So, you want to buy a house?

Buying a house is not as easy as it was 10 years ago due to the rising cost of living and escalating house prices. The problem hindering the current generation of Malaysians from buying their first home is that property prices are just too high in comparison with the income of the rakyat. To quote Bank Negara Malaysia Annual Report 2016: “since 2012, the increase in house prices in Malaysia has outstripped the rise in income levels. Consequently, prevailing median house prices are beyond the reach of most Malaysians”.

According to a report by Khazanah Research Institute entitled “Making Housing Affordable” released on Aug 24, 2015, the Malaysian all-house price grew at a compounded annual growth rate (CAGR) of 3.1% from 2000 until 2009. However, between 2009 and 2014, it grew at a CAGR of 10.1%.

The rapid rise in house prices has made it very challenging for the rakyat to buy their dream homes, and many parties have called for the lending criteria for purchase of properties to be relaxed.

It may appear that this proposal has some merit as it helps people who cannot afford to buy their dream homes to get the necessary financing. However, relaxing lending criteria is very detrimental in the medium to long term and will only compound the problem that property prices are too high in comparison to income levels.

Loan applications are often rejected because banks feel that the credit risk of the prospective borrower is just too high based on their current income levels.

Furthermore, relaxing lending criteria will only encourage housing developers to price their properties higher and worsen the situation for both current and future generations of homebuyers.

When homebuyers take on a loan that they cannot afford, they will have to cut back on other areas and have very little or no savings for any emergencies such as illness or accidents.

Let’s do the math

1 HBA offers the following advice for all aspiring first-time house buyers:

House buyers should always try to set aside at least 10% - 20% of their monthly pay as savings for the purchase of their first home and unforeseen emergencies. They must be prepared to make sacrifices and forgo luxuries such as the latest gadgets and hipster hangouts.

2 Aspiring homebuyers should not buy their first car (depreciating asset) until they have bought their first house. With an existing car loan, the amount of housing loan a homebuyer can take will be greatly reduced.

3 Know your maximum property price/loan amount — in assessing a customer’s credit worthiness, banks will use the Debt Service Ratio or DSR which is the monthly loan instalment as a percentage of the customers’ monthly income. Typically, banks will apply the following DSR:

 • For any single loan repayment, the DSR cannot exceed one third (or 33.33%) of the monthly income. Some banks may go as high as 40% DSR for the housing loan but HBA advises against exceeding 33% DSR for the housing loan and a lower amount of 10% DSR for non-essential loans such as car loan.

 • For all loan repayments combined, the DSR cannot exceed 50% of the monthly income. Some banks may be willing to go as high as 60% to 70% DSR for all combined loans, but HBA recommends not to exceed 40% DSR for all combined loans.

Say, your monthly income is RM5,000 a month. Your maximum loan repayment for the housing loan based on one third DSR is  RM1,666 per month.  

Assuming an effective interest rate of 4.6% p.a. for the housing loan, the maximum purchase price and housing loan are as follows:

Hence if you want to buy a property worth RM500,000 and apply for a housing loan of RM450,000, the loan application will be rejected as the monthly loan instalment for the housing loan of RM450,000 will be higher than one third DSR of your current monthly salary.

4 Prepare a realistic budget — even with a monthly instalment of RM1,666, you must be able to service it and maintain an acceptable standard of living while saving for emergencies as well.

It would not be sustainable if you have to skip meals to maintain the loan instalments.

Conclusion

For the average person, buying a property is the single biggest financial commitment in his or her lifetime, hence careful thought and planning is a must. 

There is no shame in renting until you are financially ready to buy a home. Amidst the slow economy, you can scout for a low-enough rental that allows you to save for a future house. 

Datuk Chang Kim Loong is the Hon. Secretary-General of the National House Buyers Association (HBA).
HBA can be contacted at: Email: [email protected]
Website: www.hba.org.my
Tel: +6012 334 5676

This story first appeared in the EdgeProp.my pullout on Feb 28, 2020. You can access back issues here.