Housing is a basic right, not for speculation

THE EDGE WEEKLY ISSUE#995

THE WEEK OF DECEMBER 30, 2013 – JANUARY 5, 2014

MY Say: HO KAY TAT

It is universally accepted that all humans have a basic right to food, clothing and shelter.  Modern socio-economic theorists have updated this to include good sanitation, education and healthcare.

Indian economist and Nobel laureate Amartya Sen went one step further by articulating that it is our capacity to meet these basic needs, rather than their mere consumption, that determines our individual significance and socio-economic well-being.

For the same reason that we strive to ensure that everyone has access to basic food – either through price control, subsidies or some form of distribution to those in need – so too should housing be made equally accessible.

This is why the issue of house prices rising way above affordability is a politically sensitive matter that needs to be addressed by every government.

Since 2003, average home prices in Malaysia, as measured by the Malaysian House Price Index, have gone up by 80%.  Average income, as measured by nominal GDP per capita, rose 92% over the same period.

However, much of the rise in property prices occurred only in the past four years, when average home prices surge 48% from the end of 2009 to 3Q2013.  That is compounded annual increase of 10%, outpacing income growth of around 7% per year.

The surge in home prices in the Klang Valley has been more marked with landed home prices generally doubling over the same four-year period.

Rising home prices, combined with high rates of home ownership and low levels of income, have converged to create a high level of household debt in Malaysia.  Our household debt-to-GDP ration of over 83% is the second highest in Asia.

To be fair, property prices in Malaysia is not universally expensive or out of everyone’s reach everywhere in the country.

According to government statistics, the average home price in Malaysia was RM269, 324 as at 3Q2013.  It will, therefore, take 8.4 years for an average Malaysian to buy a home based on nominal GDP per capita of RM32, 144 per year.

By comparison, it takes about five to six years of average income to buy homes in Singapore (based on an HDB apartment price), the UK and the US.  Thus, although Malaysians are worse off, the two year difference is not too wide.

However, the urban-rural divide in Malaysia is very large and that is where the real problem is.

The national average home price of RM269, 324 would be able to buy only a 200 to 300 sf apartment or half a shoebox in the city centre.

Indeed, statistics show that the average price of homes in Kuala Lumpur, at RM620, 758, is 130% above the national average while at RM405, 836 in Selangor, it is 50% higher.

In other words, using a similar level of affordability, urbanites have to earn about 2.3 times more than the average Malaysian to be able to afford a house.  This means you have to earn about RM6, 200 per month.  The question is, how many people living in the Klang Valley earn this figure?

Apart from demand, supply and cost, there is another variable that affects property pricing – excessive speculation.

Take DIBS (developer interest-bearing scheme), which started in 2009 and was recently banned by the government.

Here, a buyer only pays minimum downpayment, say 10% of the value to secure the purchase of a home.  In the case of a high-rise home, the buyer pays nothing more until completion three to four years later.  The bank provides the mortgage and pays the developer based on the percentage of completion.  The developer pays the bank the interest to service the mortgage.

Thus, for a mere 10% of the home price, the buyer gets the upside of any appreciation in the property’s value over a four-year period.  Even if it goes up by 20%, it is whopping 200% return on investment.

In effect, instead of being a house financing scheme, DIBS became a high gearing warrant, turning the purchase of properties into a speculative investment instrument.

Some people believe the government should not impose too many rules and restrictions and they argue that it is best to leave free market forces to determine property prices.

But the reality is that the free market is not a perfect market and asset bubbles created by excessive speculation bring large socio-economic costs to society.  Government intervention is thus justified when prices have become too high and thousands of people are denied access to a home.

Recognising the need for social inclusion in housing, the federal government and state governments of Johor and Penang have introduced a number of measures to cool down property prices.

Some of the measures announced since Budget 2014 include revising upwards the Real Property Gain Tax (RPGT) rage for the disposal of properties within the first five years; for foreign buyers, raising the minimum foreign purchase restriction from RM500, 000 to RM1 million, imposing a 2% levey on foreign buyers and removing DIBS.

In Penang, additional measures were announced to curb speculation, including the imposition of a levy on property transactions and a moratorium on the sale of affordable and public housing for 5 and 10 years respectively.

Making housing affordable is not an option.  The challenge is how to make it happen.

The measures taken so far to cool down property prices, although punitive, are necessary.  But imposing restrictions is a negative way of tackling the problem.

In the long run, what we need are positive measures to support genuine home ownership.  The Singapore government’s investment in HDB homes is a good and tested model and it puzzles me why we can’t copy it.

Malaysia has similar schemes, but they lack quantity, quality and suitable locality.  There is simply no point in building affordable homes in far-out places because few people will take them up.  And many of our low-cost and affordable housing in the city have become urban slums.

We should just engage the top people at Singapore’s HDB to find a solution to our public housing problem.  Don’t let our pride and prejudice stand in the way.

Tax incentives like deduction for first-time home mortgages will assist first-time home owners.  This was done on a limited scale for homes purchased from March 2009 to December 2010 with a RM10,000 per year tax relief for three years.  This scheme should be made permanent.

Developers will also be encouraged to reduce profitability (which means lower prices) if the risk of their business can be further mitigated.  This can be done through timely approvals and transparency on land use and densification as well as better infrastructure planning.

Developers should also be allowed to withdraw a project launch and return deposits on bookings if the launch fails to achieve the pre-disclosed sales target.  This eliminates further financial risk to developers, buyers and the banks.

On balance, the rise in overall home prices in Malaysia is consistent with income growth.  It is only in urban areas that housing affordability has become a major issue.  As stated earlir, this was contributed by speculation facilitated by low interest rates and DIBS.

Access to affordable housing is a basic human need and a fundamental responsibility of every government.  While investing in a property is a legitimate hedge against inflation over a period of time, excessive speculation, whereby buyers flip the property they buy within a short time, must be contained.   E

Ho Kay Tat is the publisher and group CEO of The Edge Media Group