Singapore property prices have declined for 6 quarters as a result of the cooling measures. Price declines were seen across all segments of the private residential and HDB units. Sales volume dropped substantially but the cumulative price decline of around 6% is not alarming, yet.
In this post I am going to explore how low can property prices drop strictly from the angle of affordability, stripping away factors that are unquantifiable such as sentiment, confidence, future economic performance and external factors.
What is Housing Affordability?
Affordability is one of the backbones of support for any property market. At the national level managing affordability is one of the major policy tools in controlling the housing price and demand.
Put simply, affordability is the ratio of house price to lifetime income.
A recent study by the NUS Department of Economics defines housing affordability as a ratio less than or equal to 0.3 or 30% of lifetime income. Although this is a very rough estimate based on averages it can give us a glimpse of where we are in terms of finding a bottom, notwithstanding a multitude of factors that may afflict the market. The ratio does not take into account whether buyers can afford the downpayment.
From the latest Department of Statistics survey the Singapore worker’s median income is S$3,770. Given that the majority of home buyers are from dual income families, we can double the median income and use $7,540 for our calculations. Assuming an average working life of 30 years, the lifetime household income is approximately $2.7 million.
Therefore 30% of lifetime income is equivalent to S$810,000.
Again applying the broad use of averages here, we can postulate that if a 3 bedroom mass market private residential apartment in an average neighbourhood, ie outside of the central region (OCR) drops to S$810,000 or below it would be considered affordable. This is the price of true affordability where the average household can comfortably afford a 2-3 bedroom private condo/apartment. Some or all of the cooling measures might even be withdrawn before this level is breached.
Any increase in median wages will see this value increase proportionately. Below is the projected wage growth till 2016.
Will You Buy If Prices Dropped Another 30%?
So let’s see where we stand right now. Currently prices for a new 3 bedroom unit outside of the central region (OCR) is around S$1.1 to $1.3. To drop to $810,000 is a decline of around 30%. Yes that is drastic. Bear in mind that this is only a theoretical value, a line in the sand so to speak, where prices will be supported by the mass market.
Let’s say if a new 1200 sq ft condo/apartment at Hougang, Bedok or Jurong dropped to $800,000 would you buy without hesitation?
Do drop me your thoughts and comments below.