How did we get into this housing mess?

By Sherilyn Goh

While housing is generally out of reach for average Malaysians at current price levels, we need to first identify the reasons that contributed to this conundrum in the first place. KINIBIZ explores the housing bubble, what’s in a house price, escalating household debts and sluggish income growth.  

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As a result of the sudden spike in property prices observed between 2009 and 2014, the lower and middle-income groups increasingly find it difficult to buy their homes in many locations, even outside of urban Kuala Lumpur.

The prices of suitable houses or “affordable homes” have now reached critical levels – beyond the grasp of average, urban-dwelling wage earners.

The fact that the Malaysian housing market is out of reach for the average Malaysian is substantiated in Khazanah Research Institute’s (KRI) ‘Making Housing Affordable’ report, which shows that house prices overall are more than four times the national median income.

An objective benchmark to measure the affordability of property prices is by comparing it against annual household income – a multiple of more than three is considered unaffordable.

The housing conundrum is only a recent phenomenon, as there were much less complaints about property affordability about a decade ago. But today it is a grave issue with the housing affordability index in Kuala Lumpur (8.22) almost on par with cities like Sydney (8.30) and London (7.8).

“Kuala Lumpur is priced out there in terms of a global city, but something to bear in mind is that wages in Malaysian aren’t increasing as much,” said Institut Rakyat’s executive director Yin Shao Loong.   

More staggering is the fact that Sabah (11.41) and Sarawak (9.04) emerged as the most “severely unaffordable” states, with their affordability index surpassing that of Kuala Lumpur (8.22) and Selangor (5.88), according to findings from the think-tank’s Malaysian Housing Affordability Survey 2014.   

The high index in the East Malaysian states was attributed to a combination of weak household income and high house prices, dispelling the notion that housing unaffordability is only an issue affecting Klang Valley folks.  

The housing bubble

House prices have been climbing steeply since 2009, and by early 2014, the average price had already more than doubled compared to prices in 2000, which explains why middle-income first-time homebuyers increasingly find it hard to secure a property which is affordable even based on their respective combined household incomes.

To put things into perspective, KRI report found out that the Malaysian all-house price had grown at a compounded annual growth rate (CAGR) of 3.1% between 2000 and 2009.

However, between 2009 and 2014, house prices grew at a CAGR of 10.1%, which is almost three times faster than the growth recorded in the period between 2000 and 2009.  

While that may come as good news for existing homeowners who can enjoy appreciating assets, official data show that 27.2% of Malaysian households did not own a home in 2012, and more first-time homebuyers are likely to find themselves priced out of the current housing market.

Many existing property owners are overjoyed to see steep price increases in their properties compared to the cost of acquisition.

These gains, according to the National House Buyers Association (HBA), are merely “paper gains”, as they have yet to be realised and exist only on paper.

“We are of the opinion that steep price escalations especially within a relative short span of time are not necessarily a good thing.

“Without insulting any homebuyer, a property that cost RM140,000 to buy will always be a ‘RM140,000 property’. Just because the market price has increased to RM500,000, it does not mean that the quality has suddenly improved, giving the new buyer a RM500,000 ‘built quality property’,” it wrote.  

The cost of building a house

While more in-depth analysis and investigation are needed to ascertain what caused the sudden spike within a short period of time, one could usually attribute them to several reasons. From the price perspective, it could be broken down to the price of the house and the cost of borrowing from financial institutions.

Land price becomes a major factor, more so than construction and labour costs, which also rise alongside the appreciation of the housing market, and can also vary from state to state.

“The price a developer is willing to pay for new land will go up as the market prices for new housing increase,” said KRI in its report.

It further noted that short-term speculative behaviour exacerbates the situation of a housing bubble.

“By this we mean purchasers who buy houses and sell them soon thereafter, instead of five to 10 years later. If supply is inelastic, as it is in Malaysia, every time a speculator buys a house and resells it at a higher price, the new higher price becomes the benchmark price for all similar houses.

“Prices rise faster than they otherwise would without this speculative behaviour,” it explained.  

According to KRI, the World Bank in 1989 stated that Malaysia’s high standards for land use and infrastructure also contribute to the high cost of land for housing.

“The time taken to get relevant approvals can contribute to the overall costs of building houses. A development planning application can take up to six months before it is approved and construction can commence,” it wrote.

What comes as most surprising in the report is that construction costs – that of labour, materials, and machinery and equipment cost – have been falling in recent years, with the gaps between house prices and construction costs increasingly widening, especially in Sabah and Sarawak.

“Given that these have been falling, it is expected that housing prices would fall accordingly.

“The contrary seems to be the case,” observed KRI.

The cost of borrowing

In addition to the cost of building a house, house prices also include the cost of borrowing from financial institutions.

A major issue of late, mortgages and personal loans have seen rapid expansion in the past few years due to a combination of low interest and easy credit.

“While most of these are required, if you have an environment where you have easy access to credit, low interest rates, along with speculation driving price increases, then it’s possible to say that we’re in the midst of a housing price bubble.

“And because bubbles burst, there are risks both to the broader economy, as well as to consumers,” said Yin.

The developers interest-bearing scheme (DIBS) is one such property financing scheme which has artificially lowered credit costs, and as a result, promoted flipping of properties in the housing market.

For the uninitiated, DIBS essentially exempts property buyers from paying interest on their mortgages while their purchased home is under construction as the interest costs – claimed to be borne by the developer – had actually been priced into the home sale price.

Bank Negara Malaysia has banned the controversial scheme in November 2013, which was after four years of consideration since its inception in 2007.

Amid the slowdown in the property market, recently there are growing calls for DIBS to be reinstated, especially to assist first-time homebuyers in purchasing their own properties.

We will examine the issue further in the fourth part of this series.

Mortgages and household debts

Growth in household debt has become a major concern in recent years, and property mortgages may very well precipitate the issue. By 2014, Malaysia’s household debt was at a staggering 87.9% of GDP.

Housing loans are a component of household debt, and in 2014, 60% of non-performing loans totalling RM61.1 billion, were for the purchase of residential properties.

“That’s basically 1.5 times of 1MDB’s debt,” quipped Yin, referring to self-styled, debt-ridden strategic investment firm 1Malaysia Development Bhd.

According to Bank Negara Malaysia’s insolvency department, the second biggest reason for bankruptcy is for defaulting on housing loans.

“The situation of low-income earners in this environment is of particular concern to us, as these are individuals and families who appear to be the most debt-burdened,” said Yin.

In response to the housing bubble, the central bank has also introduced cooling measures such as raising the cost of lending and restricting credit access to low-income borrowers, as a measure to curtail any increases in unsustainable debt and bankruptcy, and to forestall a sudden bursting in the housing bubble.

“This is a prudent measure for the economy as a whole, but it also means that low-income households will face a tough situation in the years ahead,” he explained.

Other measures announced by the government include higher real property gain tax, lowering loan-to-value ratio for a third mortgage, banning DIBS and higher minimum price for foreigners.

These measures, according to HBA, were not meant to lower property prices or make property prices more affordable, but rather to reduce the steep rise of property prices, and to a certain extent, deter speculators and bogus homebuyers.

Both prices and income matter

While average house prices have been on the rise, growing by a sharp 60% since 2009, statistics suggest that household incomes have not kept up in decades.

From 2011 to 2013, Malaysia’s average home prices increased at CAGR of 7.3%, outstripping gross national income per worker which grew at a slower pace of 6.3%, according to a Moody’s report.  

Wage share to gross domestic product (GDP) has also stagnated despite evidences of increased productivity in recent years, according to the Malaysia Human Development Report published by the United Nations Development Programme.

Worse still, Yin added, is that the share of wages in the national economy shows that the government is projecting a similar rate of growth from 2014 to 2020, as from 2008 to 2013.

“Wages in Thailand and South Korea account for over 60% of their GDP, meaning that workers share more in national prosperity,” he said.

This, according to Yin, is in contrast with Malaysia’s wage share of GDP which only stood at 33.6% in 2013. Furthermore, in 1971, wages comprised 33.8% of GDP, little different from the figures today. In contrast, the share of GDP taken home by the corporate sector has risen from 51.7% in 1971 to 64.2% in 2013.

While homeownership is fairly high at 74% of total Malaysian households, it is suggested that these figures may well be overestimated because most young adults – unable to afford their own properties – are still living with their families.

There are a lot of people who want to own a home but increasingly find themselves locked out from the housing market. More first-time homebuyers are expected to face the same problems. It is likely that if the current situation is left unchecked, we will end up with a whole generation of people without their own houses – a “homeless generation”.

This group of people – constituting 50% of the Malaysian population according to some estimates – will then be left with the option of either renting a house and be subjected to the whims of their landlords, escalating rents, etc, or be forced to commit an excessive proportion of their monthly household incomes to servicing a 30-year home mortgage, at compromised standards of living.

Yesterday: The problem of unaffordable houses

Tomorrow: PR1MA and the housing intervention