A credible Housing Policy is long overdue

housing-problemsHaving decent shelter, adequate food, good health care and education are basic human rights of our citizens. The government has a moral responsibility to ensure that majority of its citizens can either own their house or afford to rent public housing.

Sadly for the citizens the government is not taking the problem seriously or is going about it the wrong way. For if it was genuine in making housing affordable it should be reining developers, bankers, and speculators – all the parties who play an important role in rising property prices.

House prices have soared to exorbitant levels in major cities of Malaysia so that even the middle class cannot afford to own a house or apartment, let alone the lower classes. In 2009, the average house price in KL was RM390, 000 almost 6 times the average household income. It was even worse in Penang Island where the average house price was RM540, 000 or 8 times the average household income. Clearly, this is beyond the reach of the average family. A ratio of house price to household income of 3 to 4 times is internationally acceptable.

In its 2011 budget, the government announced that a first-time house buyer is eligible for 100% loan. It also announced a 50% reduction in stamp duty for houses costing RM350, 000 or less . While the stamp duty discount is helpful, it should be restricted only to first-time buyers. The 100% loan eligibility policy is dubious because it encourages risky lending on the part of banks and temptation for irresponsible buyers to walk away from their mortgages if house prices fall or if they are unable to service their loans. Requiring a house buyer to put in some equity is a more prudent policy.

housing-vacancyWhy have house prices risen so high and become unaffordable to many ordinary Malaysians? Normally prices are high because supply is inadequate to meet demand. But data from Malaysia’s Population and Housing Census indicate there are more housing units than households.  In 2000 the vacancy rate, i.e., unoccupied housing units, for all of Malaysia was 15.6%. It was higher in areas like Malacca 24.5%, Penang 23.5%, and Kuala Lumpur 15.9%. Reasons for vacancy show that 67% of housing units in urban areas were vacant because they were newly completed for sale or rent. This suggests that many people buy property for speculative and investment purposes, pushing up house prices.

In other words, there is a mismatch between demand and supply of houses. The majority of Malaysians want affordable homes but developers are supplying houses that they cannot afford. Developers prefer to cater to investors and speculators who buy to rent or to flip over and make money. Many of these people own two or more houses. In fact, it is a known fact that developers give preferences and reserve the best units to clients who purchase multiple units even before a project is officially launched. Ordinary house buyers then have to queue and accept less desirable units or buy them from the investors usually at higher prices. Developers go overseas to aggressively market properties as they are still cheap by international standards. In fact, the government through its misplaced priority is aiding this process by encouraging foreigners to invest not only in apartments but also landed property. Unlike Indonesia, Philippines, and Thailand, Malaysia is one of the few countries in Southeast Asia that allows foreigners to own landed property.

Banks also contribute to escalation of house prices through various aggressive marketing techniques.  They have relaxed credit standards and are willing to lend up to 95% of the value of a property. They offer variable, rather than fixed-rate loans, to reduce initial installments in a low-interest rate environment. Another method to reduce monthly installment, is to stretch loan tenure to 40 years, beyond the work life of a borrower. The recent suggestion to offer two-generation loan that stretches to 70 years, similar to what happened in Japan, is a reflection of how absurd the situation has become. Borrowers are encouraged to saddle future generation with their own debt. Hence, the ready availability of housing loans – to those who are rich enough to buy multiple units, and to those who can barely to afford to buy but are able to do through stretching loan tenure to unreasonable lengths or through offering low initial teaser rates – is a major cause of rising house prices.

In order to make housing affordable to ordinary Malaysians and to reduce unsustainable and unhealthy rise in property prices, the government should do the following.

  •  It is time for the government to start a public housing policy that provides affordable housing, particularly in urban areas, to people below a certain level of income. A good example worth studying is the Singapore Housing Board where the government spearheads the building of affordable housing for a majority of its citizens. Alternatively, the government can consider doing this in partnership with the private sector. Where land is scarce and density high, a comprehensive planning of land use with provision of good public transportation to reduce traffic congestion is absolutely necessary.
  •  For the private housing sector, the government must take a leading role to monitor property prices and take appropriate and timely measures to avoid unhealthy and unsustainable run up in property prices.  One lesson of the recent financial crisis is central banks and policy makers have focused narrowly on consumer price and wage inflation and neglected to monitor and regulate asset price inflation. It is time to recognize that asset inflation (property and stocks) has posed a greater threat to financial and economic stability. The recent measure by Bank Negara to limit buyers of third property to a 70% loan to value ratio is not enough to curb excessive investment and speculation. We suggest that loan ratio be reduced to a much lower level to test the market reaction.
  •  The government should increase property gains tax for short-term transactions. The present 5% property gains tax for property held under 5 years is not discriminating enough. The tax rate should be increased significantly, the shorter the holding period; the same should be done for sale of the second and successive properties.
  •  The government should stop the sale of landed properties to foreigners. As for non-landed properties, foreigners should not be eligible for local housing loans, unless she is a permanent resident.
  •  Town planners and local councils should have comprehensive land use planning and give more importance to developing green and friendly cities, first class public transport system and less to the building of more shopping malls, hyper markets, and roads.

In short, the government’s priority should be to put the needs of the majority of Malaysians ahead that of   banks, developers, speculators and rich foreigners.