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.

Friday 20 December 2013

DBKL Assessment - Facts, Fallacies and The Bottomline

Ever since Dewan Bandaraya Kuala Lumpur (DBKL) announced the higher assessment value, many commentaries have been made and some appear to be intentionally deceitful. I have also written fairly extensively on why it is not justified. 

With DBKL having just announced a reduced assessment RATE, and sticking to higher assessment VALUE previously decided, what is the bottomline effect for you? In other words, how much more do you pay in actual assessment TAX? 

I hope this article will help provide further clarity for you. 

A. DBKL's total expenditure and revenue 
2013 Budget figures*
Total Revenue        RM1,690.00 mil
Total Expenditure  RM2,190.00 mil
- Operational         RM1,406.00 mil
- Development      RM  782.55 mil 
Source : DBKL Budget Speech 2013

B.   Total Assessment Tax Collections (Before and After Revision)

The estimated revised assessment tax collections amount to RM1,430 mil compared to RM880mil currently.  This represents an increase of 62.5% or RM550mil more. DBKL should disclose the exact figures, but we believe our estimations are reasonable.

C.   The Assessment Rate
Revised Assessment Rate
Property Type
Within 36 miles radius
% of reduction
Service Apartment
Low cost flat
Vacant commercial land
Vacant residential land
Kampung Baru, Kampung
Sungai Penchala & Kampung

Melayu Segambut Dalam

What is the basis for the different percentage of reduction of the assessment rate for the various property types and locations? If the intention is social inclusion to assist the lower income group, it would have been easier to give a further discount to the assessment rate base on income reported on tax returns. A billionaire who lives in a designated area with low assessment rate pays low assessment tax even if he has a palatial home. 

D.   How does the new assessment rules affect you?

Whether you pay more or less depends on the relative changes to your assessment value and your assessment rate, as per the formula above.  In general, most people will pay a higher assessment tax as the rise in assessment value is greater than the fall in assessment rate.
With DBKL getting RM500m to RM600m more, who pays?
Is this pain fairly spread out? 

E.   Illustrations of the above and its effect based on 3 scenarios on a residential property

F.    Conclusion
To address the unhappiness of Kuala Lumpur residents, we hope DBKL will provide further clarity and transparency on the following questions :-
a)    How much more assessment tax revenue will DBKL get after the revised assessment value and rates?  How will this additional collections, which we estimate at over RM500 million, be spent? Tax payers have the right to demand accountability and responsibility. As I have written in previous articles on this issue, DBKL is already spending more than other municipalities per person.
b)    What is the basis of computing assessment value? I know it is rental income (implied or actual) but what are the reliable sources of information or database used? DBKL should make the entire list of assessment values for all properties in KL available on the Internet. This will allow every resident the ability to check their assessment value against all others, in the interest of fairness and transparency. 
c)    A failure to be transparent would likely give the impression of possible biases in the way assessment values are determined, leading some residents to feel they are being penalized for choices they previously made.

Saturday 14 December 2013

Where is Malaysia's Mandela?

As Nelson Rolihlahla Mandela is laid to rest and the world has paid its tributes, we ask the obvious question, where is Malaysia’s Mandela?

Mandela has been described by other leaders as a giant of history who moved a nation towards justice and a light of the world. Madiba not only led but also made sacrifices.

Words such as freedom, courage, reconciliation, forgiveness, inspiration, grace and compassion are closely associated with him.

President Barack Obama made the following observation in his speech: “Emerging from prison, he would hold his country together when it threatened to break apart. He would erect a constitutional order to preserve freedom for future generations, a commitment to democracy and rule of law ratified not only by his election, but by his willingness to step down from power.” 

Mandela was no saint, as he himself admitted. “I am not a saint, unless you think of a saint as a sinner who keeps on trying.”

But he was willing to make sacrifices and had the courage to do what was right. He lived by his idealism, taking risks through the power of action. 

It is worth noting a few examples of his sacrifices, simplicity and courage.

Offered a release from prison in February 1985 if he rejected violence, he spurned the offer stating: “Only free men can negotiate.” He had the courage to safeguard the jobs of white civil servants, although this concession brought him fierce internal criticism. He was also chastised for granting amnesty to 3,500 members of the then hated police force.

Elected president in 1994, Mandela allowed F W de Klerk to retain the presidential residence and instead settled into a nearby Westbrooke manor. And he lived a simple life, donating a third of his 552,000 rand annual income to the Nelson Mandela Children’s Fund and made his own bed, even as president.

Malaysia needs a Mandela. Perhaps, there never will be one. 

But will there be leaders of the country who are able and willing to make his life’s work their own? Will we have such leaders who lead by sacrifice, courage, inspiration, grace, justice and moral authority? Who will lead us to greater freedom, and social and economic inclusion? Who will unify us racially, religiously and culturally? 

Our nation is deeply polarised, whether by politics, race, religion or income. The urban-rural divide is not just about income but also race and politics. Households are cash poor, running up high levels of debt. The cost of living is rising as the increase in income falls behind real inflation rates, and made worse by the weakening of our ringgit. Besides having to pay one of the highest car prices in the world, the removal of various subsidies and the introduction of the Goods and Services Tax in 2015 will compound the misery of the lower and middle-income groups. 

Meanwhile, the stock market and property prices are at an all-time high. We see capital outflows by the rich. The economy is increasingly in the stranglehold of fewer and fewer people. The top 1% has more income than the entire bottom 40%. Monopolistic and rent-seeking behaviour continues and, indeed, is perpetuated by the establishment. The anti-monopolistic law is toothless. We have leaders of people openly flaunting their power and authority, comforted by the knowledge that their abuses will not be brought to accountability. 

Bigots openly cast racial aspersions and perform offensive acts, knowing they are immune from prosecution. The same bigots and their supporters at the same time threaten others when opposing views are expressed. Moderation is seen as being liberal-minded. And all liberal views should be banned, as expressed by some delegates at a political convention of the dominant political party recently. 

Surely, now more than ever, we should pray for a Mandela?

To quote Madiba, the greatest moral leader of our time: “What counts in life is not the mere fact that we have lived. It is what difference we have made to the lives of others that will determine the significance of the life we lead.”