BY Chris Prasad
Rapid development has made Malaysia a nation that is somewhat obsessed with homeownership. The heyday of double-digit economic growth contributed to a robust appetite for property buying, which could almost be compared to the “land rush” years in the American Wild West. However, it has also dimmed our senses to alternative options when faced with the dilemma of how to put a roof over our heads.
The current economic environment has made the purchasing option harder, and while house prices have moderated, they remain severely unaffordable to a majority of citizens. Despite this, industry experts and financial institutions reject the notion that such a situation would lead to a “homeless generation” of Malaysians, as there is still the rental option available.
In response to criticisms levelled at stringent loan regulations implemented by banks, Bank Negara Malaysia (BNM) issued a statement last month reminding the nation that the “implementation of responsible financing guidelines serves to protect the interest of individuals, so that they borrow within their capacity to repay the loans throughout the loan tenure”.
This is to protect borrowers from undue financial hardships and excessive debt burdens, it said. Therefore, the view that individuals should seek a property purchase at the risk of their long-term financial health is a dangerous one – especially in this economic climate.
Faced with the sizeable gap between median incomes and house prices, various industry players and think tanks are beginning to express their support for a national policy pivot towards the creation of a well-functioning rental market.
They point out that a number of global markets are led by renters rather than buyers, and many of these boast robust and healthy local property industries because of strong systems and regulations that have been put in place.
At the recent fourth Economics Research Workshop organised by BNM, themed “The Housing Market: Issues and Policy Options”, industry stakeholders were invited to discuss broader alternatives to homeownership and there was a consensus that an effective rental market should be pursued as a policy priority to counter the rapidly softening buyer market.
This is especially true for those in the low-income economic bracket, where the affordability gap is currently considered to be severe.
According to the “median-multiple ratio” standard by the United Nations Centre for Human Settlement, a housing market is considered “affordable” if the house price to household income ratio is below three times.
A study conducted by Khazanah Research Institute indicated that the overall Malaysian median-multiple in 2014 was 4.4 times.
More alarming, the median-multiple ratios for key urban centres such as Kuala Lumpur (5.4 times), Penang (5.2 times), Terengganu (5.5 times) and Sabah (5.1 times) were considered to be “severely unaffordable”.
At the heart of the matter is concern over the country’s rapidly urbanising population. The rate of urbanisation is expected to rise to 75 per cent by 2020 and 80 per cent by 2030, according to the Economic Planning Unit under the Prime Minister’s Department.
As such, the provision of adequate housing to cope with this influx has been a government priority over the last decade, but the increase in house prices in urban areas will make it difficult for urban migrants to afford the incoming supply of units.
Among the solutions put forward at the BNM workshop was the creation of more rent-to-own schemes to cater to young professionals and start-up families.
Rent-to-own schemes are popular in countries such as Germany, where the rental subsector dominates the housing market. In fact, tenants make up 85 per cent of the market in Germany and, recently, one local council even intervened by purchasing private units to prevent an escalation of rental prices.
Similarly, the secretary-general of the National House Buyers Association Chang Kim Loong warned that a shift in focus to a rental market would require a step-up in enforcement to prevent the abuse of schemes intended to assist households.
As an example, Chang said various government schemes for low- and medium-cost housing, including the People’s Housing Programme (or PPR), had been abused by applicants who were not qualified to own or rent such housing projects.
However, Chang supported the rental option for struggling households as it is less burdensome and tenants are not bogged down by expenses such as loan repayments, insurance, sinking funds, maintenance charges and taxes.
Other solutions to the homeownership dilemma discussed at the workshop included better enforcement for existing government-led home ownership schemes and the adoption of standardised price thresholds.
Moving forward, the attendees also agreed that there should be careful consideration paid to future homeownership incentives offered by the private sector. Such incentives should not blunt the effectiveness of market mechanisms which work to correct housing imbalances.
BNM said the need for alternatives highlights the adverse consequences that poorly designed incentives to increase homeownership can have on housing affordability over the longer term.
With regard to this, the central bank brought up the negative impact of the now outlawed Developer Interest Bearing Scheme (or DIBS) and its concerns about the recent proposal to allow developers to offer bridging financing. It suggested that providing buyers with 100 per cent financing could be counter-productive and lead to a subprime situation.
The Economics Research Workshop held last week was attended by representatives from financial institutions, government agencies, property developers and academic think tanks.
Its purpose was to examine key issues in Malaysia’s housing market, drawing on current research conducted on housing affordability, demand and supply mismatches and the drivers of property prices.