Research and advocacy of progressive and pragmatic policy ideas.
An overview of the housing affordability gap and its key drivers.
By Aziff Azuddin & Ziad Razak9 September 2021
For most young Malaysians, buying or renting their own home is an important rite of passage, marking the beginning of “adulting” which includes taking on probably the most significant financial transaction of their lives thus far. This rite of passage is, however, no longer assured or certain for many young Malaysians, as the gap between incomes and housing affordability continue to worsen.
Figure 1 indicates the extent of the problem: from 2002 to 2019, the disparity between median house prices and annual median household income has nearly tripled.
Figure 1: Median House Price vs. Annual Median Household Income, 2002-2019
A widely used housing affordability indicator is provided by the multiple median approach which divides the median house price by median annual household income. House prices that are more than three times annual household incomes are considered to be unaffordable*. As Figure 2 shows, the housing affordability ratio for Malaysia has been consistently above three times in recent decades. As a comparison, Malaysia’s housing affordability ratio sits between the United Kingdom (4.5) and Canada (3.6).
*Note: This ratio can still be an underestimate as it does not take into account financing costs.
Figure 2: Housing Affordability Ratio, 2002-2019
Therefore, many young Malaysians face a hard choice – pay the price of unaffordable homes (for those who manage to qualify for a loan) and struggle to survive within a tight budget, or buy slightly more affordable homes in far-flung locations and live with a lengthy commute to work (though WFH policies post-pandemic could help make this more bearable). For Malaysians who do own a home, monthly housing expenditure take up a large portion of household income. A 2017 Bank Negara report indicated that housing loans comprise 52% of household debt, far beyond the recommended 28%.
Before unpacking the key drivers of this affordability gap, it is useful to know the range of housing measures to date.
Housing has always been an important aspect of national development. The Ministry of Local Government and Housing was established in 1964 as a means of concentrating efforts to ensure adequate affordable housing to the growing population of a young nation. The Perumahan Awam Kos Rendah (“PAKR”) programme was launched in 1976, which later evolved into the Projek Perumahan Rakyat (“PPR”) which is currently the mainstay of government initiative for providing affordable housing for the poor.
Today, policies for affordable housing in Malaysia are mainly focused on direct provision of social housing (where the government takes on the role of building and/or owning the bulk of housing units), subsidised housing (such as PR1MA) and subsidised financing schemes. There are also supportive regulatory measures such as inclusionary zoning, where local authorities issue development approvals conditional on having a segment of the proposed development be set aside for the building of affordable homes).
As introduced in the 11th Malaysia Plan, It is useful to categorise affordable housing measures by their intended target market i.e. measures for households in the bottom 40% by income or the B40 and measures for the middle 40% of households by income or the M40.
In terms of relative need, B40 households are especially vulnerable to the challenge of affording a roof over their heads and many schemes are geared more towards rental rather, though purchase schemes are also selectively offered. Table 1 contains a non-exhaustive list of housing measures for the B40.
Table 1: Affordable Housing Programs for the B40
In the 11th Malaysian Plan, the federal government expanded their focus towards the Malaysian middle-class. Despite being in a higher income bracket, households in the M40 class are also often unable to afford housing commensurate with their income and expectations. The M40 group has a wider range of schemes and programs catered for their financial capabilities compared to the B40 group, a non-exhaustive list is outlined in Table 2 below.
Table 2: Affordable Housing Programs for the M40
Despite the plethora of measures that have been introduced over the years, affordability is still a challenge as indicated by the housing affordability ratio shown above. A number of persistent factors continue to define the problem.
A frequently cited factor is the mismatch between housing demand and supply. A 2015 report by Bank Negara shows that the proportion of property launches in the under RM250,000 range have been steadily decreasing (see Figure 3). In 2014, only 21% of new housing was priced below RM250,000, at a time when RM165,060 was the threshold of affordability for the median Malaysian household.
Figure 3: Distribution of New Residential Property Launches by Price Range, 2008-2014
The report also showed an oversupply of properties priced at over RM500,000, resulting in a property overhang where completed properties at the high end of the price spectrum remain unsold for months after completion. The National Property Information Centre (NAPIC) indicated that at the end of 2020, 170,699 residential units remained unsold, which is twice the number of unsold units from 2004 to 2015 (see Figure 4). 75% of these unsold units were priced above RM300,000.
Figure 4: Overhang Units in Malaysian Residential Market, 2003-2020
There are several perspectives on why the demand and supply gap persists. Critics argue that property developers choose to focus on satisfying demand for high-end developments in order to maximise profit margins, but there are perspectives, such as from think tank IDEAS and others arguing that the low-priced housing segment is made unprofitable by regulations that lead to supply-side bottlenecks. On the other hand, Khazanah Research Institute, points to the inelasticity of housing supply, driven to some extent by the lack of integrated data on housing supply and demand, among others.
On the other side of the coin, housing affordability is also negatively affected by the anaemic rate of income growth in the Malaysia economy. In 2019, a World Bank report stated that income growth rates for low-income and younger earners have slowed down in recent years, growing at an annual rate of 2.4% compared to their older, better-educated counterparts at 3.9%. In fact, the starting monthly salaries for fresh graduates in Malaysia have actually declined since 2010, after adjusting for inflation.
As housing prices continue to rise at a much faster rate than income growth, more young Malaysians are shut out from home ownership. In 2019, real estate industry leaders indicated that more Malaysians are opting to rent as housing prices became increasingly unaffordable. A 2019 study among Malaysian young professionals showed a willingness to embrace renting as existing housing costs — both purchasing and maintaining one — become increasingly out of reach.
Setting aside the much bigger challenge of slow income growth, the key problem of affordable housing lies in raising the supply of housing in the price range below RM250,000, which is the affordable range for households earning median income and below in Malaysia. To effect this, the supply of housing in this price range either needs to be commercially viable for the private sector, or needs to be provided more efficiently and sustainably by the government.
There are a number of areas which should be further investigated in order to contribute to the policy discussion on this issue.
In order to increase marketable supply of lower cost housing units, there is a need to update our understanding of today’s demand. What are the preferences of young Malaysians today in terms of the trade-offs and choices they would make between buying vs. renting, space, layout, commute times, security, leisure and social amenities and other factors? How do housing requirements and preferences change amongst young Malaysians from different income classes, from B10 and B20 households to the upper end of the B40 or M10 income range? Knowing these preferences could change the size, design and location of low-cost housing developments, potentially enabling commercial provision of lower cost housing.
Efforts at updating information on demand could also be part of a national data repository on housing demand and supply, as proposed by parties like the Khazanah Research Institute.
As a matter of necessity, the government customarily steps in to fill the supply gap for affordable housing, especially for the lowest end of the price spectrum. As seen in many countries around the world, the need for affordable housing can often outstrip the government’s ability to fund or build the supply efficiently. Supporting the government in providing housing supply more efficiently could require new forms of public-private partnership.
The right incentives will be needed in order to catalyse private sector involvement. This could involve subsidies, or funding measures such as the issuance of public bonds to facilitate the financing for affordable housing.
Reforms to planning processes and approvals at the local authority level can also have a significant impact in facilitating more private sector involvement in providing affordable housing. For example, a number of cities have applied inclusionary zoning laws that mandates residential developments to set aside a share of the development to include affordable homes particularly around public transit hubs. The quid pro quo of inclusionary zoning laws is that developers are offered cost-saving incentives, whether it is low-cost land, tax breaks, or low-interest financing. In this way, inclusionary zoning allows the government to facilitate the increased provision of low-cost housing through the private market.
One interesting solution, which could be particularly appropriate in a post-pandemic environment, is the conversion of vacant properties into social housing. In Hong Kong, for example, underused hotels and guesthouses are offered to low-income earners, with the rent capped at 25% of the tenants’ income. Similarly, the Irish government has a Buy and Renew Scheme (BRS) that allows local authorities to purchase and renew dilapidated housing units, and convert them into social housing. Indeed, we have seen this take place in Malaysia: an abandoned hotel in Kuala Lumpur was converted into “Rumah Prihatin” to provide for the homeless and indigent during the Covid crisis. This experiment, if successful, can open the doors for more of such repurposed housing in the future.
Yet another example is rent control, which is especially interesting as this was once implemented in Malaysia, before its repeal in 1997 (see Note 2). Rent control is a legal measure enforced by the government to put a ceiling price on rent prices. In San Francisco, beneficiaries of rent control policies were less likely to migrate, decreasing tenancy turnovers and allowing households to stay longer in their neighbourhoods. The experience of repealing rent control in 1997 suggests that there is room for improvement, were rent control to be reintroduced in Malaysia.
Another form of intervention related to making rental rates more affordable, would be rent subsidies. In Canada, for example, emergency rent subsidy was introduced as one of the measures to alleviate the negative impact of the Covid-19 pandemic. There is room to experiment with the implementation of rent subsidy, either as direct cash vouchers to qualified households, or as tax credits to rental housing owners.
Malaysia’s Control of Rent Act 1966
Malaysia once had a rent control law, the Control of Rent Act 1966, that was repealed in 1997. The repeal was intended to reactivate flows of land capital and liberalise the Malaysian economy, in response to the Asian Financial Crisis and the ensuing need to recharge economic recovery. This repeal, however, led to short-term overnight rent hikes, rampant eviction of tenants, and increased shortages in affordable housing.
While rental levels increased exponentially by 400% post-repeal (though from a relatively low base), it was also found that the repeal of the act also helped to regenerate urban development, as buildings which were previously under rent control can now earn adequate rental income at market rates to facilitate much-needed renovations.
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