OVER the years, the issue of prohibitive house prices and affordability have generated much attention. Why is housing unaffordable for many Malaysians? What are the solutions?
The price appreciation of residential properties in Malaysia has outpaced income growth and the average home prices are now well beyond the budget of many Malaysians.
Affordability has become a major concern for potential house buyers. Many are young, first-time buyers and the escalating cost of living means that they need to prioritise essential everyday expenses. They cannot afford to pay a deposit and repay the relatively expensive home loans associated with buying a property.
Furthermore, the general market perception is that income growth has not kept up with the increases in home prices.
This perception might not be totally correct, based on market research by Jones Lang Wootton (JLW). The monitoring of the residential market, among other property sectors, is part of the chartered surveying company’s Quarterly Property Market Report service and is available on a subscription basis since 1991.
Property is heterogeneous, due to its type, location, surroundings etc. As such, one rule does not apply to all. JLW analysed the growth of the most popular type of residential property, which is the double-storey terraced house.
Two popular well-established locations were chosen, Petaling Jaya and Melawati, located to the west and east of Kuala Lumpur, respectively.
Findings indicate that house prices grew at a moderate rate of between 4.5% and 7%, depending on the base year.
It was only in recent years, from 2010 and 2018, did we see a higher growth of between 6.5% and 7.5%.
This could be the result of speculation and the herd mentality in early 2010 which pushed up prices, and also innovative financing proposed by developers.
Selangor’s mean household income, based on Statistics Department’s data, has the following compounded annual growth.
> 6.1% between 1979 and 2016;
> 6.4% between 1989 and 2016; and
> 6.8% from 2009 to 2016.
These levels of growth in mean household income are very similar to house price growth.
Why, then, are people saying that property prices have grown beyond the means of many Malaysians?
What if people are not considering the cost of living and the changing lifestyle trends, which are happening among the younger households.
Today, a larger proportion of monthly expenses is being spent on buying a car, eating out, travelling, health and education, which limits net household income that could have been used for monthly mortgage repayments.
As much as the authorities are promoting home ownership, is this really the right solution?
More importantly, there should be a healthy supply of residential accommodation which meets the needs of the population, be it for owning or for renting purposes, depending on the needs and wants of the household.
Times are changing and home ownership might not be what the younger generation really need or want.
We have to address this in a holistic manner and not just what policy makers want, and what we think potential house buyers want.
To rent or to own
JLW studied the option of whether an individual or household is better off renting, or owning, a property.
The model took into consideration the popular terraced house priced at RM500,000 in a suburban location 25km south of the city centre.
As a potential purchaser, the conventional option would be to take a mortgage which entails a downpayment of 10% (RM50,000). Other expenses include stamp duty, legal fees, etc which could be an additional 4% of the purchase price.
As a house owner, there are also the outgoings to be considered, such as quit rent, assessment, insurance, security and maintenance, in addition to the monthly mortgage payments, which could vary subject to interest rates.
Apart from the monthly mortgage payments, many do not realise that if the loan tenure is 30 years, the amount of interest incurred over the years for a 90% loan of RM450,000 is RM370,800, or 82% of the loan amount.
Additionally, the purchaser will also need to bear other associated transaction costs, such as stamp duty and legal fees, circa 4%, or RM20,000, of the purchase price.
The property would need to appreciate to RM890,800 in order to be at par with the sum of the mortgage repayments and transaction costs. This relates to an annual growth of 2%. In order to yield a positive return, the property price would need to appreciate at more than 2% per annum to be attractive.
If the property is rented, the responsibility would be to pay the monthly rental. The rental increase could probably be at the rate of 4% per annum. The tenant will not be responsible for the maintenance and other outgoings.
The downpayment incurred in buying a house can be utilised for other purposes, i.e. equity investment, retirement plan or fixed deposit which are income generating.
The downside is that in a rental option, one does not own the property.
The model is sensitive to the projected capital appreciation and also the increment in the rental payable.
The current interest rate regime is considered low at between 4.3% and 4.5%, compared with the mid-1990s when the rates were around 8%.
Assuming a compounded growth in house prices of about 5%, and rental growth of about 4% per annum, it would appear that over the short to medium term of up to 20 to 25 years, the savings in renting are greater than the cost of owning a property.
Maintaining a house is not cheap and costs have escalated quite substantially over the years. However, by renting there is flexibility and if job changes are involved, a move to a new house would be easier.
The risks, however, would be subject to the availability of houses for rent in a particular location.
In addition, many potential home buyers are in the early stage of their working life and usually have minimal savings.
So enthusing them into buying a home, which they cannot afford, could further burden them financially.
Becoming a home owner can be a risky venture compared with renting and house owners endure relatively large debts, commit to long term loans and need to incur maintenance and furnishing costs. Furthermore, the escalating housing costs, weakened economic activity and demographic changes have made renting more appealing to the younger population in recent years.
So is it better to rent or to own? It all boils down to preference and intention, timing of purchase and often depends on other questions.
> How much can I afford?
> Where do I want to live?
> Do homes sell quickly in this area?
> What is the potential capital appreciation?
> How long do I plan to stay?
> Can I afford home repairs and maintenance?,
> Do I prefer flexibility or stability?
> What are my lifestyle, financial, career and family goals?
It is important that a potential buyer, with the availability of market information, undertakes thorough market research to decide whether they are better off buying or renting.
We are today faced with an overhang of unsold properties, primarily as a result of overbuilding.
JLW’s monitoring of the Klang Valley residential property market indicates that over the last eight years, 2010 – 2018, there has been an annual number of launches of both landed and strata housing of 48,745 units versus 36,444 units between 2000 and 2010. This represents a 34% increase.
JLW’s monitored stock does not take into consideration low- and medium cost housing and the lower band of the Rumah Selangorku of less than RM150,000, which could represent a maximum of 40% of the houses within a housing development, depending on acreage and zones, as required by the Selangor planning authority.
What the market fails to acknowledge is that, over the same period, population growth has been slowing down. The Statistics Department data shows that Selangor’s population growth between 2000 and 2010 was 2.8%. It is forecast to grow at 2.0% from 2010 to 2020.
The decade between 2020 and 2030 is even slower at 1.3%. Developers and policymakers need to acknowledge and study the fundamentals to address the challenges that we are – and will be – faced with.
Another important consideration is the income band of the population. If the objective is to improve the household income and lifestyle, we have to study this aspect to relate to market demand.
To date, data on household income is available only up to 2016. Nonetheless, while that may be the case, an analysis of the data shows that over the years, household income bands have been improving.
In 2009, about 59.3% of Selangor’s households earned less than RM5,000 per month. However, in 2016, only 26.8% household earned less than RM5,000 per month.
Moving forward, this percentage could further reduce. Thus, it appears that the objective of improving household income is materialising. In tandem with this, we have to study preferences, needs and wants of the target market.
There is no point focusing on “affordable homes”, for which there is, to date, no specific definition, when the market preference could be for different forms of accommodation.
To address the overhang, it is considered that developers need to continue to slow down the pace and scale of their projects and only build houses which the general public can comfortably afford.
In the longer term, the government needs to assist by helping to improve Malaysia’s workforce skillset, and wages, in order to increase their purchasing power.