Housing mismatch and the middle-income trap

By Khairie Hisyam

In our second issue piece on the property industry, we delve into housing affordability concerns in the property market. We examine why prices have skyrocketed beyond what many can afford and how that has led to a mismatch between market supply and demand. Finally, we ask the million-ringgit question: is the industry heading towards a bubble?

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Housing affordability has been a hot button topic in recent years when it comes to the Malaysian property industry. And bearing the brunt of surging prices is the middle-income group.

The perception is that the group is trapped in what is termed the middle-income trap — while they cannot qualify for low-cost housing, they also cannot afford a comfortable home within the city area.

“I have been informed generally in my meetings nationally and at state level that the current prices of housing, either direct from developers or in the secondary market, is beyond the reach of the majority of the wage-earners at the moment,” said Michael Geh, International Real Estate Federation (FIABCI) national committee member for the Malaysian chapter.

A glance at the Property Market Report 2012, released by the National Property Information Centre (NAPIC), reveals that prices have generally surged in major cities including Kuala Lumpur, Penang and Kota Kinabalu to levels beyond the affordability level of an average wage-earner in the RM4,000 take-home pay bracket.

For example, a single-storey terrace in the Lucky Garden area, Kuala Lumpur, is priced from RM777,777 upwards. It is a stark contrast to prices in some other nearby areas — a similar house in Happy Garden is priced from RM378,000 according to transaction data from NAPIC.

How did we come to this situation?

“Due to the property market super-boom over the last five years, prices have increased as much as by 50% in three years in certain areas,” said FIABCI’s Geh.

That pace has outstripped purchasing power growth on the house buyers’ part, said National House Buyers Association (HBA)’s honorary secretary-general Chang Kim Loong. “Salaries have not increased proportionally as property prices increased.”

The result, explains Geh, is a disparity between purchasing power and housing affordability.

Indeed, the price surge is reflected by the Malaysian House Price Index accelerating upwards over the past few years. While hovering in the mid-range single digit in terms of annual increase percentage since 2001, between 2010–2012 it has picked up pace. The index, covering all house types spanning terrace, high-rise, detached and semi-detached, rose by 11.8% in 2012, the highest percentage increase since 1996.

However, industry insiders do not seem to think it is a nationally widespread problem.

“The skyrocketing prices issue is not nationwide but the perception is that it is,” said Ng Seing Liong, immediate past president of the Real Estate and Housing Developers’ Association (REHDA).

According to Geh of FIABCI, the problem is most felt in major cities where urban migration is occurring. “It’s a very serious problem affecting Penang, Selangor, Federal Territory and Johor Bahru…but not the small towns,” said Geh. “In places like Ipoh, prices are still cheap.”

Speculation fuelling skyrocketing prices

The main cause, said HBA’s Chang, is speculation.

While there are many who speculate in the market by buying under-construction properties before selling for a higher price upon vacant possession, there are also investors clubs who negotiate with developers for bulk purchase discounts in order to make more profit when they sell.

“The crux is that people are allowed to buy multiple properties,” said Chang.

Geh feels that the current environment is unhealthy as the majority of the industry is geared towards selling to investors as opposed to genuine home-buyers. Instead, there should be a system to sell properties directly to home-buyers, upgraders and downsizers first before the investors and speculators step in, he adds.

“We can’t blame the people with money to invest, but the industry should have a mechanism to directly sell to these groups,” said Geh. “Having said that, unfortunately what is happening in Malaysia is consistent with the regional problem such as in Singapore.”

Ng of REHDA agrees that the present environment favours investors. “For speculative properties, i.e. high-rises, some developers are afraid they cannot sell, so they give discounts to these so-called investors clubs.”

“This is also distorting the market because it is not real demand,” added Ng.

Additionally, escalating cost of increasingly scarce land in prime areas is a real factor, said Dr Daniele Gambero, CEO and co-founder of strategic marketing consultancy firm REI Group of Companies. Other factors include increased construction costs as well as demand for high profitability by developers.

“If nobody is buying, prices will drop but as per today the demand is much higher if compared to the offer…consequently prices keep on rising,” said Gambero, adding that prices are also inflated by pricing in the costs of schemes such as developer interest-bearing scheme (DIBS), free memorandum of transfer (MOT) fees, and so on. “Investors have been kind of spoiling the market by going for multiple purchases too.”

There are also unpublicised costs that developers have to bear, said Ng, who cites Selangor as an example. For a landed development on an area bigger than three acres, there must be 30% medium-cost and 20% low-cost components respectively, he explains, adding that for developments on an area less than three acres the requirement is for a 30% medium-cost component.

“So that means about 50% of your development cannot make money,” Ng concluded. “If you cannot make money, you have to make it up somewhere else.”

Supply-demand mismatch

With profitability a major factor, the perception today is that many developers prefer the high-end segment of the market at the expense of the medium-range. But is that where the bulk of the market demand is?

“The real demand is in affordable housing,” said HBA’s Chang, adding that developers cite high land costs as a reason to focus more on the high-end sector.

Therefore there is a mismatch between real market demand and what is being offered, said Gambero of REI Group of Companies. “Out of 10 affordable houses requested by the market, developers are actually supplying two affordable, four office spaces, two retail spaces and two very high-end/cost properties.”

Gambero adds that the middle-income group become ‘forgotten’ and continue paying high rentals instead of buying their own properties because prices are too expensive in convenient locations. “On the other hand, if it is farther and affordable, it is (likely) not yet served by public transportation and the commuting exercise will drain their monthly savings — putting them in a very difficult position.”

Another industry observer laments that this quandary arose as a result of the industry ‘celebrating’ speculators. “Why are we celebrating people who buy so many houses? We are a victim of our own creation.”

The observer explains that while there is often much ado about investors buying properties en bloc from developers, there is rarely news of whole blocks being sold to genuine home-buyers. Additionally, there is a lack of effort in encouraging and supporting those who are looking to buy their first homes.

“The whole system is about speculation — catering to speculators’ demand and also more profit,” said the observer on condition of anonymity, lamenting further that many developers push the responsibility on affordable housing solely to PR1MA (1Malaysia People’s Housing Programme) so they can focus on high-end developments. “I hope the industry will move towards first-time homebuyers as PR1MA alone is not enough.”

However, unrealistic expectations on the buyers’ part may also be adding wood to the housing affordability fire.

“The trouble is that when you build lower-end properties, people don’t want them,” said Ng of REHDA. “There is a lot of distortion in the market in terms of perception of what they want and what they can actually afford.”

Ng explains that nowadays, homebuyers are looking for a lifestyle as opposed to simply homes. And the added costs that come with specific lifestyles is what many are complaining about.

“In previous decades, we just buy houses. Now they want security, landscaping, facilities and so on,” said Ng. “So when these come into play, the value becomes different. That is why we get people complaining why prices shot up so much.”

“Even with high-rises, when you look at condominiums with plenty of amenities…all these become add-ons to the price,” added Ng, commenting further that many feel unsafe unless they are living in a gated and guarded area as a result of security concerns portrayed by the media. “So if you go for low-cost, as in affordable housing, they don’t even look at it. I myself am very confused.”

Bank Negara steps in: Is there a bubble?

The mismatch in expectations and affordability levels is also a contributing factor to the high household debt to gross domestic product (GDP) ratio, said Ng. The ratio, which is currently at 83%, is among the highest in the world.

In fact, rising household debt levels led to Bank Negara announcing a number of curbs to arrest the uptrend. Among them is limiting the maximum financing tenure for both residential and non-residential properties to 35 years.

While it remains to be seen if that particular curb will have material impact on speculative activities, there is a general air of expectation that more curbs are in the works. Not least of which is due to previous talk that Bank Negara has, for years, been mulling curbs regarding the popular developer interest-bearing scheme (DIBS), which many point to as encouraging speculative activities.

As for HBA, they trust the central bank to continue taking appropriate measures. “We welcome the restrictions so far,” said HBA’s Chang. “Thank god they are listening to us — we (HBA) have been in dialogue with Bank Negara for the last two years.”

With Bank Negara stepping in to curb rising debt, however, the big question is whether it implies the industry needs slowing down. Is there a bubble?

“That is a good question,” said REHDA’s Ng. “That depends on the location and whether it’s landed or strata.”

Geh of FIABCI thinks that the industry is heading towards a residential property bubble at the current rate. “In fact the residential bubble is already there to me, it just hasn’t burst yet.”

Another industry observer, property lawyer and author Khairul Anuar Shaharudin, feels that the answer is not a simple yes or no. “It depends on the area as we are still undeveloped in certain parts,” said Khairul, adding that “fringe areas like Sepang, Banting and Rawang can still ride the wave.”

“However, it will affect all if the bubble spread is big enough,” explained Khairul. “If the areas affected by the bubble overlaps, it may create a full bubble as the falling price or stagnant price will affect all developers.”

Is PR1MA the answer?

In 2011, the government rolled out two schemes in effort to address affordability concerns. In addition to My First Home Scheme which helps first-time buyers by exempting them from the required 10% down payment for home financing, there is also PR1MA.

Established via the PR1MA Act 2012, the programme ostensibly aims to “plan, develop, construct and maintain affordable lifestyle housing for middle-income households in key urban areas”, with middle-income defined as having a cumulative household income between RM2,500–7,500.

According to PR1MA chief executive officer Abdul Mutalib Alias, PR1MA operates on an apolitical and bipartisan basis. “There’s no bumi quota, no bumi discount (in the program). If you are eligible, everyone has a fair chance in the balloting,” said Abdul Mutalib earlier this year.

Yet PR1MA has also drawn criticism, most recently from a member of parliament who pointed out PR1MA’s slow progress in meeting its own target of building 80,000 affordable homes in joint-venture with the private sector.

“At the current speed, it will take 105 years to build the 80,000 units of PR1MA houses and to sell them is another major problem,” Kluang MP Liew Chin Tong was quoted as saying earlier this month, after noting that PR1MA has started construction on a total of 761 units in Putrajaya and Nusajaya, Johor.

At publication time, PR1MA has yet to respond to KiniBiz enquiries on the criticism.

With PR1MA still relatively in its infancy, it perhaps deserves the benefit of the doubt as it finds it feet.

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Yesterday: Are we heading towards a property bubble?

Tomorrow: Drowning in office space