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Affordable homeownership Affordable homeownership policy: policy: Implications for housing Implications for housing markets and housing elasticitiesmarkets and housing elasticities
Professor Sock-Yong PhangSingapore Management University
ERES, June 2009, Stockholm
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OutlineOutline
I. Homeownership as policy objective
II. Indicators of housing affordabilityIII. House price to income ratio target
– market implicationsIV. Singapore V. Conclusion
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I. Homeownership as policy I. Homeownership as policy objective 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
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Homeownership as policy Homeownership as policy objectiveobjective
Some negatives: Household immobility Overconcentration of household
investment Risks from interest rate and price
fluctuationsProposals: Insurance on market values Hedging against house price risk
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HomeownershHomeownership ip ratesrates
Singapore 90%
Spain 85%
Greece 84%
China, Norway 80%
Italy 76%
UK, Luxembourg 71%
US, Australia, NZ 68%
Denmark, Portugal 65%
France 63%
Sweden 60%
Netherlands, S. Korea
54%
Germany 43%
Switzerland 35%
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Determinants of variationsDeterminants of variations
Legal Economic
Income Demographic Relative price of ownership to rental
costs Availability of mortgage finance
Cultural Ethnicity
Political: Government policies
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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 policiesGovernment policies
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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 II. Indicators of housing affordabilityaffordability
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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.III. Homeownership affordability Homeownership affordability as as policy objectivepolicy objective
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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 targetsDeviation from targets
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A simple model of the aggregate A simple model of the aggregate housing market (Malpezzi-Mayo)housing market (Malpezzi-Mayo)
Demand QD = α0 + α1 Ph + α2 Y + α3 D
Supply QS = β 0 + β1 Ph Equilibrium QD = QS
Q=log of quantity of housing Ph=log of the relative price of housing services Y=log of per capita income, D=log of population (households),
=>Ph = α0 - β0 + α2 Y + α3 D β1 - α1 β1 - α1 β1 - α1
or Ph = γ0 + γ1 Y + γ3 D + ε
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Estimating the price elasticity Estimating the price elasticity of housing supplyof housing supply
1) Estimate Ph = γ0 + γ1 Y + γ3 D + ε
2) Assume values for the price elasticity (α1 ) and income elasticity of demand (α2 )
3) Compute the supply elasticity β1 = α2 + α1
γ1
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Estimating the price elasticity Estimating the price elasticity of housing supplyof housing supply
1) Estimate Ph = γ0 + γ1 Y + γ2 D + ε
2) Assume PY ratio is constant – policy targetγ1 = 1, γ2 = 0
3) Compute the supply elasticity β1 = α2 + α1
Since α2 and α1 are generally estimated in the literature to be less than one, we expect price elasticity of supply β1 < 1
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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 Regulated market with housing affordability targetaffordability target
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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.VI. Singapore’s housing - public Singapore’s housing - public sector dominancesector dominance
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Per capita income and house Per capita income and house pricesprices
0.00
50.00
100.00
150.00
200.00
250.00
1975
1977
1979
1981
1983
1985
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
GDP Per Capita Index Resale HDB Price Index
Private Housing Price Index New HDB Price Index
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Expansion of targeted group Expansion of targeted group
Year HDB Household Income ceilings
% population in HDB sector
Homeowner-ship rate
1970 S$1,200 (1970)
35% 29%
1980 S$2,500 (1979)
81% 59%
1990 S$5,000 (1989)
86% 88%
2000 S$8,000 (1994)
83% 92%
2008 S$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$1 = Euro 0.49
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HDB flat types and prices S$ HDB flat types and prices S$ (new)(new)
HDB Flat type
Average price
Flat size (sq m)
Average ppsm
2-rm $88,000 45 $1,956
3-rm $146,000 65 $2,246
4-rm $251,000 90 $2,789
5-rm $339,000 110 $3,082
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Housing affordabilityHousing affordability
HDB Flat type
Median income of applicants
HPY Ratio(with housing grant)
Debt Service Ratio
2-rm $1,280 5.7 (3.1) 18%
3-rm $2,100 5.8 (4.6) 24%
4-rm $4,350 4.8 (4.6) 21%
5-rm $5,400 5.2 23%
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House price to median household House price to median household income ratio, 4-rm HDB flatincome ratio, 4-rm HDB flat
0.0
1.0
2.0
3.0
4.0
5.0
6.0
1995 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
Year
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Income and housing `gaps’ Income and housing `gaps’
5 to 3 room gap
5 to 2 room gap
Median Income
2.57 4.22
Flat size 1.69 2.57
House Price 2.32 3.85
Average ppsm
1.37 1.58
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Housing supply elasticity Housing supply elasticity estimates estimates
Price Series
Population coefficient
Price elasticity of supply
α2 = 0.5 α2 = 0.75
Resale HDB
0.8446(0.67)
0.00 (α1 = -0.5)
0.20 (α1 = -0.3)
0.250.45
Private Housing
-1.1749(-1.46)
-0.23-0.03
-0.090.11
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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 V. Summary
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Thank youThank you