Mortgage affordability evidence Minister Lawrence Wong provided is debatable

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Speaking at the 2019 Committee of Supply Debate, Minister of National Development Lawrence Wong said that mortgage affordability today is better than it was in the 1970s.

“I asked my parents who bought their HDB flat in the 70s, they said that indeed, at that time when they bought their first flat from HDB, it was about $25,000, which was about the price in the 70s. But then, their combined income was less than $1,000 per month, just a few hundred dollars, and they had to fork out almost 50% of their income every month for mortgage servicing.

“Today, the mortgage servicing ratio is less than 25%, below what it used to be in the past. It is also well within international benchmarks of affordability. Internationally, when we look at housing affordability, they will typically look at the servicing ratio of around 30% to 35%. We are keeping well below that. Not to mention that the vast majority of these first timers are able to service their loans entirely with CPF, that means with zero cash. And even for those who use cash, it is very little.”

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mortgage affordability
Evidences suggest that mortgage affordability today versus the affordability in the 70s is debatable

The anecdotal evidence Mr Wong provided for mortgage affordability in the 70s may have not been the norm.

A Straits Times article published in 1977 pointed out that a family which bought a four-room flat for about $25,000 paid just $82 a month to service their mortgage loan (or $45.55/month/person).

Moreover, in speaking to the New Nation in 18 March, 1978 about a newly launched mortgage protection insurance scheme for HDB flat owners, then-CEO of NTUC Income Tan Kin Lian said, “in the current drive we have found that many people have already paid in full for their flats through their CPF.”” (‘Income now offers mortgage policies’, The Straits Times, dated 18 March, 1978)

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These evidences suggest that mortgage affordability today versus the mortgage affordability in the 70s is debatable.

“Based on the current contribution levels, the average Singaporean who has just started working, after buying a comfortable four-room flat, and after working 40 years, can retire with at least $35,000.

“A person just entering the labour force, say at the age of 15, would have 40 working years ahead of him. Before he is entitled to withdraw his CPF. During that time, his average wage would be in the region of $400 at current levels.

“This means that he can accumulate in those 40 years a total CPF savings of $59,520, which is a sizable sum. This is assuming the contribution rate remain at 15 ½ per cent for employer and employee.

“Even after the purchase of a flat – and a four-room one can be bought from the HDB for about $24,500 – he would have $35,000 remaining in his account to comfort him in old age.

“…HDB statistics show that the average household income for people wanting to purchase four-room flats is now $672 for an average of 1.8 income earners. This works out to an average of $373 a person.

“On this salary, the person would accumulate CPF savings of $115.60 a month which is considerably greater than the payment needed for purchasing a flat. A family who buys a four-room flat and chooses to stretch payment over the maximum of 20 years will have to pay principal of $82 a month. Using the same average of income earners in a family, (ie. 1.8), this works out to $45.55 a month for each person. The surplus that remains in the account is therefore about $70 a month.

“Even if the family chooses to buy the flat over 10 years, the family’s repayment would be only $163 a month in principal, or $90.70 a person. This is still lower than his CPF contribution though the margin is much reduced.

“The four-room flat which these figures refer to is the latest offered by the HDB.

“These ‘new flats’ offer three bedrooms, a living room as well as a kitchen and two bathrooms. The living area is also vastly increased over older designs.

“Expensive as they may be in relation to smaller flats – the three room new flat costs only about $16,000 against $25,000 for a four-room one – they are very popular among those who want to move out of smaller flats.” – ‘Falling back on CPF in old age’, The Straits Times, dated 19, September, 1977

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