Contrary to Straits Times’ opinion piece, Price-to-Income Ratio puts HDB flats in category of unaffordable

Contrary to Straits Times’ opinion piece, Price-to-Income Ratio puts HDB flats in category of unaffordable

by Foong Swee Fong

Ms Chua Mui Hoong, Associate Editor of the Straits Times, insists in her opinion piece on 4 November that Built-to-Order (BTO) flats sold by the Housing Development Board (HDB) are affordable compared to many Asian cities.

She says that most first-time buyers use less than 25 per cent of their total pay to service the monthly loan repayments, which can be covered by the funds in their Central Provident Fund (CPF).

Most of us will realise that this line of thought is a non-starter because the duration of the loan can be increased. I vaguely recall loan duration used to be 15 to 20 years, but now it can be stretched to 30 years.

More pertinently, she cites the price-to-income ratio (PIR), which is the most reasonable measure of affordability, because it takes into account both house prices and purchasing power.

A PIR of 1 means it takes one year’s worth of the household salary to buy a house.

Ms Chua notes that the PIR for HDB flats as reported by the Urban Land Institute is 4.5, while her own calculation of a 4-room BTO flat in Ang Mo Kio is 6.8, which she claims is “still low compared to many Asian countries”.

She then cites the PIR for private property in Singapore, which is 13, while that of Hong Kong is 30, Beijing is 27 and Tokyo is 17.

This comparison is misleading because it gives the impression that HDB flats are affordable. It is not. There are cities where the PIR is lower than Singapore’s and she did not mention those. She has chosen a comparison just to make her point, thus losing objectivity.

A useful PIR takes the median house price and divides it by the annual median household income (Median is better than average because it is not skewed by extreme prices).

According to Demographia International Housing Affordability, “In a well-functioning market, the median-priced house should be affordable to a large portion of middle-income households”, which makes sense and indeed, was the case a few decades back, before the onset of neoliberalism.

Using the PIR, middle-income housing can be categorized into “affordable” (PIR 3.0 and under), “moderately unaffordable” (PIR 3.1 to 4.0), “seriously unaffordable (PIR 4.1 to 5.0) and “severely unaffordable” (PIR 5.1 and above).

Demographia calculated the PIR of 92 cities using publicly available data and Singapore scored 4.6 in 2019 which puts it in the “seriously unaffordable” category, which quickly deteriorated to 5.8 in 2021 to “severely unaffordable”.

Significantly, Ms Chua’s calculation of 6.8 for a 4-room BTO flat costing $347,000 based on a couple’s income of $6,500, puts it firmly in the “severely unaffordable” category.

The Urban Land Institute report of 4.5 for HDB flats puts it in the “seriously unaffordable” category, which curiously, it nonetheless states that “Singapore stands out as the only city-state where housing is deemed affordable”.

Even though many major cities have deteriorated into the “unaffordable” categories in the last few decades according to Demographia, it brings no comfort that Singapore is one of them. That our houses are less unaffordable than other Asian cities’, doesn’t make ours any more affordable. Ms Chua should bear this in mind.

My father bought his 4-room HDB flat in 1973 at Toa Payoh for $12,500. His pay, with lots of overtime, was about $700 per month. That puts the PIR at less than 2, firmly in the affordable category.

And bear in mind, in those days, household income is mostly derived from the husbands’ work as the wives were looking after the family. Put that into context and you appreciate what a wonderful job the first generation of the People’s Action Party (PAP) did with regard to public housing, and the mess PAP 2, 3 and 4 have gotten us into.

So, what is to be done?

There are various reasons why prices are exorbitantly high now, including allowing the use of their CPF to pay for houses, factoring the market price of land into HDB flats, albeit with subsidy, as well as allowing foreigners to buy houses here.

My humble suggestion is to make it extremely prohibitive for foreigners to buy houses here, bearing in mind that there is a rippling effect from the private property all the way to HDB flats, including BTO prices, given that it is pegged to resale prices.

Also to substantially increase the subsidy for BTO, including for 4-room and 5-room flats so that the PIR drops to the “affordable” category. At the same time, increasing the minimum occupation period substantially, perhaps 20 years, so that the temptation to flip for a quick profit will be curbed.

This write-up was first published on Mr Foong’s Facebook page and reproduced with permission.

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