This article first appeared in City & Country, The Edge Malaysia Weekly on August 20, 2018 - August 26, 2018
Affordable housing has been talked about for many years now but ask anyone about it and it is likely he or she will not be too clear about what that really means. What actually is an affordable property? To some, that is a subjective question.
To illustrate, let me relate my experience.
About three years ago, I decided I needed to buy a property. After making a checklist of all the things I wanted for my dream home, I began my search.
To cast my net wider, I signed up with Perbadanan PR1MA Malaysia (PR1MA) as well.
Several months went by before I got an email asking me to go for balloting at a few selected schemes. Then, after two years, I received an offer to select a unit — with a minimum price of RM385,000 — at a PR1MA project in Jalan Jubilee, Kuala Lumpur.
According to the PR1MA website, the project will have 543 apartments on 2.5 acres of leasehold land. Sized from 906 to 1,089 sq ft, all units will have at least 2 bedrooms and 2 bathrooms. Facilities include a community hall, nursery, playground, swimming pool, kindergarten, outdoor gymnasium and surau.
But what is supposedly affordable turned out to, well, not quite the case. If you pay a 10% downpayment and get a 90% loan, the monthly repayment would work out to RM1,735, based on a 30-year tenure and 4.4% interest rate.
Apart from that, you will have to pay the maintenance fee, assessment tax (two instalments annually), quit rent, home and mortgage insurances and Indah Water service charge, among others.
And even though the household income ceiling was raised to RM15,000 for PR1MA homes — way above Bottom 40% (B40) levels — that doesn’t mean young Malaysians can afford to pay a RM1,735 monthly instalment. The reasons could include a bad credit history, one too many loans or insufficient salary.
And that is supposing one can even afford to pay the 10% downpayment, or RM38,500, to begin with. If a purchaser takes up a 100% loan, his monthly repayment will be higher too.
Definition of ‘affordable’
In Malaysia, there are several different definitions for affordable homes. To the Real Estate and Housing Developers Association (Rehda), they are priced from RM300,000 to RM500,000, compared with the National House Buyers Association’s range of RM150,000 to RM300,000.
Bank Negara Malaysia (BNM) says such homes should not be more than RM282,000, while Khazanah Research Institute (KRI) puts the price at RM188,208 (as at 2016) by applying a multiplier to household income, based on a median monthly household income of RM5,228 and median annual household income of RM62,736.
Often, in news reports, developers will describe properties priced below RM500,000 in the Klang Valley as “affordable”, whether or not they are open for sale to the public or designated by the government as affordable homes.
In the 2016 Household Income and Basic Amenities survey, the Department of Statistics Malaysia states that the B40, middle 40% (M40) and top 20% (T20) households registered median monthly incomes of RM3,000, RM6,275 and RM13,148 respectively.
Using Demographia International’s Median Multiple method, in which a house is considered affordable if it is less than three times the household median annual income, it means the maximum affordable house price for the B40, M40 and T20 are RM108,000, RM225,900 and RM473,328 respectively.
It looks like the PR1MA scheme — which aims to develop homes priced between RM100,000 and RM400,000 for the middle-income households in key urban centres — doesn’t really fit the bill as the housing threshold for the M40 group should be RM225,900 or below. (See Chart A)
Syarikat Perumahan Negara Bhd (SPNB) is a government-owned company under the purview of the Ministry of Finance that was set up to provide quality and affordable homes in line with the National Housing Objective.
It was given the task of developing comfortable and affordable homes through a number of programmes such as Rumah Mampu Milik and Program Mesra Rakyat. Subsidiary companies — SPNB Aspirasi, SPNB Idaman, SPNB Mesra, SPNB Edar and SPNB Dana — were established to play different roles.
CBRE | WTW managing director Foo Gee Jen says the affordable home pricing range as indicated by Bank Negara and KRI is reasonable. However, he points out that affordability is likely to vary across states, depending on economic status and income level.
“Thus, there is a need for affordability to be defined by locality instead of a standard nominal value adopted nationally,” he adds. (See Chart B)
Rehda Institute trustee Tan Sri Eddy Chen agrees, saying that as the property market is non-homogenous, dynamic and segmented in nature, the interpretation of housing affordability should take into consideration factors of locality.
That is why Rehda’s affordable housing price range differs from that of Bank Negara although both use international standards based on the housing cost burden approach, he explains.
Rehda, Chen says, takes into account the factors of locality, adjusted to reflect the economic differences of each state and district. It covers the top four states — Selangor, Kuala Lumpur, Johor and Penang — that are seeing higher residential development as well as higher population growth.
For example, the estimated affordable house price is RM514,000 in Kuala Lumpur, RM422,000 in Selangor, RM339,000 in Johor and RM326,000 in Penang.
“Future housing demand in these four states is deemed to be higher and may eventually trigger more property developments, making housing availability and affordability in these states more vital than others. In this sense, Rehda’s definition of housing affordability — in the price range of RM300,000 to RM500,000 — is more practical,” he says. “The difference is that Bank Negara’s affordable house price represents the national level of housing affordability.”
Chen explains that on a more micro level, taking into account the purchasing power of households in a more specific area, estimated affordable house prices are significantly different from the state and national level estimates.
In the Klang Valley, where the estimated average affordable house price is RM815,000, he notes that the area with the highest affordable house price is Mont’Kiara–Duta Hartamas (RM1.45 million), followed by Subang Jaya (RM1.17 million), Denai Alam (RM895,000) and Ara Damansara (RM873,000).
“This goes to show that scale does matter in the measurement of housing affordability. In this sense, affordable house prices derived from the median household income at the national level is not an appropriate indication because it tends to overlook the factors of locality,” Chen says.
To support this view, he points out that most government affordable housing projects, in particular PR1MA, are priced above BNM’s definition of RM282,000. Although there may be some that are cheaper than that, they are mostly far from urban areas, where land is less expensive.
Such locations are inconvenient and residents would have to spend more on transport.
Chen says the low take-up rates in these schemes prove that factors of locality are important. Properties on the urban fringe lack local amenities, infrastructural network, employment opportunities, educational facilities and so on. Eventually, all these houses will become unsold properties that add to the severe affordable housing overhang in the country,” he says.
Housing and Local Government Minister Zuraida Kamaruddin, in an email reply to City & Country, says the ministry sets the affordable housing price threshold at RM300,000, based on various factors such as location.
“The ministry is studying the best mechanism to reconcile the differences in the affordable housing price threshold set by various agencies,” she says.
High construction cost?
CBRE | WTW’s Foo says most developers claim low-cost houses are usually sold at a loss while low-medium-cost houses break even at the best. Affordable houses by the government are generally sold below RM300,000.
“These prices are not realistic because they may only cover the actual construction costs and exclude the land, infrastructure and other compliance costs, which can easily double the effective cost of a house,” he says.
Henry Butcher (M) Sdn Bhd chief operating
officer Tang Chee Meng says it is financially not attractive or viable for developers to build affordable homes in certain locations unless land is cheaper, or the project enjoys certain incentives such as higher density and subsidised or waived statutory contributions.
Rehda’s Chen explains that total development costs in a housing project comprises three major elements — land, construction and soft cost — with land and construction making up the biggest chunk.
Soft cost refers to architectural engineering, financing, compliance and legal fees, and other pre- and post-construction expenses.
In the Klang Valley, the construction and land costs are roughly 60% of the gross development value for high-rises, and 65% for low-rise developments, he says.
The gross development cost per sq ft for building an average apartment is about RM324 within the Klang Valley, depending on the location.
“There is very little a developer can do to lower the land cost, especially in prime areas because they have very attractive local amenities and supply is limited by their very nature. The second major development cost is construction, which includes architectural cost, civil and structural cost, mechanical and electrical cost as well as cost of piling and site work,” Chen explains.
“While a developer can make some decisions to minimise the construction cost — such as substituting cheaper materials for more expensive ones — it is largely determined by market forces. Some say the construction cost in Malaysia has not significantly increased throughout the years, but it is not true. During a period when the ringgit performs poorly, construction materials and consultancy services are likely to cost 5% to 10% more.”
Affordable housing developments in prime urban areas are not feasible because of the high land cost, and the fact that most developers have to rely on loans to fund construction.
Chen says such developments may even be aborted before they begin if there is a widening gap between the sales revenue and the amount the developer needs to repay loans and give investors some returns.
“In certain cases, developers are able to access public land to build affordable housing. But when this option is not possible, the high land cost is passed on to house buyers. A higher development density might increase affordability, but living standards could be compromised.” Besides that, other factors, such as car park and setback rules, could limit the full utilisation of land, he notes.
Many people also blame high property prices on developers’ high profit margin. Chen says it commonly ranges from 10% to 20% of total development costs, but tends to be lower — usually not more than 10% — in affordable housing projects.
The issue of misusing
There have also been stories of affordable homeowners in schemes such as PR1MA, Rumah Mampu Milik Wilayah Persekutuan (Rumawip) and Rumah Selangorku (RSKU), renting out their units before the moratorium on reselling or renting ends.
As a rule, homeowners cannot sell or rent out their affordable homes for a period of five years, starting from when the land title is transferred.
Tang says this can happen when a homeowner who can afford another property is given the opportunity to buy an affordable home. This can be avoided if stringent checks are carried out.
“By doing so, these people are depriving those more qualified from owning a home. However, higher-priced affordable homes, such as those between RM250,000 and RM400,000, may not attract so many first-timer homebuyers. These units need to be opened up to others who can afford to buy them. They can then be rented out to those who cannot afford to purchase a unit and, at least, provide a roof over their heads.
Foo says a direct approach would be to include a clause to make it compulsory for the owners to occupy the unit or risk having it taken back, and the lease agreement terminated.
However, enforcement may be difficult unless registration of tenants is made mandatory, complete with profiles of the tenants and landlords.
“Otherwise, it is almost impossible to monitor rental activity on the open market and trace the movement of tenants,” Foo says. “Alternatively, developers of affordable housing could offer a leaseback option so that they are able to filter the tenants and control rents. This way, property management and security issues that arise may also be overcome.”
Foo says renting is popular among households in highly urbanised areas, with 27.6% of households in Kuala Lumpur and 33.4% in Selangor renting homes. He believes putting up more houses for rent could be ideal in these areas.
“If anything, the more pressing concern is to prevent multiple ownership of affordable houses. We need to have one single registry for all affordable housing schemes to ascertain that eligible applicants are allocated only one house each.”
Chen says while misuse of affordable housing schemes is not a new issue, it intensified following Kuala Lumpur City Hall’s confiscation of some units leased under the Program Perumahan Rakyat (PPR) and Perumahan Penjawat Awam (PPA).
“The high demand for housing prompted some of the original tenants to lease their units to third parties, especially foreign workers, while some units were abandoned. These offenders prevent other deserving cases from getting a place in PPR and PPA,” he says.
He adds that stricter measures should be put in place to weed out those who are no longer eligible as there are some 60,000 people on the waiting list.
“A more comprehensive identification process can ensure that the units are allocated to the right applicants, and a more detailed tracking process would enable the identification of tenants who have moved out but continue to hold on to the units.”
Chen says the quality and living standards of these homes should not be compromised so that these units are habitable in the long run.
In June, Housing Minister Zuraida had announced that PPR owners would be given three months to evict foreign tenants. If they fail to do so, action can be taken against them, including cancellation of home ownership rights. After this, the ministry will take similar action for other affordable housing schemes nationwide, she said.
For schemes such as Rumawip and RSKU, monitoring and enforcement will be refined under a single entity under the ministry.
Buy or rent?
Various initiatives have been introduced in recent years to make it easier for people to own homes. One is rent-to-own (RTO), offered in different guises by banks, developers and even PR1MA.
To many Malaysians, however, owning a home is an aspiration and is seen as a form of financial security, savings and a measure of wealth. To them, renting a home is seen as a trade-off in some sense.
Foo says the lack of a comprehensive framework to safeguard the interests of tenants and landlords is a major deterrent to the growth of the home rental market.
Not having a third party that can resolve disputes creates distrust and further deters renting, he adds.
There are other concerns, including security and privacy, cultural and religious differences, property management, risk of default and dubious contract terms.
The question is whether the cost of buying a property for your own occupation is more than the cost of not buying one.
Foo says many feel that renting a home is a cost, whereas paying a loan instalment is considered savings.
But, he cautions, the interest incurred on a loan is an often underestimated cost.
Some years back, the steep rise in property values could more than offset the loan interest. Now however, any increase will be slow as prices have gone up tremendously, and is likely to be lower than the interest on a housing loan, he says.
“Often, the loan interest is now more than the combined monthly rent and rate of capital appreciation. It is a misconception that loan interest is not a cost or will be more than offset by rising capital gain. People need to be aware of that.”
Tang says there is also substantial incidental costs apart from the loan differential, such as legal fees and stamp duty.
“As such, the cost of buying a property is higher than renting one. Furthermore, owners also have to pay for quit rent, assessment tax and maintenance charges where applicable.”
“However, the key advantage of owning rather than renting your home is that mortgage repayments to the bank ultimately lead to home ownership whereas rents do not result in home ownership.”
For affordable homes located far from urban areas, roads and public transport need to be put in place to ensure good accessibility and connectivity.
Housing Minister Zuraida say the issue of accessibility and housing is a matter that needs to be taken seriously, based on the study under the National Housing Policy 2.0.
“The National Housing Department (NHD) welcomes proposals from the Ministry of Transport to develop housing together, but no proposals have been officially received by the Housing Ministry as yet,” she says.
She says based on the household income report, wages are not increasing as fast as house prices, making the rising cost of living even more burdensome.
As such, the NHD also welcomes the Ministry of Human Resources’ suggestions for higher minimum wages, she adds.
A house is a basic need, a place we call home.
The housing ministry is working towards making houses available to as many as possible, but it cannot do this alone. Other ministries need to play their role to tackle the issue of housing affordability and the cost of living.
So what is the state of affordable housing in Malaysia? The answer is still fuzzy but, keeping our fingers crossed, we hope more concrete solutions can come soon.
In the meantime, perhaps all stakeholders should refrain from using the word “affordable property” until it is clearly defined.
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