HDB Flats - are they affordable?

Sent to Voices, Today Paper, on 24 March 2012

I refer to the article entitled "PropertyGuru report misleading: HDB" (Today, 24 March 2012).

HDB produced figures to show that the monthly installment is about 25% of the
median household income for purchasers of the 4 and 5 room HDB flats.

The calculation is based on the average selling price of new flats bought under
the Build-To-Order scheme, less the additional housing grant. According to HDB,
this income ratio is affordable, compared to international benchmark of 30% to 35%.

The purchaser has to fork out 10% of the selling price and has to  take a loan for 30 years
at an interest rate of 2.6% to achieve this "affordable" monthly installment.

It is risky for a family to commit to a large mortgage payment on a 30 year loan, especially
as jobs are not secure. If any of the income earners were to become unemployed, the
financial burden can be quite severe.

If is also risky to assume that interest rate will remain at 2.6%. Global interest rate is
now at a historical low and if the interest rate were to increase in the future to keep
pace with inflation, the monthly installments will increase.

I have recalculated the monthly installment to allow for a higher rate of 3.5%
and a more prudent repayment period of 25 years. The revised monthly installment
represents 30% of the median household income.

Looking at another indicator, the net selling price represents 69 of the
median household income for purchasers of 4-room flats and 67 times for 5-room flats.
I agree with the PropertyGuru report that a ratio of 60 times can be described as
"severely unaffordable".

We can still hope that the burden on households will become smaller, if their
income were to increase in the future. In recent years, the increase has been
modest, so we cannot expect too much help from this source.

Tan Kin Lian