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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