CORRELATION BETWEEN MEDIAN HOUSEHOLD INCOME AND RESALE PRICE INDEX

CORRELATION BETWEEN MEDIAN HOUSEHOLD INCOME AND RESALE PRICE INDEX: 4.

Mr Lim Biow Chuan asked the Minister for National Development (a) how has the median household income risen in comparison with the HDB Resale Price Index (RPI) over the past decade; (b) has the annual HDB RPI increase been higher than median household income growth when indexed against different years; and (c) in light of the announcements made in Budget 2010, how is the Government making sure that flats remain affordable for first-time homebuyers.

The Minister for National Development (Mr Mah Bow Tan): Mr Speaker, Sir, the HDB Resale Price Index (RPI) has risen by an average of 3.2% per annum in the last decade, from 1999 to 2009. In comparison, the rise in median household income was marginally higher at 3.3% per annum over the same period. If Members would refer to Chart 1*, it illustrates what I have just said.

Chart 1 also shows that, during this period, prices have fluctuated from year

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to year. Some years prices have gone up, other years prices have come down.

*Cols. 175-176.

Hence, in answer to the Member's question, it is possible that prices of resale flats have risen faster than incomes when indexed against different years. Using more recent years to index the growth, we find that the annual RPI growth exceeded income growth, due to the strong demand and the quick economic recovery. This is shown in the latter part of Chart 2 . On the other hand, if we go back further and use 1995 as the base year, prices rose by 2.8%, lower than income growth at 3.2%. This is illustrated in Chart 3.

Sir, ultimately, what matters is whether, at all times, first-time home buyers are able to afford HDB flats. This is what the Government is committed to achieve. It does so in two ways: one, by making available new flats of different sizes and in different locations for different income groups, from basic 2-room flats to premium 5-room flats, and two, by setting the prices of these flats such that they are well within the means of buyers within the income ceilings. To check on affordability, HDB uses the Debt-Service Ratio (DSR), which compares the monthly mortgage instalment to the monthly household income. The average DSR for new flats that were launched in the last six months in non-mature estates ranged from 17% for a 2-room flat to 23% for a 5-room flat to 25% for a 3-room flat, as shown in Table 1*. This is close to the CPF contribution rate of 23%, and well within the international benchmark for housing affordability at 30%-35%.

The DSR has remained at a comfortable level for first-timer households due to generous subsidies. All new flats come with a substantial market subsidy. First-timers can also enjoy a CPF Housing Grant of up to $40,000 when they buy a resale flat, Design Build and Sell Scheme

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(DBSS) flat or Executive Condominium (EC). Households earning less than $5,000 monthly can apply for Additional Housing Grant (AHG) of up to $40,000. Eligible households can also get HDB concessionary loans.

Sir, I wish to assure Members that the Government will continue to set prices for new HDB flats to ensure that they remain affordable to first-time home buyers.

*Cols. 175-180.

Mr Lim Biow Chuan (Marine Parade): I thank the Minister for the reply. I just want to check with the Minister on this. I understand that there are some flats in certain precincts that are priced much higher than the average selling price, as listed in Table 1. Would the Government consider raising the income ceiling for first-time home buyers to allow a larger group of Singaporeans to buy the new flats just to make it more affordable? Secondly, could HDB speed up the construction process of new HDB flats? I understand that for private properties, they take about one-and-a-half to two years to build. If we are able to build the flats faster, certainly, I think this would be a better option for first-time home buyers.

Mr Mah Bow Tan: Yes, the Member is correct that there are flats in certain precincts which are priced higher. What I have cited in the Table are really the average prices. Why are these flats priced higher? One of the main reasons is because they are located in the central areas or mature estates. The prices I have cited are specifically for the non-mature estates. Having said that, we also track the affordability ratio, the DSR ratio for flats in the mature estates, and the DSR ratio also comes in at around 30% or so. Again, it is within the affordability benchmark.

Sir, the Member asked whether we would raise the income ceiling to allow more people to buy these flats. As the Member knows, the income ceiling today is $8,000 and at this income ceiling,

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when we track the Debt-Service Ratio (DSR), we find that prices of flats are still within the affordability benchmark. Hence, there is really no compelling reason for us to raise the benchmark. But the other reason why we will not be raising the household income ceiling at the moment is because, as I had explained in this House many times, we have a finite housing budget and out of this housing budget, we will have to subsidise the first-time home buyers. And at the household income ceiling of $8,000 today, we are subsidising about 80% of the population. So, given the fact that our housing budget is limited and given the fact that we are already very generous in our housing subsidy framework, there is no reason for us to increase the household income ceiling at the moment.

The other question he raised was whether we can build flats at a faster pace. The current time to build a HDB flat from the moment the contract is awarded to the time it is completed is roughly three years. Are private sector flats built at a faster pace? If you take the same criteria from the time that the contract is awarded to the time it is completed, it is the same. But what the private sector may do is that they may build the flats, award the contract earlier and then market and sell the flats later on. So the time from when the person buys the flat to the time when it is completed may actually be less than three years. This is something that the HDB is looking at, to see whether it can award the contract slightly earlier, eg, if the subscription rate is very high, it may decide to award the contract earlier, given a fair chance that the flats for that particular contract will be more or less fully subscribed. So that is something that the HDB is looking at to see whether it can shorten the completion period from three years to, say, two to two-and-a-half years.

Assoc. Prof. Paulin Tay Straughan (Nominated Member): I thank the Minister

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for these figures. I have a couple of questions. First, with regard to affordability, I note that it is the 3-roomers that have been hit the hardest. So this would affect Singaporean families which are in the working class and lower class. Is the Minister worried about that? The other comment I have is looking at the affordability figures, I note that in order to take care of mortgage responsibilities, it seems like most Singaporeans are maxing out their CPF to pay for their housing loans. This means that in terms of preparing for retirement, it may be a serious consequence ahead if they are not able to recover the funds, depending on whether the valuation of their property goes up.

Mr Mah Bow Tan: When the Member looks at Table 1 which shows that the Debt-Service Ratio (DSR) for 3-room flats is higher than that for the rest, it would appear at first glance that the 3-room flat buyers are, as she put it, hit hardest. But these numbers refer to the average over the last six months. We have been monitoring the DSR for all the flat types over the last 10 years. We find that at every year, during the last 10 years, the DSR has been within this benchmark of 30% to 35%. So, if I take a concrete example, at 25% DSR for a 3-room flat, we are talking about, on average, monthly instalment of $528. $528 can be almost fully paid for using the CPF contributions. So, that family would need to pay something like $40 to $50 per month in cash because the rest of that mortgage instalment would have been taken care of by CPF. I do monitor this closely and based on the current situation and the situation over the last 10 years, these figures indicate that our new flats are well affordable, well within the means of all the different income groups, from the lowest to the highest. As I indicated in my reply, there is more help for the lower-

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income groups because we have an Additional Housing Grant which we give to the lower-income groups. Because of this Additional Housing Grant, the 3-roomers and the 2-roomers benefit even more than those in the higher income brackets. So I would like to assure the Member that we do watch this carefully and I can say in all honesty that our new HDB flats are within the affordability range of all our new HDB first-time flat buyers.

A related question is whether, as a result of this, people are maxing out their CPF. To answer that question, I have to emphasise that buying a HDB flat is not an expenditure. It is an investment. It is not consumption because when you buy a HDB flat, at the end of the tenure of the flat or towards your retirement, that HDB flat is a very significant store of value. In fact, when the Department of Statistics last did a household survey a few years ago, they found that, on average, a Singaporean family has over $100,000 worth of asset sitting in his flat. That means, net of debt, net of all the payments, all the repayments due, a Singaporean family on average is sitting on over $100,000 worth of asset and that asset can be used for retirement purposes. Some of the policy changes over the last few years had been to achieve this objective of monetising that valuable asset. If we can monetise that asset, then the Member need not fear that we are spending our CPF funds. And this is another vindication of our home ownership policy because if we were to use that same amount of money – 25% of income – to rent a place rather than to buy a place, then at the end of 20 or 30 years, you will not be having this asset which you can use for your retirement income. Again, I would like to assure the Member that when we allow people to use their CPF for purchasing a home, it is to purchase an investment. It is not for consumption purposes.