You won't believe how home price hike outstrips income growth

Low interest rates are masking the truth.

According to Nomura, low interest rates have kept housing “affordable” based on the monthly mortgage service (20-21% for HDB 4-room flats and mass-market private condos on our numbers).

However, if the effects of interest rates are removed, it appears household income growth has not caught up with the rise in home prices (the price-to-household income multiples for HDB 4-room flats and mass-market private condos = 5.9-6.4x, vs. the mid-cycle 5.1-6.2x, on our numbers).

Here's more from Nomura:

Anecdotally, it appears banks have also increased mortgage rates by c.10-20bps since the end of 2012. Assuming a mortgage rate of 3%, the mortgage service ratio would increase to 24-26% for HDB 4-room flats and mass-market private condos, vs. the current 20-21% and mid-cycle 20-25%, on our numbers.

The government’s concern is therefore not unfounded, in our view, considering 1) the fast rising leverage of the average households’ balance sheets, 2) higher home prices that has outpaced income growth, and 3) mortgage rates that are creeping up. More policy intervention is therefore on the table if the previous rounds of cooling measures prove to be ineffective in cooling the housing market.