M’sian property market — a case of less is more?

The demand should be determined by the market itself and not a centralised authority, says expert


STRINGENT regulations and politicking in Malaysia’s property market may impede economic growth, while creating unprofitable situation for private developers, according to an economist.

The Pakatan Harapan government came into power over a year ago with its goal to solve the issues of affordability and home ownership, especially among the lower income group, forming a salient part of its election manifesto.

Since then, the administration pledged to build one million affordable homes over the next 10 years, averaging out to 100,000 units a year, and allocated RM1.5 billion in the last budget to help achieve this target.

While the goal is both ambitious and praiseworthy, it detracts from the question that is often left unanswered — does the market actually need a million affordable homes over the next 10 years?

Institute for Democracy and Economic Affairs senior fellow Dr Carmelo Ferlito (picture) said home affordability in Malaysia is not as much of an issue as it is “politically claimed”, with 76.3% home ownership in 2016 — higher than most developed countries for that year.

The country may need significantly less or more than what was pledged, but the demand should be determined by the market itself and not a centralised authority, he told The Malaysian Reserve.

Ferlito added that the debate on affordability and call for government intervention are mostly limited to property — and not other necessities such as food and clothes — as the latter two have been adequately served by the market.

“The market is providing all the solutions…(and) the market proved that it can provide this, as long as there is no unfair competition,” he said.

Here lies the predicament that as the government intervenes in the affordable housing market, it is crowding out profit opportunities for private developers, while centralised planning of affordable housing often runs counter to market demand.

Threat to Social Mobility

The lower income group, otherwise known as bottom 40% income earners, contributed to 16.4% of the nation’s income share in 2016 with median and mean household incomes of RM3,000 and RM2,848 respectively.

The government’s goal to solve home affordability and ownership issues, while noble, threatens to impede the mobility of the lower income group — the very demographic it is seeking to alleviate.

Ferlito, who is also an INTI International College Subang adjunct faculty member, said affordability is often measured using median housing price against median household income, but it ignores the floor size and location of the property.

As such, the government’s proposal to fix the minimum size for affordable homes could backfire as it would result in these units being built outside areas of economic opportunities to keep costs down.

“If you fix a minimum size requirement like the government is doing at 900 sq ft or 1,000 sq ft in order to keep the house affordable, you need to go and build in the remote areas,” he said.

This has the adverse effect of keeping individuals who are in need of good jobs far away from the areas — namely Kuala Lumpur and the Klang Valley — that offer such job opportunities, he said.

“You are impeding social mobility and these people from contributing more to economic growth for themselves and the country in general,” he added.

Ferlito said individuals striving for social mobility are willing to live in smaller or micro dwellings, so long as they have access to these economic opportunities which, in turn, will grow their earning power to purchase a larger property in the future.

“So, regulations that aim to help (the lower income group) can potentially have the unintended consequence to harm them and the general economic situation.

“That is the complexity that we have to take into account. The government operating outside of the market is not in a good position to have access to that complexity,” he said.

As such, location forms an important part of the equation and cannot be traded off when measuring affordability.

Where Intervention Fails

The lower end of Malaysia’s property market has long been defined by state-owned developers, taking the lead in affordable housing projects, as well as stringent regulations and quotas imposed upon private developers.

While the aim is to ensure affordable homes meet the requirements which the government deems to be desirable, government intervention can create distortions in the market vis-à-vis supply and demand dynamics.

It could also result in the lower end-market, being artificially unprofitable for developers.

Ferlito said the lack of affordable homes in the market today is perceived as proof of a market failure, but the question remains as to why private developers did not step into the affordable housing segment in the first place.

“I strongly believe that the explanation is because they are kept outside that market with, first of all, regulations that make it unprofitable to build affordable housing and, secondly, the high involvement of the government agencies in that market.

“If you are a private developer, you are not going to compete with the government because you know that you can’t beat the government,” he said.

Ferlito added that this is a partial, but important consideration in explaining the market today — which is not a market failure, but an obstacle created by government intervention.

The allocation of Bumiputera housing lots, typically at 30% across most states in Peninsular Malaysia, and quotas for affordable homes imposed on private developers are among the issues cited that are creating these unprofitable situations for developers.

Ferlito said developers will build Bumi lots and affordable homes, if there is a market for it, and if they do not have to compete with state-owned developers, while dealing with stringent regulations.

“I’m sure that if there is a certain demand for affordable or Bumi housing, the developers are going to build because they are there to make money. They will take these opportunities whenever there are profits,” he said.

It is no coincidence that unsold Bumi lots are among the issues being faced by Perak, Kedah and Johor.

Last year, it was reported that Johor has over 5,900 units of unsold properties worth RM3.8 billion, mostly comprising such lots.

As such, Ferlito concluded that the lower end-segment is not inherently, but artificially unprofitable due to government intervention.

Where are the Opportunities for Property Developers?

According to Ferlito, developers are moving away from the high-end market after excessively exploiting the segment and are finding opportunities within the RM350,000 to RM600,000 price bracket due to the burgeoning middle class.

The majority of these opportunities are within the Klang Valley as the region represents the economic heartbeat of Malaysia and is where the majority of the population reside, he noted.

While opportunities elsewhere will differ from state to state and market to market, it is safe to say that gone are the days of developers looking to exploit the high-end market for profit, due to the persistent glut of such properties today.

Imperative in solving the issue of home ownership today is ensuring that homebuyers can secure the necessary financing to buy a home in the first place.

Various government-led measures have been taken to this end to assist first-time homebuyers, including the setting up of a RM1 billion fund for those earning RM2,300 or below a month and stamp duty waivers for properties priced between RM300,001 and RM1 million.

The property crowdfunding scheme — the first of its kind in the world — is also slated to be deployed to provide alternative financing options for first-time homebuyers.

Nonetheless, Malaysia’s household debt to GDP remained high at 83% or RM1.18 trillion in 2018, with housing loans accounting for 53.2% or RM628 billion.

Housing loans further made up 23.6% or RM6.01 billion of the total RM25.42 billion non-performing and impaired loans recognised by Malaysia’s banking sector in April this year.

Ferlito said addressing the negative equity among households is key in tackling the issue of home ownership.

“It is a way to shift the burden from income to consumption. By having a tax system more focused on indirect taxation, you can de-incentivise excess of consumption, thus creating more savings,” he added.

Such a development would be a paradigm shift in Malaysia’s tax regime, but is highly unlikely given the legacy of debt inherited by the current government of RM1.09 trillion or 80.3% of GDP.

The move, of which its virtues have yet to be tested, will also be perceived as contrary to the government’s pledge to bring down the cost of living in the country.

Rental Market and the New Gen

Ferlito said there is a huge cultural aspect that is often overlooked when it comes to understanding the property market as future-oriented mentalities slowly give way to present-oriented ones.

Those with a traditional mentality see home ownership as highly important in securing your future, whereas the present generation favours a transitional lifestyle and perceives home ownership as an unnecessary burden as opposed to a needed investment.

“Nowadays, there is a different shift. Young people want to travel and not to be linked to a certain physical place for too long. They want to be more flexible,” Ferlito said.

He said caught in between this category are those in their 30s to 40s who have grown up with the social pressure to own a home, while living in a world that is pushing in the opposite direction.

“It will take a couple of generations before this process is complete and there will be a growing role for the rental market because such a market gives you that flexibility,” he added.