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Part 2 of "The Big Singapore Market Upgrade of 2017?": Income Growth and Housing AffordabilitySINGAPORE, Sept. 26, 2017 /PRNewswire/ -- Ku Swee Yong, Co-founder of HugProperty and Shannon Aw Qian Tong, undergraduate from the Department of Real Estate, National University of Singapore publish today their joint series article on "The Big Singapore Market Upgrade of 2017?". The article is split into three parts. Full text of the second part is as follows: In the first part of the series, we discussed the factors that the author overlooked when claiming that the shrinkage of Singapore's property sizes would drive up the prices of private properties. We also clarified some other points that were neglected in the formation of their claim. Moving on to part two of the series, we will discuss the validity of the correlation between income growth and housing affordability. 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 1 Fact 2
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". Source: SingStat, IPA 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 3 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 in home prices in the past decades: 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, b) the accumulation of CPF monies in the earlier years and a subsequent relaxation of rules around the use of CPF for purchasing homes, c) increased plot ratios for housing developments and higher quality homes built with better material and specifications, both contributed to home values, and 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 4 Fact 5 Fact 6 In this part, we learnt that numbers can be deceiving, and some positive numbers here and there might not provide a comprehensive view of the full picture. The reduced demand for private homes is due to a high home ownership rate, together with an ageing population and workforce. This concludes part two of the series, and we will touch on the effects arising from an increase in single-person households in part three, the final part of the series soon. About HugProperty HugProperty is a web-based property platform, which provides potential buyers and sellers with expert knowledge and insights, that are necessary to make informed decisions. Originally started by three co-founders, Mr. Winston Lam, Dr. Andy Teoh and Mr. Jeffery Sung in July 2016, the HugProperty team now consists of industry experts such as veteran property agent and property analyst, Mr. Ku Swee Yong and renowned mortgage expert, Ms. Ally Yang. Through data analysis conducted by the experts, HugProperty can help make property buying and selling, an intelligent and hassle-free experience. For more information, please contact: Keith Jonathan / Nadia Chan Photo - https://photos.prnasia.com/prnh/20170728/1904117-2 SOURCE HugProperty |