As we were doing research for our main article on the Malaysian property sector, this headline caught our attention. The writer, Ashraf Abdullah, a former group managing editor of Media Prima TV Networks, articulated the reasons why the government must impose an indefinite moratorium on the construction of high-end houses and compel developers to build affordable homes — as the way to help Malaysians achieve their dream of homeownership.

“Malaysia has witnessed a troubling trend in its housing market: an oversupply of high-cost houses juxtaposed with a glaring shortage of affordable homes. A moratorium on the construction of more high-cost houses is prudent. It will enable the market to absorb the existing inventory, ensuring that property prices not only stabilise but also stop declining.”

As our readers well know, we are data-driven analysts. Hence, we were perplexed. Our first reaction was, is there an oversupply in high-cost houses and shortage in affordable homes? Here is what the data tells us. Chart 1 shows the number of unsold residential houses as at 1Q2024, broken down by price range. It is very clear that the highest percentage of total unsold units are in fact those priced under RM300,000, followed by those priced between RM300,001 to RM500,000. Even more so, most of these unsold affordable homes are recent launches. By comparison, many unsold high-priced units are “old stock” from before the DIBS bubble burst.

Hence, contrary to Ashraf’s claim, there is ample supply of affordable homes in the market. Developers are building lower-priced homes — the problem is they are not selling. The perception that developers are not building what the market needs could not be more wrong. Private sector property developers are profit-maximising entities. Of course they are and nobody would expect otherwise. But property developers don’t profit from simply building the homes, they only make a profit when the homes sell! A 30% margin on zero sales = zero profit (in fact, worse as they would be saddled with unsold stock). Hence, to say that developers only build high-margin luxury homes even when there is no demand makes zero sense. In fact, it is “unintelligent”.

Yes, we must address the issue of homeownership. It is the right of every individual to own a home, if they so wish. But the correct question should be, why aren’t more people buying these unsold affordable homes? Is it because of the location, quality, facilities and amenities, logistics or is it the fact that there are segments of the population, the low-income or first-time young buyers, who simply cannot afford commercially built homes? More in-depth research and analysis is required to truly understand the root cause — so that the correct policies can be implemented. Don’t prescribe medication without knowing the real cause of the illness — you might kill the patient!

We feel compelled to point out that Ashraf’s claims that the number of unsold residential properties (26,286 units in 2Q2023) would have risen significantly by now and likely continue to escalate, leading to declining property prices and thus, raising the risks to developers, the financial system and Malaysian economy, are also wrong. The fact is that unsold residential properties have been decreasing since hitting a peak of 36,863 units in 4Q2021. There were 24,208 unsold homes as at 1Q2024 (see Chart 2). And the Malaysia House Price Index has been rising over the past 10 years — home prices are broadly higher across market segments. This is why we are upbeat on the property sector, as articulated in the main article.

Homeownership and affordability is a pressing issue in many countries across the world today. As we have written time and again, the ability to own a home is a fundamental human right, not a privilege. On a positive note, for the majority of Malaysians, affordability is not an issue with the homeownership rate at a reasonable 77%. Nonetheless, we should always aim to do better — to help the segment of the population where homeownership is currently still beyond their reach. Here is our proposal to help at least 80,000 families own their first homes each year — with a housing grant.

We have established that developers are building affordable homes and there is no shortage. It is not a matter of the developers not meeting market demand. The fact is affordable homes (those priced below RM300,000) make up the bulk of unsold residential homes. See Chart 1 in “Unintelligent prescription might end up killing the patient”.

Another misconception that has been gaining traction in recent years is that renting is better than owning, on the basis that Malaysian households are already over-leveraged. This proposition could not be more wrong! There are good debts and bad debts. Borrowed money used to buy assets that depreciate in value are bad debts. Taking a mortgage to buy a home is good debt — it is a form of forced savings. Homeowners are building equity (wealth) for the longer term. Rental is an expense. Furthermore, homeownership is good for democracy. It also expands the middle class and the number of taxpayers over time.

In fact, housing in general in Malaysia is NOT unaffordable. Banks will typically lend the equivalent of up to 30% of a person’s gross income to service the monthly payments towards home mortgages. Based on this criteria, the minimum monthly household income to qualify for a mortgage to buy a RM200,000 home is RM2,840, a RM250,000 home is RM3,550 and a RM300,000 home is RM4,260. The median household income in Malaysia was RM6,338 in 2022 while nearly 90% of households earned more than RM2,840 a month. So why are some Malaysians still finding it difficult to buy a home?

To be sure, some cannot qualify for a mortgage because they have inconsistent income or insufficient proof of a steady income, poor credit card repayment track record and so on. But one of the main reasons is that many simply don’t have the lump sum savings to pay for the 10% deposit on a new home, whether because they have little income left over to save after cost of living (including paying rental) expenses, lack the discipline to consistently save a percentage of their disposable income, or have just started working (the younger generation).

Additionally, homebuyers would have to start servicing the mortgage drawdowns during the three-year construction period — while still having to pay rent on their existing rented premises. In effect, they would be paying double for the cost of housing for up to three years.

Give a “once-in-a-lifetime, first-time homebuyer” grant to pay the 10% deposit on a home — up to RM30,000 per married couple (for a RM300,000 home) or RM15,000 for single Malaysian citizen. To qualify for the grant, the monthly household income must be less than RM5,000. And subject to the homebuyer successfully getting a mortgage from a bank as well as completing a financial literacy course. A society where the population is financially literate will go a long way in ensuring a sustainable and resilient economy.

Additionally, to address the double payment for cost of housing during the construction period, defer all interest payments on the mortgage until the home is completed. These deferred interest payments can easily be added to the principal amount, and repayment spread over the life of the mortgage, serviceable upon completion of the home. The resulting increase in the monthly mortgage payments is relatively small and manageable (RM60 per month based on our simulation in Table 1).

Of course, the grant scheme must be funded, to avoid raising the budget deficit further. How?

Levy a 1% transaction tax on all property transactions, which totalled RM200 billion in 2023. This will raise RM2 billion annually, to be channelled into a special purpose vehicle (SPV) for the housing grant. Assuming an average grant of RM25,000, this plan will support at least 80,000 families to become homeowners each year. To avoid burdening the home sellers, legislate agent commission (currently ranging between 2% and 5%) to a maximum 2% by limiting tax deductibility. This will also reduce current unscrupulous “overselling”, which ultimately is paid for by buyers.

Notably, a “transaction tax” is not wealth or income tax. And developers should not be unhappy since the expected increase in sales will clear the backlog of unsold homes. Furthermore, new residential home sales account for only RM25 billion of the total RM200 billion in annual property transaction value.

This housing grant scheme will make homeownership affordable for at least 80,000 families each year. It is simple and efficient. The government should NOT build affordable homes (lesson: the failure of PR1MA) or lend money to B40 to fund their homes (lesson: repayment issues now facing PTPTN). Leave the property developers and banks to do what they do best, building homes and lending to the people.

Giving grants to help raise homeownership is a growing global trend. The Singapore government gives up to S$120,000 housing grants for eligible first-timer families and up to S$60,000 for first-timer singles. In the US, Democratic presidential nominee Kamala Harris has proposed a housing plan that gives up to US$25,000 in downpayment assistance for first-time homebuyers. Malaysia can do the same to further raise the homeownership rate.