Are BTO prices affordable? (And why no one can answer that question)

One the of big dividing lines in Singapore is housing affordability. Ask if BTO prices are affordable, and you get two polarised answers: one side swears that housing in this country only affordable if you’re happy to live on one kidney, the other will tell you that 90% of Singaporeans are home owners so it definitely is. And if you want to start a fight, just suggest you can buy a HDB BTO flat on $1,000 a month.

Sometimes, it’s almost like we inhabit two different realities when, in fact, both sides of the argument are correct — in their own ways:

Why isn’t it totally obvious to the other side that BTO prices are/are not affordable?

It’s like the blue-and-black dress that can also be white-and-gold (sorry for the outdated analogy). The point is: perceptions create differences that are so fundamental, it’s hard to even imagine how the other side can’t see what you’re seeing. This is especially the case with the property market because… take a deep breath, we’re going to tell you a big secret about property:

Property issues are 80 per cent psychological, 20 per cent factual. That’s why it’s so difficult to make accurate predictions of price movements, or why there are always outliers that blow apart historical price data, or median rental yields. It’s why someone would pay a million bucks for a HDB flat, even during a market downturn. The driver of property values is emotion, not cold, hard facts (if rationality ruled the market, we wouldn’t have situations where the unit across the corridor from you is worth much more or less).

A lot of this also accounts for why we can’t agree on whether BTO prices are affordable. What you need to consider is that:

• “Affordable housing” also means “acceptable housing” to most people
• It’s about more than making the mortgage 
• The “x5” factor 

1. “Affordable housing” also means “acceptable housing” to most people

The concepts of affordable housing are often used interchangeably with acceptable housing. The two are not the same.

Acceptable housing means you are living in sufficient comfort. I could sell you a zinc-roofed hut adjacent to a longkang somewhere, and you would probably be able to afford it; but you still wouldn’t buy it because it doesn’t constitute an acceptable level of housing. You would want a property that meets your standards of a home, not just shelter from the weather. And this is where it gets sticky.

When some people argue that housing is not affordable, they seldom mean there are literally zero flats they can afford. What they usually mean is that there are no flats which can meet their living requirements, at a price they can manage. For example:

If your requirement for housing is a five-room flat in a central location, and your income is $2,000 a month, you will probably feel most flats are not affordable. On the other hand, if you can handle cramped conditions in a far-flung neighbourhood, then you may find almost any BTO prices extremely affordable.

Before you hammer out an angry comment, I’m not saying lack of affordability is due to your being fussy. 

What I am saying is that we don’t share an objective standard of acceptable housing.

If you can’t understand how any Singaporean claims flats are affordable, you have to consider that maybe, the other side has fewer living requirements. They may be committed to not having children and need a smaller house, or can work by remote and don’t need a central location. 

On the flip side, if you can’t understand how Singaporeans can claim their flat isn’t affordable, consider that your fellow Singaporean may have requirements like a bigger house (perhaps she has more children), or better access to certain amenities (like a hospital, for an elderly parent who needs dialysis). Those factors can require more expensive – and hence less affordable – flats.

So contrary to what you may think, the other point of view is probably not due to “privilege” or “delusion”. It just comes from different living situations, and hence different standards of acceptable housing.

2. It’s about more than making the mortgage

Yes, you can buy a flat on $1,000 a month; but that’s not a particularly useful boast. “Affordable” doesn’t just mean you can pay the mortgage. It also means you can pay the mortgage, while still having enough money to handle emergencies, to invest for your retirement, to eat three meals a day, and so on.

Now in Singapore, mortgages are capped by debt servicing ratios. Without going into too much detail, let’s just say the mortgage will (with a standard HDB loan) never go beyond 35 per cent of your declared monthly income. 

So if your take home pay is $2,500, you’d be forking over $875 per month. Assuming you set aside a further 20 per cent for savings ($325), and $200 to invest (say in a blue chip programme or insurance policy), that’s about $1,105 left for food, other debt obligations, and to raise a family if you have one.

Whether this is manageable depends, again, on your circumstances. If you’re single, that looks affordable. If you have two children to raise, I’d hesitate to call that affordable lest you punch me in the mouth.

A lot of arguments regarding “affordability” dwell on how much you need to pay for the mortgage. Well you can throw those arguments out the window. Affordability is less about how much we pay each month for the house; it’s about our quality of life after getting a mortgage.

3. The “x5” factor

Are things getting too complicated? Then you can work things out using this simplified method: define affordable housing by multiplying your annual income by five. 

Your house, according to this rule of thumb, should not exceed five times your annual household income. So if you and your spouse each earn $2,500 a month, your flat can’t cost more than $300,000 (a four-room flat can fall into this category, after subtracting subsidies). Based on this, you can work out for yourself if an acceptable home is affordable to you. 

Again though, this can be a rather simplistic formula. As we mentioned in points 1 and 2, your living situation are the main determinants of affordability. There is no simple maths for that.

Perhaps arguing about affordability is a waste of time

By now, it should be clear why there’s a such a divide on the issue. One side is using the simple cost of the flat, or the monthly mortgage repayments, to argue that BTO prices are affordable (the numbers work, you can buy them, and therefore you can afford them).

The other side is taking a more holistic view, and looking at how their condition of life changes after they’re saddled with the burden of a mortgage. They are also considering whether the flats they get – and which they will spend most of their life paying for – are worth the sacrifice. 

In the meantime, perhaps we should focus on how Singaporeans find life after buying their first flat. Let’s focus on whether they can still comfortably eat lunch, instead of just saying things like “you can buy a flat for X$ a month”. 

If you found this article helpful, 99.co recommends The new landlord’s guide to subletting your flat and 5 easy ways for savvy landlords to increase rental income.

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