Home are affordable! Stop complaining!

HDB resale flats are affordable. I'm going to discuss the results of a recent study and do my own calculations here.

A study showed that homes are affordable to the masses in the long term. Read full report: [Redefining affordability of homes]

Long-term affordability

Debt-to-service ratio (DSR), defined as the proportion of monthly income that goes into paying the mortgage, was 23% last year. This means that 23% of monthly incomes goes into paying the mortgage. (The internationally recognised threshold for housing affordability is 30%) The study showed that homes are generally affordable in the long term for income groups in the top 80% income earners.

30-year loan
HDB resale flat/apartment in non-mature estate
No subsidies
Interest rate of about 3%

So if you add in the people who qualify for subsidies and to buy directly from HDB, and the lower interest rates available now, there are even more people who can afford to buy HDB flats.

Short-term accessibility

Accessibility is defined by the ratio of the cash a buyer needs to make all the upfront payments for a new home to his savings including CPF balance at that point in time. E.g. if the upfront payment is 50K and his savings are 100K, the home is affordable. If his savings are only 30K, the home is unaffordable.

The study found that the bottom 20% of income earners are unable to "access" small resale flats in suburban towns, while the bottom 30% are unable to "access" a 4-room (3 bedroom) HDB resale flat in established areas like Bukit Timah. Also, buyers in the age group of 20 to 29, have an accessibility problem rather than a long-term affordability problem.

Upfront payments include down payment, stamp duty, Cash-over-Valuation (COV) payable for resale HDB flats. The median COV in Q2 2011 was 30K. Add in 10K for buyer stamp duty, agent fees and buying basic furniture, the total is 40K.

Let's calculate how long a median income earner will take to save 40K.

The median monthly income of resident Singaporeans in full-time employment is S$2,710. Suppose a median-income earn saves 20% of his monthly salary = $542 per month. Note that 20% is deducted for CPF contribution, so this means he's effectively saving 40% of his salary.

Time taken to save 40K in cash = 40,000/542 = 74 months = 6 years

Renovation cost was not included in the study but realistically speaking most resale HDB flats would require some renovation. Suppose it costs 20K, that means 24 more months or 2 more years of savings.

In all, a buyer would take 6 years to be able to pay the cash portion of buying a HDB resale.

Assuming CPF ordinary account contribution rate of 23% (includes employee and employer contributions), that's $623 per month. If he buys a 300K HDB flat and he's taking 80% loan, he needs to have 60K to pay the 20%. Time taken to save 60K in CPF account = 60,000/623 = 96 months = 8 years

So taking the longer of both durations, if a person starts working at age 24, he should be able to afford to buy a small HDB resale flat by age 32. And if his is a dual-income household, he can afford to do so in half the time, i.e. 4 years at age 28.

Of course, he could do that in less than 4 years if he can earn more and save more.
But can most people save 40% of their salary (20% cash, 20% CPF) without spending any of the savings?

Many people would "reward" themselves by buying cars, designers watches, bags, going on holidays, alcohol, cigarettes etc when they see spare cash in their bank accounts.

Sure, there are genuine people who need help, but I would hate to see the government give any new type of housing subsidies while making people who are happy with Polex watches and Prata bags contribute our hard-earned/saved dollars (via tax) to those who have-not-homes-but-got-designer-products.


Anonymous said...

With the median income of S$2,710 one will have to work 200 years to get close to Con-You's minister pay!

Yu-Kym said...

You mean his 1 month's salary?

Anonymous said...

too much assumption... are u pro PAP??

Yu-Kym said...

Scientific, mathematical and economic calculations always require statement of a set of assumptions.

I'm pro whatever benefits me :D

WaiZai said...

30yrs loan isn't exactly affordable, so to speak

normal uni guy graduates at 25 +/- 1-2yrs. 4yrs to save, 30yrs old to be able to afford.

30yrs loans meaning working till 60yrs old, without any retrenchment, any illness, any loss of ability to work or any other unforeseen circumstances.

Yu-Kym said...

That's why they raised the retirement age :D But I think it's hard to find a job or to stay employed after 45 :( So I think homebuyers should buy property that they can comfortably pay off within 25 years. Buy a BTO and get as much subsidies as they can, instead of buying resale HDB in mature estate and paying high COV. (Given the current low interest rates, they should take a long loan and invest their savings.)

WaiZai said...

raising retirement age is simply rubbish, given how stressful current lifestyle is, i wonder wad kinda health problems u gonna get proceeding into ur 50s. N employers dun like employing old people, taking a chance to suppress their pay owing to lower productivity.

taking a long loan is like a time bomb waiting to go off. interest rates will not stay low like now forever. when it rises, many people will be sweating over the loan financing.

N we're only toking abt housing here. Dun forget other "loans", like children's educational fees are not in the picture yet.

BTOs affordable? yeah, loan per month, utility bills, household expenses, children expenses, transport expenses n wadever other matters, end up u haf ZERO savings.

N halfway u get some illness, u think ur medisave will be enuff to save u?

marry at 30, first child at 32, children entering university when u're 51 at earliest. Only then u'll noe wad's sweating u out.

Yu-Kym said...

There are people who enjoy working, e.g. my mum. But I think working after 55 should be an option for the person rather than a need.

We have to understand that people's expected standard of living has risen therefore causing the cost of living to rise.

Anonymous said...

To WaiZai & all young folks sweating over prices of HDB flats;

I'm going to dish some hard knuckle words here;
if you have any objections to the situation, for goodness sake; speak up for your rights.

Write to the PM - I told him the stupid ex-National Development Minister ought to be sacked for saying "lowering HDB prices is akin to robbing the Nation's Reserves".

They are paid astronomical salaries - they had better produce astronomical results or the PM wont have enough MPs to form the next Government.

Economics is never an exact Science. Sometimes they get it right, sometimes they don't.

Many citizens ask why dont the State give more subsidies for people to buy HDB flats.

The answer is very simple - because we do not want to create a situation where lazy bums can buy a cheap 5-room flat, stay 5 years & sell at a HUGE profit in 2nd hand market. Then they squat in mother-in-law flat & lived off the profits or worse; marry a 2nd wife & f..k all the time producing lots of babies. When the money runs out - as it certainly will; they go crying to their MPs for welfare.

And the irritating thing about that situation is - we folks work our ass off building a progressive economy that INCREASES the value of our HDB flats- while that fat son-of-a-bitch stays in his mother-in-law's flat buming around.

And you know, every Singaporean is entitled to buy 2 HDB flats and so that bum can repeat that money & baby-making stunt twice.

I am not casting any aspersions at any race but I do not think Singapore's civil law allows the Chinese or Indians or Other races to marry up to 4 wives.

Just think of the implications if the Chinese do not form the majority race 20 years from now.

Personally, I do not like it at all.

So toughen up boys, write to your Prime Minister to get rid of the stupid MPs, work hard & start a business, find a nice girl & marry her, forget about girls who fed your wet dreams, send your kids to train/work/live with the chinese in China and watch the miracle of a super-power in the making, along the way you will meet lots of nay-sayers & hate-LKY losers, .... etc.

Its a great adventure out there. If you dont even have the guts to write to PM Lee, I doubt you got what it takes to compete with the next generation of 1.3 billion English-speaking chinese.

Do not let one miserable HDB flat stop you.