Friday 27 December 2013

My Say Dec 30, 2013 issue of The Edge
By Ho Kay Tat
Housing is a basic right, not for speculation
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 health care.
Indian economist and Nobel laureate Amartya Sen went one step further by articulating that it is our capability to meet these basic needs, rather than their mere consumption, that determines our own 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 controls, 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 surged 48% from end of 2009 to 3Q, 2013. That is a compounded annual increase of 10%, outpacing income growth of around 7% per year.
The surge in home prices in the Klang Valley have been more marked with landed homes generally doubling over the same four-year period.
Rising home prices, combined with high rates of home ownership and low income levels have converged to create a high level of household debt in Malaysia. Our household debt to GDP ratio of over 83% is the second highest in Asia.  
To be fair, property prices in Malaysia are not universally expensive or out of reach of everyone, everywhere in the country.
According to government statistics, the average home price in Malaysia is 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 5 to 6 years of average incomes to buy homes in Singapore (based on a HDB apartment price), the United Kingdom 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 about 200-300 sq ft, or half a shoe-box apartment, in the city centre.
Indeed, statistics show that the average price of homes in Kuala Lumpur are 130% above the national average, at RM620,758, while those in Selangor are 50% higher, at RM405,836.
In other words, using 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 per month. The question is, how many people living in the Klang Valley earn this figure?
Apart from demand, supply and costs, another major variable affects property pricing – excessive speculation.
Take the example of the DIBS (Developer Interest Bearing Scheme) financing structure which started in 2009 and was recently banned by the government.
Here, a buyer only pays a minimum down payment, say 10% of the value, to secure the purchase of a home. In the case of a high-rise apartment, the buyer pays nothing more until completion three to four years later. The bank provides the mortgage and pays the developer based on percentage of completion. The developer pays the bank the interest to service the mortgages.
Thus, for a mere 10% of the home value, the buyer gets the upside of any appreciation of this property value over a four years period. Even if it goes up by 20%, it is a 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 price bubbles created by excessive speculation bring large socio-economic costs to society. Government interventions are thus justified when prices have become too high and thousands of people are denied access to a home.
Recognizing the need for social inclusion in housing,  the Federal Government and the 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 Gains Tax (RPGT) rate for disposal of properties within first five years for foreign buyers, raising the minimum foreign purchase restriction from RM500,000 to RM1 million, imposing a 2% levy on foreign buyers and removing the DIBS scheme.
In Penang, addictional measures were announced to curb speculation. This includes the imposition of a levy on property transactions ng and the moratorium on sale of affordable and public housing for five and ten 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 into 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 the quantity, quality and suitable locality. There is simply no point in building affordable homes in far out places as 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 mortgage will assist first time home owners. This was done on a limited scale for homes purchased from March 2009 to Dec 2010, with a RM10,000 per year tax relief for three years. The 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 risks 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 earlier, this was contributed by speculation facilitated by low interest rates and the DIBS easy financing scheme.
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.


  1. Yes - I totally agree with the idea that housing is not to be an instrument of speculation. However, I would like to point out that the comparison given in this article is seriously flawed. UK average house price is around £165k vs an average wage of £25k which is 6.6x. With the number of foreign millionaires in Singapore, using gdp per capita is pretty meaningless - the median wage in singapore is just aroound $40000 pa (3480x12) vs an HDB on around $300000 of 7.5x.

    More importantly, it is the dual income households who are bidding against these stuffs so comparing this against a GDP per capita (Rather than average household income) is rather misleading.
    Malaysia (like most SE countries) is actually a country with 2 stage of economic development - the big cities approaching western standards and the kampungs - and again - this make the average prices rather meaningless.

    Finally, the way to solve this has been thought out of Henry George over 100 years ago - it is the land value tax. Most property value appreciation occurs in the value of the land/location rather then the increase in build cost. Tax away the unjust gain and use it for a productive purpose (e.g. very basic safety net) is really the way to solve this.

    In the mean time, the monopoly game continues.

  2. With every right there is a corresponding obligation. I wonder who bears the obligation to provide housing. Even affordable housing. The government? Where is the place of liberalism then? Or is Malaysia wanting ever bigger government?

    1. The fundamental question is whether housing is a basic human right. I think it is. How then do we ensure affordability and availability?

      At a minimum, speculating on this asset class must be discouraged. In Australia, foreigners can only purchase new developments. Consequently, all homes ultimately end up with residents. In US and Canada, property taxes are very high and gains are treated as income to discourage speculation. This tax is applied to fund local schools and public transportation system.

      Discouraging speculation on its own is probably not sufficient in Asia, where owning multiple homes by those who can afford has become a tradition and proven effective in wealth creation. There is a need for social safety net to protect the homeless. And I will post some photos of these homeless families in future. The government has a role, directly or indirectly, to help create supply of affordable homes. Private sector motivation to maximize profit makes them an unreliable source.

      Whether the Malaysian government can be effective is another question. We know in the case of Singapore, the HDB policy has become an integral part of nation building.

    2. Right to housing has been recognised as fundamental and the UN has long recognised it. I'm just not sure couched in a framework of basic human rights - thus creating a direct albeit implied government role as the obligor - is the best way to deal with homelessness. Sure, one can envisage an array of tax regimes as levers to calibrate resource allocation to achieve a desired outcome and this can take different shades and hues depending on socio economic scenarios. Maybe it's the season but stewards of capital may want to think of drivers other than returns/profits as fruits of their labour. If more such stewards put aside traditional measures, we need only very small governments. Big governments aren't sustainable. We are obliged - we ourselves - to help our fellow men to be adequately housed.