Thursday, April 14, 2005

Housing Affordability.

Sydney, Melbourne homes not affordable
By Shane Wright / AAP
April 13, 2005 - 6:40PM

Homes in Sydney and Melbourne have been ranked among the most unaffordable in the developed world as people move from quarter acre blocks to inner city units.

The Demographia international housing affordability report ranked housing in Sydney just behind parts of Los Angeles and San Diego as the least affordable in the United States, Australia, Canada and New Zealand.

Melbourne was not far behind, just a little more affordable than New York, while Adelaide, Hobart, Brisbane and Canberra were all ranked among the 20 least affordable cities.

- from
theage.com.au Australia national news

The source of the data is from the Demographia International Housing Affordability Rankings Index conducted by Wendall Cox Consultancy out of the USA. The survey covers the major cities in USA, Canada, Australia and New Zealand.

The research attempts to make the case that "smart growth" (i.e. artifically restricting the geographical expansion of urban areas) leads to unaffordable housing. All the Australia cities (except Darwin) rank as severely unaffordable market, with Darwin ranked at the top of the unaffordable market list. Only USA cities (and two Canada cities) rank as affordable - and there is no surprise that the affordable cities share the common feature of the absence of strong urban consolidation ("anti-sprawl") policies.

In any case, it is rather obvious that the research is hardly objective. Or at the very least it does raise serious questions about the validity of the data interpretation.


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However the methodology of the research does present a few interesting angles on looking at the housing affordability issues.

"Affordable" had become one of those squirm words for me. Our national building press bandies around that word when discussing living costs in Singapore - seldom ever stopping to define fixed yardsticks of affordability. To be cynical about it, "affordable" in Singapore is simply reduced to what the masses are prepared to pay for a resource with no ready viable substitutes.

The Demographia research measures housing affordability by using an index calculated by the estimated median house price multiple relative to median household income. A multiple of 3.0 or below is considered affordable and a multiple above 5.0 is severely unaffordable.

The multiples calculated for the Australia cities (and a few other reference points) are:

  • 10.2 LA Orange County
  • 8.8 Sydney
  • 7.1 New York
  • 6.8 Melbourne
  • 6.2 Adelaide
  • 6.2 Hobart
  • 6.0 Brisbane
  • 5.9 Auckland
  • 5.6 Canberra
  • 5.4 Perth
  • 5.3 Vancouver
  • 4.1 Wellington
  • 4.0 Darwin
  • 3.9 Toronto
  • 3.0 Calgary
  • 2.6 Dallas
  • 2.1 Syracuse

Let us do some estimates to arrive at the relevant indices for Singapore.

The median househould income for Singapore is S$4943 (mean: S$3607) as of the last census in 2000. That puts annual median household income at about S$60k (mean: ~S$40k).

Use the Demographia yardstick of price multiples, a HDB flat would cost approximately:

  • under S$175k to be affordable
  • S$175k - S$235k to be unaffordable
  • S$235k - S$300k to be seriously unaffordable
  • above S$300k to be severely unaffordable

Using the price multiples calculated for the Australia cities for housing affordability:

  • 8.8 (Sydney) translates to S$ 522k
  • 6.8 (Melbourne) translates to S$ 403k
  • 6.2 (Adelaide) translates to S$ 368k
  • 6.2 (Hobart) translates to S$ 368k
  • 6.0 (Brisbane) translates to S$ 356k
  • 5.6 (Canberra) translates to S$ 332k
  • 5.4 (Perth) translates to S$ 320k
  • 4.0 (Darwin) translates to S$ 237k

Of course this is a very rough comparison, not taking into account many important factors such as employment wage levels, taxation, other cost-of-living adjustments, etc. And of course, the general case (median) may or may not apply to any specific individual.

Another interesting calculation to note. Our rulers here have been pointing out that HDB flats are "affordable" since most "owners" (lease-holders) can afford to finance the lease payments entirely from their mandatory CPF contributions. At the median household income level CPF contribution rates to the Ordinary Account at 22% works out to about S$13k annually. This amount against a loan at the HDB loan rate of 2.6%p.a. over 30 years would pay for a total value of around S$200k (current value). Which is about the lease cost of a 4-room HDB flat built for the "average" Singaporean family.


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This whole mathematical exercise comparing housing affordability is, of course, based on the assumption that the reader would accept that a 99-year lease on a 100-odd square metre highrise apartment unit in Singapore is the same as the typical "house" in the other cities being compared to.

4 Comments:

Anonymous journette said...

Was the survey just on inner city housing?

April 19, 2005 1:14 AM  
Blogger Wenjie said...

Just some information you might find interesting. My parents-in-law bought a piece of land last year in Perth. Within a year the plot of land have risen from AUD$120k to approx AUD$180k. They have been trying to get us to get a house in Perth quickly as the property prices of Perth have been increasing. There have been talks among the people in Perth that the property prices in Perth will soon match those in Melbourne and Sydney, which is something that I find hard to believe.

April 19, 2005 11:35 AM  
Blogger KnightofPentacles said...

journette:
Not specified in the Demographia website, to the best of my knowledge. Their source is from the local real estate data, so I suppose it refers to accommodations within the city limits - excluding outlying suburban areas.

Wenjie:
Thank you for the interesting bit of information. It sounds reasonable considering the rapid growth of Perth city due to the influx of immigrants. However, like you, I find it hard to imagine housing prices of Perth approaching Sydney levels - not until Perth grows to become a city the size of Sydney anyway.

April 19, 2005 5:15 PM  
Blogger Wenjie said...

Something I left out. The housing loan interest rate in Australia are much much higher than that in Singapore. Also, the GST in Australia is 10%, and if you are buying a house say for AUD$350k, you will have to add another AUD$35k just for GST.

April 21, 2005 10:11 AM  

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