In the first 2 quarters of 2021, we have seen the private property price index increased by 3.3% in Quarter 1 and 0.8% in quarter 2 respectively. If we project this increase for the whole of 2021, I think the private property price index may see an increase of 5% to 8%. For property owners or potential property purchasers, this increase could have an impact on our selling or buying decision.

One of the key questions to ask ourselves is that, is the increase in prices sustainable? If the price increase is not sustainable, then is it a good time to sell our investment now? If it is sustainable, should we hold out for more profit?

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**A look back in history**

Looking back in history, Chart 1 below show how the property price index has increased over the decades.

Chart 1 (Source information: singstat.gov.sg)

Looking at the property price index from 1975 Q2 to 2021 Q2, the index has risen from 9.1 in 1975 to 163.5 in 2021. This increase is an average of 6.48% per year over the last 46 years. Comparing the (46 years) average increase to the current 2 quarters of price increase (in 2021), it seems to suggest that the current property prices could be increasing at a faster rate than the long-term average rate of increase.

However, does comparing the recent increase to the average long term increase a good measure of whether the property prices had increased too fast? In my opinion, I will suggest that we can look at another variable as the basis to determine if the current property price increase is sustainable or if is there a bubble is forming in the property market.

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**What is a property price bubble?**

First, let us define what is a property price bubble.

To me, a property price bubble happens when the **price of the property is increasing at a rate that is much faster than the rate of increase of the income of the purchasers. The property prices have become unaffordable to its buyers. **

Thus, to determine if property prices are forming a bubble, we can calculate if the buyers could afford the prices of the property today. One way to determine this is to look at the income of such buyers and compare that to the property prices. I believe property prices is a function of affordability. If the resident population here can afford to buy the property, then the property prices can be supported.

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**Whose income shall we look at?**

Let us explore what are the percentage of the Singapore resident population staying in a private dwelling.

Source information: singstat.gov.sg

The percentage of resident household staying in condo and landed dwelling has increased steadily from 9.4% in 1984 to around 15.6% in 2004 and to 21% in 2020. Dwelling in these housings has increased over the years.

In the calculation to determine affordability of such dwelling, I decided to use the income of the top 20% of income earners here to see if they can afford to buy a condo or landed property. (Of course, not necessary the top 20% income earners buy private property, the rest of the 80% can also afford to buy). I am using the top 20% income earners here to match the 20% resident household staying in private property to determine if they can afford to buy. The same approach can be used for other deciles of income earners

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**Over the years, have the top 20% earner’s income increase more than property price increase?**

Chart 2 below has shown that the private property price index has increased from 90.2 in 2001 to 163.5 in 2021. This is an average of 3.01% increase per year over the last 20 years.

Chart 2 (Source information: singstat.gov.sg)

We can compare this to the income increase using the 2 charts below (for the top 10 percent of income earners and the top 11^{th} to 20^{th} percent of income earners here in Singapore)

Source information: singstat.gov.sg

Source information: singstat.gov.sg

For the 81-90 decile (top 11^{th} to 20^{th} percent), their household income has increased from $8,631 to $18,215 over the last 20 years. On average the increase is 3.81% per year. For the 91-100 decile (top 10 percent), their household income has increased from $14,862 to $29,246 over the same period. On average the increase is 3.44% per year.

Comparing the rate of income increase to the rate property price increase (average of 3.01% per year over the same period), we can see that for the combined top 20% of income earners, their income has increased slightly faster than the property price increase. In fact, in this income vs property price growth comparison, it does not indicate a property price bubble for the top 20% earners.

**Let us now look at affordability**

We can also use the latest income figure here to determine if they can afford to buy the properties at the current prices.

By applying the TDSR calculations in Table 1 for the 81-90 decile, we can see that their income can afford a $2.5M property.

Income | $ 18,215 |

TDSR | 60% |

Interest (TDSR) | 3.50% |

Loan Tenure (years) | 20 |

Loan amount | $1,884,441.22 |

Property Price | $2,512,588.30 |

Table 1 (81-90 decile)

If we apply the same TDSR calculations in Table 2 for the 91-100 decile, we can see that their income here can afford a $4M property.

Income | $ 29,246 |

TDSR | 60% |

Interest (TDSR) | 3.50% |

Loan Tenure (years) | 20 |

Loan amount | $3,025,658.41 |

Property Price | $4,034,211.22 |

Table 2 (91-100 decile)

Two assumptions are taken here. Firstly, we assume the buyers uses the maximum loan that TDSR allows. Secondly, we assume that the buyers have sufficient funds for the initial 25% down payment for the property.

Comparing the affordability of the top 20% of income earners here to today’s prices, I think prices today is still very much affordable for these deciles of buyers.

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**But is using the 60% mortgage servicing ratio (TDSR) a fair one?**

Even though the TDSR uses a 60% mortgage servicing ratio, buyers may not want to max out their TDSR or loan. Therefore, I think we can also use a lower mortgage servicing ratio of 40% to calculate the affordability of the buyers.

Using the lower 40% mortgage servicing ratio here for the 81-90 decile, we can see that their income can afford a $1.67M property. (See Table 3)

Income | $ 18,215 |

TDSR | 40% |

Interest (TDSR) | 3.50% |

Loan Tenure (years) | 20 |

Loan amount | $1,256,294.15 |

Property Price | $1,675,058.86 |

Table 3 (81-90 decile)

For the 91-100 decile, the corresponding property price will be $2.69M (See table 4)

Income | $ 29,246 |

TDSR | 40% |

Interest (TDSR) | 3.50% |

Loan Tenure (years) | 20 |

Loan amount | $2,017,105.61 |

Property Price | $2,689,474.15 |

Table 4 (91-100 decile)

Again, comparing the affordability of the top 20% of the income earners with the prices today, I think prices is still very much affordable for these deciles of buyers.

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**Are there limitations to the calculations above?**

This article is written with the intention to give the reader **the approach** on how we can determine if prices are too high or if a property bubble is forming. The above calculations are not fully conclusive, and I will suggest that we look at the whole market prices and comparing it with the full deciles of all income earners to draw a more accurate conclusion.

Thus, there are 5 main limitations that I would like to highlight here:

- Do note that all the above calculations are using averages. Within a decile, some earners in that decile are earning much more or less than the rest. So, some buyers maybe able to afford a higher property price, while some a lower property price that what is calculated.

- Is looking at the top 20% decile income good enough? Other deciles of income earners can also afford, and they do buy private properties. The reason that I use the top 20% here is to match the 20% of the population that are staying in private property. If we want an even better picture, I will suggest that we can use the same approach of calculation to determine if the rest of the decile earners can afford the corresponding property prices including HDB properties.

- Do note that foreign buyers do contribute to the property purchases here. Some of these foreign buyers consists of very high net worth purchasers and the calculations here does not apply to them.

- Here we are only looking at one factor: affordability. Even though this affordability factor can be a good gauge of property price bubble, however, there are still more factors to consider before deriving at an exact conclusion.

- You may know or hear someone making tons of profits from property than just the average numbers of 3.01% increase per year over the last 20 years. As mentioned in point 1, the calculations used here are the averages. As properties are not homogeneous, some properties do appreciate much faster than the rest.
*Thus, if you want to find out which properties have the characteristics of having a faster appreciation, you can contact me using the form below.*