I am still, and maybe always will be bitter towards the state of Malaysia’s housing market.
House affordability is a prevalent issue in Malaysia that went unsolved for a long time. Demografia International considers a house median multiple of 3 — that is, the median house price divided by median annual income — to be the limit on affordable property.
Our house median multiple in Malaysia was 4.8 in 2016, easing down to around 4.1 in 2019. This puts our housing price in the “seriously unaffordable” category. An affordable house in 2019, by Demografia standards, should be priced no higher than RM 211,428.
Consider the following chart for Malaysia’s unsold properties by HousingWatch:
The amount of property overhang (unsold properties with Certificate of Completion and Compliance) increased quarter-to-quarter, with 68% of it consisted of properties priced above RM300,000. This is arguably a result of disastrous misplanning by the developers; hungry to reap profits on more and more expensive property, they now faced the consequences of people not buying it, because the demand was not there. Efforts should be made to sell them, because property overhang is analogical to an unproductive bulk of cash tied to a tree; it does not get fed into the system to enhance economic activities by way of spending it towards goods and services, or investing it as capital for growth.
Therefore the recent news that The Ministry of Housing and Local Government is reversing its decision to tax developers on unsold properties, unsurprising as it is, still comes as a disappointment to me.
Obviously the move is applauded by property developers. In their argument against it, taxing unsold properties will lead to market-wide correction in house prices, and this could lead to hardship for Malaysians where their greatest value asset – a house – loses its value. Their extreme view is that this move will even crash the housing market.
These are certainly out-of-context perspectives: First, if this argument truly means developers are concerned towards homeowners, then the government could simply tweak the policy to only tax unsold properties owned by the developers, and not homeowners.
Second, it should not lead to nationwide housing crash if the policy is geared to isolate the impact of force-selling properties only towards developers. Homeowners have the incentive to wait for the market to recover to sell their property, but developers do not; they have to pay tax each year their units go unsold. The downward pressure to house prices this way will result to only one thing: reduced profit that the developers will take on the units they mispriced.
Otherwise, the property developers are historically hard to back down on the price they set on their properties. When demand declined and their units overhanged, possibly due to rushed and improper planning, they will push for the government to introduce various policies to induce buyers into paying the price. They will, in addition, via publications affiliated to them, cite multiple reasons from this fiasco – market conditions, income levels, cost concerns, lack of government support, and so on – not one acknowledged their own miscalculation in planning and pricing.
If housing price increase are said to be the effect of building costs, then this view is clearly misleading. Khazanah Research Institute showed that over time, house prices continue to climb despite subdued costs of building:
The developers and the authorities backing them even audaciously suggest banks to effectively ease home loans to buyers. We all know what happens when banks ease lending on buying property: property speculators and short-term house flipping will proliferate, delinquency rates will increase, and housing markets will actually crash.
A lot of their responses to increased house price is hoping for the government to bear some of the cost, for more money can be forked out of the people’s pension, and for a more fancy financing scheme to be developed. The list of diversions and blame-shifting goes on.
The government’s willingness to collude with developers exarcebated the issue. Intentional or not, a lot of housing schemes for private developers seem very much skewed towards consumers to acquire properties they otherwise could not afford. *
Schemes like FundMyHome claim to assist first-time buyers in obtaining a house with lower entry cost, but it obfuscates the reality that co-investors/speculators actually stand to gain the most from such arrangement. Schemes like these should be put under strict supervision and regulation, with their risks being sufficiently addressed and communicated to unsuspecting buyers. Even worse, in most of the schemes offered, the government is subsidizing the price set by developers – effectively paying our tax money to feed their profits – in order to provide us with a slightly lower property price. This is an unnecessary and unhealthy spending of public funds that does not benefit anyone but the private developers.
One would even argue that, had the government did not intervene in the market (aside from restricting foreign buyers and taxing profits), the housing market would be in a better state: the market forces will naturally push house price downwards to better match the price expectation of buyers. Over time, due to these hypothetical market forces, property developers would gear future housing development towards matching the income profile of the geography they represent.
So combine all these factors: the increasing house price, the upside-down government policy that targets to create demand instead of controlling supply and regulating price, the audacious push for banks to ease credit and for pension funds to be depleted, and the misplanning of development by developers, it seems to me that we’re in a uniquely positioned housing price bubble.
This bubble will expand as long as the government allows it. It won’t burst so easily because developers are allowed to increase their property prices over time, while having their downside – of people not buying their properties – being hedged by the government using various schemes targeted to the consumer. And if it ever bursts, the developer will still demand for, and will likely get, an upperhand, by way of government bailouts or deep tax incentives, and the homebuyers will be the worst-hit out of this scenario.
I’m certainly not a property expert, but I do believe that in pursuit of achieving efficient and sustainable housing market where locals can afford to own homes at the price fair to their income level, developments are properly and responsibly planned, mortgage levels and delinquency risks are healthy, and price speculations are limited, we must correct the price of unsold and unrealistically-priced houses, and we must put the pressure to do so, ultimately on developers.
Reference Shelf
- An unsold property tax compels developer to pay taxes on properties not unsold for a period of time, in proportion to the gross selling value of the property. This means the tax bill gets progressively higher on luxury and high-end properties.
- Median house price in 2019, as per NAPIC is RM289,646. Malaysia’s median salary reported by DOSM in 2019 is RM5,873.
- Khazanah Research Institute published an excellent report on the state of Malaysia’s housing affordability. Give it a read.
*That being said, I acknowledge and appreciate efforts by the Government in the context of public housing. I wish greater cost efficiency and better planning can be achieved so that the ultimate goal of asset ownership among the lower-income class and enhanced economic activity around the vicinity can be realized.