1. 1 Affordable homeownership policy: Implications for housing markets and housing elasticities Professor Sock-Yong Phang Singapore Management University ERES, June 2009, Stockholm

2. 2 Outline I. Homeownership as policy objective II. Indicators of housing affordability III. House price to income ratio target – market implications IV. Singapore V. Conclusion

3. 3 I. Homeownership as policy objective Advantages of homeownership Dwelling – size and quality Accumulation of wealth Non-tangible benefits, positive externalities Better maintenance Better citizens and communities Better children Evidence is not overwhelming

4. 4 Homeownership as policy objective Some negatives: Household immobility Overconcentration of household investment Risks from interest rate and price fluctuations Proposals: Insurance on market values Hedging against house price risk

5. 5 Homeownership rates Singapore90% Spain85% Greece84% China, Norway80% Italy76% UK, Luxembourg71% US, Australia, NZ68% Denmark, Portugal65% France63% Sweden60% Netherlands, S. Korea54% Germany43% Switzerland35%

6. 6 Determinants of variations Determinants of variations Legal Economic Income Demographic Relative price of ownership to rental costs Availability of mortgage finance Cultural Ethnicity Political: Government policies

7. 7 Tax deductable mortgage interest payments Special treatment of capital gains from housing Property tax subsidies Tenant protection laws Mass privatization Supply side subsidies to producers Demand side subsidies: grants and mortgage interest subsidies Mandatory housing funds Government policies

8. 8 Income-based Rental expenditure to income ratio House price to household income ratio Mortgage payment to household income ratio Ratio of median family income to income required to qualify for a conventional mortgage Cost-based User cost of housing capital (with and without capital gains) House price relative to fundamental costs of production Basket of measures for complete picture II. Indicators of housing affordability

9. 9 Examples: Norway, Singapore, Hong Kong, South Korea, China Homeownership policy decisions: Target group E.g. Income<Y* or y*% median income Target affordability ratio House Price to Income Ratio < x* Choice of instrument Supply side, demand side, hybrid III. Homeownership affordability as policy objective

10. 10 Unknowns, demand shocks, lags: Actual PIR x > or < x* Housing supply decisions: short run disequilibrium waiting lists or unsold units Example of positive income shock: x < x*, waiting list increases when targeted house price is held stable Housing authority housing starts increase Spillover price and crowding effects on non-targeted segment Deviation from targets

11. 11 A simple model of the aggregate housing market (Malpezzi-Mayo) Demand Q D = α 0 + α 1 P h + α 2 Y + α 3 D Supply Q S = β 0 + β 1 P h EquilibriumQ D = Q S Q=log of quantity of housing P h =log of the relative price of housing services Y=log of per capita income, D=log of population (households), =>P h = α 0 - β 0 + α 2 Y + α 3 D β 1 - α 1 β 1 - α 1 β 1 - α 1 or P h = γ 0 + γ 1 Y + γ 3 D + ε

12. 12 Estimating the price elasticity of housing supply 1) Estimate P h = γ 0 + γ 1 Y + γ 3 D + ε 2) Assume values for the price elasticity (α 1 ) and income elasticity of demand (α 2 ) 3) Compute the supply elasticity β 1 = α 2 + α 1 γ 1

13. 13 Estimating the price elasticity of housing supply 1) Estimate P h = γ 0 + γ 1 Y + γ 2 D + ε 2) Assume PY ratio is constant – policy target γ 1 = 1, γ 2 = 0 3) Compute the supply elasticity β 1 = α 2 + α 1 Since α 2 and α 1 are generally estimated in the literature to be less than one, we expect price elasticity of supply β 1 < 1

14. 14 Crowding out of non-targeted sector, targeted sector expands over time Housing affordability fairly constant across income groups and over time Greater housing consumption equity, income elasticity of demand for housing <1 New construction in response to waiting list rather than prices, supply is price inelastic House price changes inelastic wrt to population growth rates and construction costs Regulated market with housing affordability target

15. 15 Population 4.84 m (1.2 m foreigners) Land area 700 sq km 90% of land state owned 90% homeownership rate GDP per capita US$35,163 86% of resident population reside in HDB developed flats (99 year leaseholds) Mortgage lending by HDB Central Provident Fund housing schemes VI. Singapore’s housing - public sector dominance sector dominance

16. 16 Per capita income and house prices

17. 17 Expansion of targeted group YearHDB Household Income ceilings % population in HDB sector Homeowner- ship rate 1970S$1,200 (1970)35%29% 1980S$2,500 (1979)81%59% 1990S$5,000 (1989)86%88% 2000S$8,000 (1994)83%92% 2008S$8,000 (1994)82%90% HUDC: S$4,000 (1974), S$8,000 (1985) Executive Condominium Scheme: S$10,000 (1997) Exchange rates: S$1 = US$0.69; S$1 = Euro 0.49

18. 18 HDB flat types and prices S$ (new) HDB Flat typeAverage priceFlat size (sq m) Average ppsm 2-rm$88,00045$1,956 3-rm$146,00065$2,246 4-rm$251,00090$2,789 5-rm$339,000110$3,082

19. 19 Housing affordability HDB Flat typeMedian income of applicants HPY Ratio (with housing grant) Debt Service Ratio 2-rm$1,2805.7 (3.1)18% 3-rm$2,1005.8 (4.6)24% 4-rm$4,3504.8 (4.6)21% 5-rm$5,4005.223%

20. 20 House price to median household income ratio, 4-rm HDB flat

21. 21 Income and housing `gaps’ 5 to 3 room gap 5 to 2 room gap Median Income2.574.22 Flat size1.692.57 House Price2.323.85 Average ppsm1.371.58

22. 22 Housing supply elasticity estimates Price Series Population coefficient Price elasticity of supply α 2 = 0.5 α 2 = 0.75 Resale HDB 0.8446 (0.67) 0.00 ( α 1 = -0.5) 0.20 ( α 1 = -0.3) 0.25 0.45 Private Housing -1.1749 (-1.46) -0.23 -0.03 -0.09 0.11

23. 23 Housing policy: setting homeownership affordability targets Norway, Singapore, Hong Kong, South Korea, UK… Market implications: Expansion of targeted housing sector over time Relative constancy of housing affordability indicators Greater housing space equity Income inelastic housing demand Price inelastic housing supply House prices relatively inelastic to population growth rates and construction costs V. Summary

24. 24 Thank you