big Singapore Market Upgrade of 2017?”: Rise of the Single-Person Household

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