Construction of Ratio and its Change
Affordability Ratio is a Price over Earnings ratio or years-purchase that most stock investors will understand. It is the number of years a household will take to repay the purchase of a house.
The price used is that of a 4-room HDB resale flat nominally priced at $255,000 as at 1Q2011 and discounted backwards to year 1990 using the HDB Resale Price Index.
The earnings used is the medium monthly household income from the Department of Statistics. Figures (in blue) for years 1991 to 1994 and 1996 are interpolated as data was not found.
Affordability Ratio is therefore the price divided by earnings and further divided by 25 percent and 12 months. 25 percent of a household earnings is the maximum proportion set aside for housing. And 12 months is to bring the ratio from a months-purchase to a years-purchase basis.The Change in Affordability Ratio is computed by the rate of change of an affordability ratio of a year over the previous year. A positive percentage means that the Affordability Ratio has decreased as it takes a lesser number of years to pay off the purchase. On the other hand, a negative percentage means the Affordability Ratio has increased as it takes a greater number of years to pay off the purchase.
Finally in the % Change in Affordability Ratio, there have been positive percentages in the General Elections of 1991, 1997, 2001 and 2006. By the above measures, the affordability of housing in GE 1997 must have been a difficult one. It had successive years of high negative percentages before turning positive in year 1997.
Since GE 2006, the % Change in Affordability Ratio has been generally on a downward trend and stayed negative throughout. It has crept up to just below the peak in year 1996. Singaporeans have also become more aware and vocal about keeping public housing affordable, now especially that – the alternative – private housing for the middle income has reached an all time high.
Lim Tong Kay and Leong Sze Hian