Raise income to address the home affordability issue

Certain sides have aimed the gun barrel at the central bank and its strict lending rules


People really hate to hear this: “I told you so.” No. “We told you so.” “Not just once, but many times.”

Bank Negara Malaysia’s (BNM) revelation that house prices are “seriously unaffordable” is not surprising. It is like saying that Malaysia will not win the FIFA World Cup. No surprise there.

Clearly, the central bank wants to debunk the blames that the financial system was the cause for the lack of home ownership opportunities.

Certain sides have aimed the gun barrel at the central bank and its strict lending rules. Obviously, BNM must be feeling the pressure. Since July, it has been issuing statements to debunk such claims.

Certain parties want the lenders’ regulator to ease the rules especially the debt service ratio (DSR) policy. Obviously, the DSR has made borrowings harder for average Malaysians.

The data revealed last week showed houses in Kuala Lumpur (KL) City, Petaling Jaya, Johor Baru and Georgetown as the “most unaffordable” in comparison to the average household income levels.

Georgetown tops the list. The highest median house price in the capital of the most developed region after the Klang Valley was RM600,000 when the maximum housing-cost burden (HCB) is only RM256,000.

KL City did not do any better with the average house price of RM580,000 when the maximum HCB was RM385,000. The Petaling area has the median house price of RM470,000, while the buyers could only afford houses at RM336,000.

Johor Baru also falls into the category of the most unaffordable areas with actual median house price at RM335,000. The average maximum price for a house to can be purchased is RM290,000.

It is a complex issue. It is not just about house prices, lending rules and affordability. Worries at the central bank is regarding the excessive household debts.

Since 2010, the BNM has been trying to rein in lending to households, which was inching near 90% in 2015. An economic shock similar to the East-Asia Financial Crisis of 1997-98 will be apocalyptic to the country’s financial system.

Housing loans are already the single-largest component of commercial banks’ total loan portfolio, accounting for 34.4% of the total outstanding loans as at end-May 2017.

As of August this year, loans for housing was valued at RM474.9 billion from the RM1.55 trillion total borrowing of the country’s banking system. At the end of 1997, the outstanding amount for house purchases was only RM47.2 billion.

Lesson learned from the US financial crisis of 2007/08, which has dragged the world’s largest economy to the fringes of the Great Depression of the 1930s, stems from the subprime mortgage bubble. BNM wants to prevent a repeat of the US financial story.

Property developers believe there is still room for lending for the property sector. They claimed the sector generates the largest chain effects to the economy. Most of these listed property firms are also pressured to maintain their earnings forecast.

Lenders are seeing their profits thinned. Low interest rates, slower loan growth and provisions to unprofitable sectors will drag earnings. Higher capital requirements will force lenders to increase revenues. House lending is one of the profitable businesses.

The government is under a different pressure. The public demands affordable housing and the authorities are not able to deliver a simple solution. Demand and supply determine house prices. Intervention and capping of house prices run contrary to the free market principle.

What is more interesting from BNM’s recent released data is the gap of the median monthly income. In KL City, the monthly median income is RM7,620, while in Penang the figure is only RM4,792. In Petaling Jaya, it is RM6,484, while in Johor Baru the average income is RM5,497. Even with the median monthly income of RM7,620 in KL City, they can only afford to buy houses costing RM385.000.

While house prices have rocketed, income has failed to catch up. Citizens of certain cities are earning below the country’s monthly median income of RM4,585. Starting salaries for the majority of jobs have only increased 100% over the last 25 years. House prices in certain areas have risen over six times.

The home affordability issue will continue to drag on without a quick fix. But the more immediate concern is how to address the income inequality.

The slow rise of average income would not only make purchasing a home impossible. It makes the majority of Malaysians susceptible to economic uncertainties, financial responsibilities and the rising cost of living. Address the income gap, and some of the burdens may find a breakthrough. Until then, many will seek homes as far as Nilai or Serendah to find a house that is within the affordable range.

  • Mohamad Azlan Jaafar is the Deputy Editor-in-Chief at The Malaysian Reserve