Will slowdown make houses more affordable?

THE extraordinary boom in the property market in Malaysia is ending but high house prices and the middle-class obsession with home ownership are likely to persist for a long time to come.

Data from the National Property Information Centre’s (Napic) First Half Property Market Report shows that during the first six months of the year, the total value of property transactions declined 6% year on year to RM77.08 billion. In terms of volume, property transactions fell 3.5% to 186,618. The residential segment saw a 2.6% drop in transaction volume but its value took a 9.7% dive to RM36.4 billion.

The report will make sobering reading for many younger households who, for years, have seen property prices only move northwards. Between 2009 and 2014, the Malaysian House Price Index registered a compound annual growth rate (CAGR) of 10.1%. It marked a period of sharp acceleration compared with 5.6% for the period between 2000 and 2014.

This rapid growth in an otherwise sedate domestic property sector came on the back of ample liquidity that flooded the market following the global financial crisis in 2008. Predictably, grumbles that houses were too expensive for the hardworking middle class emerged. The government attempted to halt this price growth by stopping free-flowing mortgages and stepping efforts to combat speculative activities as early as 2011. Price growth slowed but it was not till 2015 that growth in residential property deals stalled.

This year, property developers are struggling with sales. Few are selling or building properties at rates seen during the housing boom and Napic reported that property stock, which stood at 4.87 million units in 1Q2015, grew to 4.89 million units in 2Q2015. At the same time, new launches fell 12.8% in 1H2015 year on year while unsold units under construction rose a whopping 32.7%.

These unsold residential units have started to subtly drive prices down. Napic’s numbers indicate that as at 2Q2015, the Malaysian House Price Index was at 220.2 points, up 5.9% y-o-y. The rate of increase of the index has been slowing since 3Q2015.

“House prices have definitely come down. If you don’t see them, it is because property developers have started to offer rebates, discounts or other incentives like free legal fees or stamp duties, which will lower the amount you pay for the property in the end,” says Chang Kim Loong, secretary-general of the National House Buyers Association.

If the additional supply is helping to moderate property prices, then some will find Napic’s data on incoming supply comforting. It reported that Malaysia had incoming supply of 795,372 residential properties in 1Q2015, which increased to 831,186 in 2Q2015.

While private developers are more cautious about adding on to that, the government is not. Based on the 11th Malaysia Plan, the government, through various housing programmes, targets to deliver 653,000 new housing units from 2016 to 2020. The sum excludes many state housing schemes.

For the middle class in particular, the 1Malaysia People’s Housing (PR1MA) programme should be adding an extra half a million affordable homes by 2018. The bulk of the promised 500,000 units should enter the market in 2017 and 2018. Lest we forget, there is also the government’s directive to government-linked companies to build 800 units in Bandar Kwasa Damansara and for Sime Darby Property to build 4,600 units of affordable homes.

Also reassuring for aspiring homeowners is that those in the business of building homes are not expecting property prices to see a surge. They tell The Edge that growth in house prices is likely to stagnate in the near term, as buyers looking for new properties and prepared for the added debt burden are denied owing to lending restrictions.

Bina Puri Holdings Bhd executive director Matthew Tee says, “I expect property prices to remain at current levels, with growth capped by the current regulatory environment. I don’t see prices coming down too much because the cost of development is very high. Land and other costs are still going up.”

Ken Holdings Bhd’s Sam Tan says, “The property development business is not as easy as it used to be. You have to offer more amenities, and provide connectivity and infrastructure to attract buyers. Developers’ profit margins are thinning due to rising costs and slowing market.

“It depends on what you build and how you price your product. The bread-and-butter properties — those priced between RM300,000 and RM500,000 — will still sell. But, generally speaking, you will not see a surge in prices anytime soon.”

So, are moderating residential property prices arising from an increase in supply the answer to the housing affordability woes of the middle class?

MIDF Research economist Izzuddin Yusuf doesn’t believe that is the case. Property prices have swelled too much over the last few years for a small tapering off to count. Affordability is still an issue for most middle-income earners looking to live under their own roof.

“I think the idea of affordable housing has changed recently for the public, to a point that it is considered affordable so long as you are eligible for a bank loan.

“Property prices are currently at a level that is still unaffordable for ‘real demand’, meaning those who buy in order to live in the property, even as speculative buying has slowed significantly. From here, property prices will probably grow at a very slow pace and it will be a while before they become affordable for most first-time buyers,” he says.

Indeed, Khazanah Research Institute’s (KRI) study, “Making Housing Affordable”, found that the the median price for the Malaysian housing market exceeded the three times median annual household — the threshold for affordability. The general median price stood at4.4 times in 2014 — a seriously unaffordable level. In cities like Kuala Lumpur and Penang, residential properties were “severely unaffordable”. Launches were priced way above the affordable threshold of RM274,320 for the capital city and RM168,272 for Penang.

Implicit in KRI’s statistics is that house prices — soaring or moderating — is not the only variable that determines if a middle-class household can afford to buy a property. It also has to do with income level and growth in disposable income.

“Housing affordability is not simply about having cheaper houses … For a house to be affordable, it means that the purchaser has the budget to pay for the home,” says Teh Lip Kim, managing director of Selangor Dredging Bhd.

Ken Holdings’ Tan says, “We try to build affordable homes and what is being sought after, but people still have to be able to buy them. People are now in a situation where banks are tightening lending requirements. [They also] have one or more banking loans to service and face a higher cost of living.”

“To buy a property, you need the additional disposable income. While wages in Malaysia are growing and the employment rate is good, they are not growing as fast as property prices. The higher your income, the more affordable a house will be to you.”

Further, socially popular regulations that stifle property price growth may help quiet public complaints about housing affordability, but won’t do more than that for the Malaysian economy. Not only does the construction sector contribute directly to the country’s gross domestic product (GDP) but it also has a strong multiplier effect. As it also affects sectors like finance, building materials, logistics, infrastructure development and job creation, it is unlikely that a prolonged sluggishness in property prices is what the government wants.

Rajiv Biswas, chief economist at IHS, says, “The construction sector in Malaysia accounted for 4.3% of GDP in 2014, based on government data. Therefore, the size of the sector is significant and any significant slowdown would act as a drag on GDP growth.

“Therefore, if the private sector residential construction sector experiences a downturn, the overall impact on total construction activity could be reduced by stronger public sector spending on affordable housing and public infrastructure projects.” But even as growth in home prices is losing steam, the dream of home ownership may still remain elusive to the middle class.

THE ISSUE OF HOME LOANS

ALTHOUGH the government’s aim to increase homeownership among the middle class is laudable, the lack of access to financing is a big problem, given that the average middle-income earner finds it difficult to come up with the 10% downpayment.

Hence, the government over the last few years has introduced various types of home loan schemes to help this group of people.

Under Perbadanan PR1MA Malaysia’s affordable home scheme, eligible applicants may apply for a 110% loan from the agency’s panel banks. The additional 10% is to help the homebuyer pay additional items such as legal fees and insurance.

Meanwhile, other programmes such as My First Home and the Youth Housing Scheme provide loans of up to 100% to first-time homebuyers with income not exceeding RM5,000 a month, or in the case of joint buyers, household income not exceeding RM10,000 a month.

The government should be applauded for making it a tad easier for the public to own a home. But does this seem to go against the cooling measures Bank Negara Malaysia has taken to rein in high household debt over the last few years?

Simply put, it raises the question of whether the “easier” access to loans could cause a higher risk of default in the banking system.

Bank Negara governor Tan Seri Zeti Akhtar Aziz, who agreed that there is still a shortage of affordable homes, said they should be offered to those who are creditworthy.

“Of course, while we are promoting house ownership, it is only to those who can afford to own houses. We do not want to see individuals and families enter into debt that they cannot service because it will end up with the house being repossessed ... This is not a direction that we want to move to, but we do want to provide homes to the community,” she said at a press briefing after announcing Malaysia’s third-quarter GDP growth last Friday.

She opined that affordable homes should also be made available for rent, providing an alternative for those who cannot afford to take up a home loan.

Nonetheless, the banks stress that they practise equal prudence when approving loans for buyers of affordable homes.

OCBC Bank (M) Bhd head of secured lending Thoo Mee Ling clarifies that the riskiness of a loan is not determined purely by the applicant’s income level and number of outstanding loans. It also involves the health of the loans in the applicant’s Credit Bureau record and his repayment behaviour.

This means that a person who earns RM5,000 a month may not necessarily be a higher risk compared with a person who earns RM20,000 a month.

The common perception that loans for affordable homes are dished out more easily should be eliminated. According to Thoo, the credit assessment of loans for affordable housing schemes such as My First Home is the same as for other mortgage applications.

“OCBC Bank uses a combination of risk acceptance criteria to determine the creditworthiness of loan applicants. These include factors like debt-servicing ratio, sources of income, the customer’s profile, Credit Bureau track record and loan-to-value ratio. Ultimately, these are also weighed against the responsible lending guidelines [set by Bank Negara],” says Thoo.

Meanwhile, RHB Banking Group head of group retail banking U Chen Hock says the bank has approved only 15% of loan applications for My First Home since it was launched. It is mostly because the applicants had insufficient income to meet financing and debt-servicing requirements. Poor credit history is another factor, he adds.

According to U, RHB has not seen any significant default rates so far among those who succeeded in getting their loans.

CIMB Group CEO of group consumer banking Renzo Christopher Viegas notes that creditworthiness for home loans is assessed based on factors such as the customer’s repayment history, credit score, repayment capacity and debt service ratio. He says the criteria for the bank’s My First Home loan are broadly similar to those for normal housing loans.

The National House Buyers Association honorary secretary-general Chang Kim Loong is strongly against the home loan schemes for affordable housing, saying that giving the buyer a 100% loan with “free legal fees and stamp duties” does not give him an understanding of the home-buying process.

“To buy a house, you must have commitment. When you get everything for free [or easily], you tend to buy a property without a sense of responsibility. If you don’t have the 20% downpayment, don’t buy the house. You should be borrowing as little as possible and not bind yourself as a slave to the bank. If you lack the sense of responsibility, [there is a high possibility that] you will be a defaulter,” he says.

According to IHS Asia-Pacific chief economist Rajiv Biswas, the risk of a housing bubble related to government support schemes would depend on the types of incentives provided. He says the risk of default on home loans can be reduced through a combination of sufficient collateral requirements and risk-mitigation products.

“An important aspect of addressing moral hazard related to such affordable housing schemes is ensuring that even low-income households have to provide some collateral. In some countries, a limited amount of the collateral can be provided from pension fund savings,” he says. – By Esther Lee

DELIVERING ON THE FIRST HOME OWNERSHIP PROMISE

CALL it an instrument of wealth creation, a tool to create socially stable communities or a driver of the national economy. Whatever the moral and economic rhetoric on the virtues of homeownership may be, Malaysians want their own homes and the government seems keen on helping out.

But, are the billions the government has spent on expanding homeownership among low and middle-income earners working?

A housing boom and soaring property prices that started in 2009 have priced many out of the housing market. The middle-income group, or M40 as Prime Minister Datuk Seri Najib Razak calls them — whose monthly income is between RM3,860 and RM8,320 — has been squeezed for being unable to afford to buy properties in the open market and being unqualified for many of the government housing schemes for the poor.

In fact, a recent study by the Khazanah Research Institute found home prices to be “seriously unaffordable” at over four times the median income of the country’s population — especially so in Kuala Lumpur, where the median house price was RM490,000.

In its attempt to put homes back within reach of the average buyer, the government has announced new affordable housing programmes and policies, and endorsed schemes to ease the path to homeownership.

The “My First Home” programme, unveiled in 2011, allows a state entity to guarantee 10% of a borrower’s facility secured for 100% of the value of an affordable home. The RM300 million My Home Scheme in 2014 was used to get private developers to build 10,000 affordable homes. For every unit sold, the developer would be entitled to an incentive of RM30,000 to cover the 10% downpayment required of buyers during the purchase.

The Youth Housing Scheme under Budget 2015 allows up to 20,000 young married individuals to obtain financing and receive monthly financial aid to repay loans. Under Budget 2016, RM200 million is set aside to help first-time buyers of affordable houses make downpayments under the First House Deposit Financing Scheme.

MIDF Research economist Izzuddin Yusuf argues that there are limitations to such government-backed financing schemes that target first-time homebuyers. They have been unpopular with banks, which favour their own credit assessments of borrowers over the government’s eligibility criteria.

“Many banks are reluctant to provide loans under such schemes. Even if the buyers are successful in securing an offer from the banks, the interest rates will be significantly higher. Buyers will either be unable to afford the amount or simply have second thoughts about the scheme.

“The number of houses the government can subsidise is limited and, therefore, the effectiveness of intervention from the demand side and stabilising of prices is negligible,” he says.

The government, Izzuddin says, is better off focusing on the supply side of the equation by incentivising private developers that build affordable housing.

So far, the most notable of the government’s efforts on the supply side is the nationwide homebuilding initiative through Perbadanan PR1MA Malaysia (PR1MA) — an agency under the Prime Minister’s Department that was given the task of building 500,000 affordable homes in prime locations over five years for middle-income earners. It is a tall order but the scheme is well supported. Allocations for PR1MA projects have increased every year since its inception.

Under Budget 2013, PR1MA was allocated RM500 million to build 80,000 homes. This sum doubled in 2014 for the construction of another 80,000 homes. The agency was given RM1.3 billion under Budget 2015 to build the same number of homes. Next year, it will receive RM1.6 billion to provide 175,000 new housing units.

Rajiv Biswas, chief economist at IHS, says there is space for state-backed housing schemes like PR1MA, but it has to serve a “very targeted” group.

“You should not have government-built properties competing in the open market and similarly, you cannot have applicants for these housing units struggling for ownership. Housing programmes have to be targeted at the right beneficiaries,” he says.

In that sense, PR1MA has glaring gaps in its modus operandi.

Unlike other government-backed housing schemes, access to PR1MA homes is open to those who are already homeowners.

PR1MA CEO Datuk Abdul Mutalib Alias told a press conference recently that those who already own a first property “should not be denied” access to the government-backed scheme. Many middle-income earners held urban jobs and could only afford suburban properties, he said.

Yet, as National House Buyers Association secretary-general Chang Kim Loong puts it, the practice is at odds with the government’s aim of expanding homeownership to those who cannot afford them.

“There are not enough PR1MA units to go around. Every time a project is open for balloting, PR1MA claims there is overwhelming demand and response. So, it should be offering the units to those who are deserving. If you have an excuse now to open the programme up to those who already own a property, there will be new excuses to widen the eligibility requirements next time,” he tells The Edge.

Also noteworthy is the fact that PR1MA poses no additional requirements in terms of the nature, location or value of the first property an applicant owns.

Hypothetically, an individual with a monthly salary of below RM10,000 (which is above Najib’s M40 range) who owns a property in Singapore but lives in Kuala Lumpur with his family would still be entitled to a shot at being enriched by PR1MA’s state-subsidised units.

“We still prioritise first-time homeowners. So, maybe only three in 10 who are successful during the balloting process would be those who already own a property,” Mutalib assured by giving a ballpark figure.

Yet because that 30% figure is more of an estimate than a cap, the figures could theoretically go the other way should a lot more applications come from second or multiple homeowners with better credit rating and earning power.

Another point of contention among observers is that PR1MA has deviated from its original strategy to use federal and state land as the main sources of its landbank to keep costs down. Privately owned land, they argue, should be PR1MA’s last resort in acquiring the 12,500 acres it needs. But, it is understood that just over 20% of its existing landbank is sourced from federal and state governments — something that perhaps PR1MA itself never intended to see.

“We started thinking that we will have access to federal and state land. It hasn’t been the case and we decided not to wait because we have the mandate to build,” said Mutalib.

Besides that, PR1MA partners private developers for the construction and development of its projects. Mutalib claimed that PR1MA’s ability to buy properties in bulk from developers, coupled with strict cost requirements it imposes on builders, ensure that it is the most cost-effective way of developing its landbank.

Chang, who remains sceptical, says, “Private property developers are not there for charity. With them on board, the cost of construction will go up and homes will become less affordable.”

Checks with industry sources reveal that construction awards offer “competitive rates and margins” to builders.

For all its flaws, PR1MA’s success in expanding homeownership is perhaps best judged by the numbers. According to a reply to a question in Parliament last month, Minister in the Prime Minister’s Department Datuk Seri Shahidan Kassim said some 200,000 units had been approved, with 64,794 units being constructed so far. To date, only 560 units in Putrajaya have been delivered to homeowners although Najib promised that another 10,000 units should reach the public by next year.

Can an extra half a million Malaysians be expected to own PR1MA homes by 2018?

A private developer who recently won a multibillion-ringgit contract from PR1MA to build about 1,000 units says, “Things are moving but they are way behind schedule ... need to complete all the units before the next general election. PR1MA is getting into a desperate situation.”

If PR1MA under-delivers or deviates from its intended goal, more Malaysians will likely have to contend with not being homeowners just yet. -- By Yen Ne Foo

Do not ask your son’s tuition teacher about the value of your home. Click here at The Edge Reference Price to find out.

This article first appeared in The Edge Malaysia on Nov 16, 2015. Subscribe here for your personal copy.