Singapore – Affordable Homeownership Policy – Implications For Housing Markets

Introduction:

Affordable homeownership is a policy that is often accorded a great deal of policy attention by governments of many countries. In this paper, we examine the market implications of setting a housing price-to-income ratio target for a market segment by the government. The policy requires active intervention by the government with regard to the targeted sector. We use a simple model of the housing market with a home-ownership affordability target to derive the market implications of such targets. In the presence of uncertainty and resource constraints, the objective of home-ownership affordability is achieved for the targeted group at the expense of greater volatility in residential construction activity.

Affordable Homeownership as policy objective:

The promotion of Affordable homeownership is often accorded a great deal of policy attention by governments of many countries. The benefits as well as the costs of home ownership have been the subject of many studies. Atterhog (2005) classifies the advantages as those relating to:

(i) the dwelling itself – ownership dwellings are typically larger and of higher quality;

(ii) accumulation of wealth as home ownership is often regarded as a long term investment;

(iii) the non-tangible benefits many of which constitute positive externalities for society and local community.

Coulson (2002) describes three aspects of positive externalities from ownership that have been studied empirically. These include:

(i) better maintenance of property (Harding, Miceli and Sirmans, 2000),

(ii) being better citizens (DiPasquale and Glaeser, 1999),

(iii) children of owners having higher levels of cognition and fewer behavioral problems (Haurin, Parcel and Haurin, 2002).

These positive attributes are by no means universal. A study by Quigley and Raphael (2004) concludes that the evidence of externalities from Affordable homeownership is not overwhelming.

Indicators of Affordable Homeownership:

Bogdon and Can (1997) provide a review of indicators of rental affordability. The share of income spent on housing or rental expenditure-to-income ratio is widely used, with 25 to 30 percent of income representing the upper limit of affordability (Hulchanski, 1995). For the majority of households in countries with high affordable homeownership rates as well as for policy makers tracking affordable homeownership, housing affordability is about affordable  homeownership. Robinson, Scobie and Hallinan (2006) provide a comprehensive review of the concepts and measurement of housing affordability. A variety of organizations monitor affordable homeownership using the following indicators:

(i) House price to income ratio (UN-HABITAT);

(ii) Mortgage payment to household income ratio (US National Association of Realtors);

(iii) Ratio of median family income to the income required to qualify for a conventional mortgage on the median valued house sold (US Department of Housing and Urban Development).

Market implications of a house price to income ratio target:

In this section, we examine the market implications of setting a affordable homeownership target for a market segment by the government using a non-formal theoretical framework. We then use the Malpezzi and Mayo (1997) formulation of the housing market to study the implications for housing demand and supply elasticities.

Setting such a house price to income ratio would require the government to intervene in the housing market to determine prices paid by households in the targeted sector. Countries where forms of selective affordable  homeownership targets and policies exist include Norway, Singapore, Hong Kong, and South Korea. These and European countries such as the Sweden and the Netherlands (where the emphasis is more on affordable rental housing) have housing allocation policies and levels of housing market intervention that contrast with the market-oriented US housing model.

Conclusion:

There is a large literature on affordable housing and housing policy. This paper adds to the literature by analyzing the implications of setting affordable homeownership targets in the context of a targeted housing segment. The analyses suggest a number of market implications of such regulation as compared to a market oriented housing model. These include expansion of the targeted housing sector over time, the relative constancy of actual housing price to income ratios for households in the targeted sector, greater housing space consumption equity, income inelastic housing demand, price inelastic housing supply, as well as house price changes that are relatively less driven by population growth rates and construction costs.

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