Managing a property market isn’t easy.
Since the onset of the new millennia, we have experienced property markets that have accelerated too quickly as the result of low interest rates and permissive mortgage underwriting standards. Some people won in this environment by buying and selling at the right time, while others defaulted on homes they couldn’t afford.
Meanwhile, the Cooling Measures have shown how difficult it is to achieve home affordability without negatively impacting market growth.
As we detailed in Balancing Home Affordability with Appreciation, the Cooling Measures have resulted in different winners and losers from that of the property market build up. These policy measures have made housing more affordable for some but the overall market finds its net worth diminished and not keeping up with inflation.
As SRX Property research indicates, during the last election cycle (May 2011 – September 2015), HDB resold market cap increased only 0.2%, annually, while the private apartment resold market cap recorded a paltry 0.7% on an annualized basis. In comparison, according to SINGSTAT data, inflation grew at an annualized rate of 1.8% while Gross Domestic Product (GDP) increased 3.6% and median income improved 5.6%.
(If we go back further in time, property prices have done even worse. Since 1995, GDP has increased by 5.7% per year while the SRX Price Index for non-landed homes has grown by only 3.3% per year.)
Without question, an imbalance in home affordability and market growth is not good for Singapore’s long-term economy. Both objectives - housing affordability and market appreciation - are important.
Homeownership is essential to the well-being of society. We know that when people own their home, they take an active interest in their neighborhood being clean and safe so the value of the neighborhood and its homes appreciates in value. As Mr. Lee Kuan Yew famously said, “The pride people have in their homes prevents our estates from turning into slums, which is the fate for public housing in other countries.”
At the same time, we know that a healthy property market builds wealth for homeowners that allow them to upgrade their living standards as well as self-fund retirement so they are not dependent on others. As Mr. Lee said, “If Singapore prospers, their flat values will appreciate and they will share in the growth. Home ownership motivates Singaporeans to work hard and upgrade to better flats for a better quality of living.”
Since both objectives – housing affordability and market appreciation – are worthy objectives, we would offer two policy changes. First, we would recommend removing the Additional Buyer’s Stamp Duty Tax (ABSD) based on the rationale we outlined in the article 3 Reasons it’s Safe to Remove ABSD. Now that more supply has come on the market and pricing transparency, prudent underwriting, and speculation controls are in place, the case is strong for removing ABSD to allow the property market to grow more in line with GDP and income and beat inflation.
Second, we would recommend that policy makers set public targets for each property market in terms of home affordability and price appreciation.
As we know from business and the military, targets and measurement are essential in managing successful projects and initiatives. Targets align people behind a vision and ensure that everyone is working together for a common purpose. Measurement allows managers to identify what works and does not work so that they can adjust.
In the past, we have not necessarily had the granularity to target and measure the property market at the street and unit level. But, this is no longer the case. We no longer need to rely solely on crude measurements like macro-price indices and apply one-size-fits all targets and solutions.
As such, we would recommend that the Government and industry work together to set targets that achieve both home affordability and price appreciation. Let’s be specific.
Setting a target is not as easy as it seems. Before one can set targets, there are many high-level questions to contemplate:
- What is the definition of home affordability?
- What are appropriate measurements of affordability? Home ownership as a proportion of household population? Available housing stock for each income percentile?
- What is the role of housing? Is it merely shelter or is it a hedge against inflation? Is it a storage of wealth retirement? Is it a vehicle to improve one’s quality of life? Is it an alternative investment to stocks, bonds and cash? Is it a catalyst for jobs? Is it a key engine in the growth of the economy?
Once these questions are answered, it is possible to set targets. For example, if the goal is for property to beat inflation, then maybe the target is 1% above inflation each year. Or, if the goal is for the market to keep pace with the economy, then maybe the target is 1% above last year’s GDP growth.
In setting micro-targets, it is possible to use algorithms and big data to achieve targets and fine-tune policy.
For example, suppose the Government set a 90% home ownership target for each income bracket. In order to achieve this target, there must be sufficient housing stock that each income bracket could afford. The following formula allows policy analysts to ascertain if there are enough affordable homes at prevailing X-ValueTM market values.
This dynamic formula identifies how many homes are currently affordable for, say, the 69,600 households in the $2,000-$2,999 monthly income range at any moment in time. Suppose that the formula reveals that only 50,000 homes are affordable at today’s X-Value market prices. This leaves a shortfall of 12,640 homes to achieve 90% ownership. This leaves policy-makers with a choice. They can increase new construction by 12,640 or subsidize purchases or a combination of both.
In today’s property market, there are many unknowns. Market participants do not know the targets the Government have in mind. This makes it difficult for homeowners to plan, families to upgrade, and businesses to grow. Uncertainty is never good for the efficiencies of a market. Now that there are safeguards – standard underwriting, speculation controls, and pricing transparency - in place to prevent a housing bubble, isn’t it time to set targets for Singapore’s property markets and remove the uncertainty?
For more details on the Affordable Housing Stock Formula, see next week’s issue of SRX Property eNewsletter (2 Oct 2015). Don’t miss out on this or any important market analysis by subscribing to myProperty Tracker. It’s free and comes with a monthly update on the value of your home and our weekly eNewsletter.