Measuring housing affordability isn’t an exact science; but the general consensus is to look at a ratio of median wage, versus housing costs. This Mother’s Day though, we thought we’d look at it a little deeper. To be clear, we think either parent (mum or dad) can be the one to stay home with the children – but it seems the right time to contemplate issues of parenthood, and how it factors into ever-rising home prices. In Singapore, even single digit millionaires aren’t spared from frightening mortgages:
First, let’s look at the notion of housing affordability
The most commonly used rule of thumb in Singapore is the 3-3-5 rule. That is, you should have 30 per cent of the required capital to buy the property, the monthly loan repayment should be no more than 30 per cent of your monthly income, and your home should be no more than five times your annual income.
If you buy an HDB property (including Executive Condominiums), the “30 per cent of income” rule is actually enforced, whether you want to follow it or not. The Mortgage Servicing Ratio (MSR) for HDB properties requires that monthly loan repayments not exceed 30 per cent of the borrowers’ combined income.
According to news reports, the median household income is $10,869 per month. So if we stick to the 3-5-5 ratio, here’s what the numbers look like:
- At five times annual income, the price of a home should be capped at $652,140.
- At 30 per cent of the borrowers’ combined income, the monthly loan repayment should not exceed $3,260.70
- Assuming we stick to a price of $652,140, buyers should have $195,642 in any combination of cash or CPF saved up, before attempting to buy.
If we stick to strictly BTO flats, we’ll definitely be within these parameters, especially after subsidies.
However, some families can’t buy BTO flats, such as Permanent Resident (PR) only families, or those who urgently need a place of their own. So let’s look at resale flat prices for these people:
As of March 2024, the average price of a resale flat is $553 per square foot. The size of a typical 4-room flat is around 970 sq. ft. (some older flats may be in excess of 1,100 sq. ft.)
This comes to an average of $536,410 for a 4-room flat. Assuming we use the maximum loan quantum, we can borrow $402,307.50 (The cap for bank loans is 75 per cent of the value, which we’ll assume is the same as the price for simplicity’s sake).
Assuming a 25-year loan tenure at a floor rate of four per cent per annum, this is a monthly loan repayment of roughly $2,100 + per month. This is well within our 30 per cent limit.
(Note that it’s impossible to determine the exact monthly loan repayment to the end of the loan, as home loan rates are variable).
Let’s assume that, for having 30 per cent of the capital needed, you’ve diligently saved or stored up your CPF; we can’t determine if everyone will have enough or not, as this is down to personal financial habits.
So at a casual glance, it would appear housing affordability is not that bad, even for resale flats. But there’s something we’re missing:
We’re assuming a dual-income family. The median income of an individual Singaporean is $5,197 per month. The median household income, which we use to calculate housing affordability above, is likely due to both parents working (Barring the odd situation such as parents being co-borrowers instead).
Going on $5,197 per month, the cap on a home price would be $311,820 – well below the price of the average 4-room resale flat; your options would likely be in the range of a 3-room BTO flat in a non-mature town; so you had better be able to wait out the three to four year construction time.
Also, the MSR would be capped at just around $1,560 per month, making a resale flat even more unlikely.
So how is it that resale flats have sold at such a ferocious pace, and at such high prices since the end of Covid?
The Circuit Breaker was in April 2022, so you can see how high demand for resale flats has been. It’s quite likely that Singaporeans have been able to purchase their resale flats mainly by combining their income, savings, and CPF with their spouse.
We should be paying attention to the number of dual-income families today, versus in previous years
The reason is that the normalisation of a dual-income family may be masking the lack of affordability, when it comes to housing. It’s possible that Singaporeans can afford home prices not because our income has kept up, but simply because we’ve put both parents to work.
This brings two implications to consider:
First, it does raise the issue of whether we’re increasingly reliant on domestic helpers or childcare services, or perhaps elderly parents, to raise our young. We don’t have any early childhood experts at Single Digit Millionaire; but the dual-income family’s effect on children has been raised by smarter people than us.
We need to consider the drawbacks of children who see their parents only around bedtime, and whose exposure to them may only be on weekends. There’s also the stress on women who go back to work after bearing a child, which might explain our declining birth rates.
Second, if we’re dependent on a dual-income to afford our homes, we’re not really as safe as we may think – even if we follow the 3-3-5 formula.
In a single-income household, the stay-at-home spouse is also a last ditch safety net. In the event that one parent is unable to work (e.g., disability or death), there is at least a chance that the other spouse can return to the workforce.
With a dual-income household, the loss of one income-earner could necessitate the sale of the property, or taking on unsustainable levels of debt.
Keep in mind this is just for HDB flats, and the pressure may be worse for private properties
If even resale flats require a dual-income family, then it’s doubly true for a property like a condo. At today’s prices of around $2,000 per square foot (new condos) or $1,500 per square foot (resale condos), even single digit millionaires may find they need a dual-income family to handle the costs.
For young parents, this may force a tough decision: do they try to provide for a more spacious home (and a more valuable asset for their child later), or do they “shrink it down” so they can stay home with their children?
And if the mortgage needs to be borne by both parents, then how safe, really, is their financial situation?
To some extent, this can be mitigated by going for BTO flats – if time allows – and by having the right insurance. If both spouses are needed to pay for the home, then it’s even more important to ensure sufficient coverage.
(PS: Whilst mortgage insurance is mandatory for HDB flats, under the Home Protection Scheme, it’s optional for private properties; so we’d check and make sure you have it).
Follow us on Single Digit Millionaire, as we look further into the issues of Singapore’s sandwiched class.
