Tan Kin Lian's Blog: Housing prices and cost of living

Friday, January 29, 2010

Housing prices and cost of living

If a family lives in a rented home and there is an increase in the rental charge, it results in a higher cost of living.

The purchase price of a home is the discounted value of the future rental. If the purchase price increases, the monthly installment to pay the loan also increases. This is almost the same as paying a higher rental.

If housing prices continue to increase, the owner will benefit as the cost is already fixed at the time of purchase. This was the case in the past, where the cost of property represents a low percentage of the average income, i.e. when housing was inexpensive..

In recent years, the housing prices has increased to a high proportion of the average earnings. It is not possible for housing price to continue to escalate, as the people cannot afford to these prices, when their earnings have stagnated.

The high housing price will be a burden for the future generation. They pay a high price and has to service the loan using a higher proportion of their earnings. The prices will not continue to escalate, after it has passed the "affordability" mark.

It is better to have a system where the housing prices is not left to speculation in the market. The housing prices to be controlled, and kept within a reasonable proportion to the average income. .

Tan Kin Lian

6 comments:

Anonymous said...: Yes, Mr Tan's commentary is spot-on about the unsustainability of property prices -- particularly HDB prices. There is no strong long-term fundamentals to the trend.

The main reason why HDB prices have gone up drastically over the past 2 years is due to pent up demand from huge influx of PRs -- many are in fact property speculators and jumping on the HDB resale bandwagon only in the last 12 months when they see the prices keep on going up. This is just like S'pore GDP growth being supported by continuous flooding of foreigners.

Frankly, the HDB prices now are in initial bubble stages. If there is double-dip recession or even if prices continue up and we get another financial crisis 2 yrs later, HDB buyers now must be prepared to face being 10 years underwater, just like those who bought in late 1996. Property prices only went back to 1996 levels in 2006.; January 29, 2010 3:20 PM
C H Yak said...: One other factor to consider in relation to "affordability" is whether jobs can be sustained.

The MND Minister and several Ministers including the MM & PM assured that HDB flats are affordable. With the benefit of the doubt that they are perfectly right, can they also assure that Singaporeans will be employed throughout the long period of mortgage?; January 29, 2010 6:04 PM
Anonymous said...: HDB main purpose is for Singaporeans to have home.

1. Ban all the rent. No rental should allowed. 0% rental.
2. For those who want to bigger size than what they need now. Impose HIGHER up-front payment. Example: if a single wants to buy 5 rooms flat, then he should pay higher up-front cash, as compared to family with 2 kids.

Additionally, we can consider imposing high tax on HDB rental, we can give tax exempt to selected groups, for example those who are unable to work, etc.

PS; January 29, 2010 10:44 PM
wjsim said...: Prices will keep rising as long as people can afford. Like you said, prices will stop rising once some people have difficulty making the downpayments.

Contrary to mainstream belief, speculation is what regulates the market. Speculators are taking a risk with every trade they make and they are rewarded for taking the risk. It is because housing is so heavily regulated that speculation cannot effectively signal the market to allocate resources appropriately.

I'm so tempted to start writing on how speculation actually stabilises prices but I suppose it won't be appreciated anyway.; January 30, 2010 12:01 AM
Tan Kin Lian said...: Hi wjsim

It is difficult for speculation to set the right market price for property for the following reasons:

- lack of information to the buyers and consumers
- exploitation by property developers and agents on the information gap
- high cost of property, making it difficulty for sufficient transactions to create a fair market.; January 30, 2010 7:42 AM
Anonymous said...: HDB apartments are for you to stay and not to make profit, speculate or enhance asset. This should be one of the basic objectives or mission sstatement of HDB. Likewise ministers' should never be compared with the private sector's salary!; January 30, 2010 8:03 AM