Homes more affordable as incomes rise

Source : Straits Times – 22 Aug 2009

Relatively cheaper than in 1996 boom year, data from two reports say

PRIVATE home prices may be on the rise again but new data suggest home buyers swept up in the latest frenzy are not necessarily overstretching themselves.

Buyers are finding condominiums far more affordable relative to their income now than they did during the mass market property boom of 1996, thanks to strong wealth creation in recent years.

This is the conclusion of separate new figures from financial giant Citigroup and property consultancy Jones Lang LaSalle.

Citigroup economist Kit Wei Zheng said: ‘Today, the average condominium is probably selling for around 19 times the annual income of the average Singaporean. While this is by no means cheap, it is still significantly lower than the peak of over 40 times in 1996, and around 24 times in 2007, though obviously higher than the lows of around 15 times from 2003-2006.’

Mr Kit’s study looked at absolute prices rather than the price per square foot.

His measure of affordability does not take account of a couple of factors boosting affordability in the current market.

First, the average condo buyer earns a higher-than-average wage, and is likely to have enjoyed faster wages growth.

Second, interest rates are far lower now than in 1996 and 2007. Analysts say this is helping to fuel demand.

Also, Mr Kit’s study uses average income, which could be significantly higher than the median – or midpoint – given the widening gap between rich and poor.

As well, he uses the average selling price of condos, which also could be higher than the median as the former is pulled up by the sale of expensive prime units, especially in recent years.

Jones Lang LaSalle compiles an affordability index looking mainly at the interaction between economic growth rates, housing prices and mortgage rates.

Its index has been falling since 2007.

It now shows private mass market homes are more affordable to first-time home buyers and HDB upgraders than in 2007 or 1996, said the firm’s head of research for South-east Asia, Dr Chua Yang Liang.

For HDB upgraders, affordability has improved a lot more than for first-time home buyers because HDB prices have risen substantially, he said.

Overall, strong wealth creation in recent years has also helped. Total economic output, or gross domestic product (GDP), per capita was $50,022 last year – exceeding the 15-year average of $40,866 by 22 per cent, said Dr Chua. Private apartment or condo prices have surpassed the 15-year average by just 16 per cent, he said.

The Urban Redevelopment Authority price index – designed to give a broad indication of price trends for private homes – fell 4.7 per cent in the second quarter.

A URA spokesman said prices for both uncompleted and completed projects still fell over the quarter even though some developers are raising prices for selected projects with good take-up.
Still, consultancies say home prices rose in the second quarter from the first.

Property consultant Nicholas Mak said more suburban condos are being launched at higher prices than in 1996.

However, ‘at the moment, prices in most projects are still within fundamental levels, even though many people have their pay frozen or cut and rents have fallen’, said DTZ’s head of South-east Asia research, Ms Chua Chor Hoon.

‘This is because income and rents had risen in the last few years when the economy was doing well; hence there was fat to cushion this current downturn.’

Mr Kit said: ‘Put another way, in nine out of the past 11 years, growth in wages has outpaced growth in property prices.’

Households also have far less debt than five or six years ago, with the household debt to GDP ratio falling from over 96 per cent in 2003, to about 70 per cent today.

These factors, combined with a resilient labour market, helped lift demand.

Also, many projects now have smaller units. ‘The new projects may look very affordable if you consider the absolute amount paid but you’re buying a smaller apartment,’ said Mr Mak.
The future, though, is hazy.

Many analysts think price growth is unlikely to be sustainable if the economic recovery is slow and incomes do not keep pace.

‘You can identify a bubble only retrospectively but I think we can’t deny that one could be forming as the recent uplift in home prices and volume is not accompanied by a broad-based economic recovery,’ said Dr Chua.

Mr Kit said: ‘The uncertainty lies in whether the current demand will be sufficiently sustained to absorb the substantial pipeline of new supply coming onstream, especially if interest rates rise, or when prices become substantially less affordable to the average home buyer.’