Housing crisis: What is the solution? (Part 1)

The government’s response to skyrocketing house prices has been inadequate and left many Malaysians burdened. Jeyakumar Devaraj demonstrates why.

It is becoming increasingly difficult for ordinary Malaysians to buy houses in urban areas.

The prices of even terrace houses have shot up in the past five years. Even in semi-rural Sungai Siput, the selling price of terrace houses has gone up to RM140,000.

The Deputy Prime Minister is reported to have said in October 2013, “House prices have skyrocketed! I often hear complaints that terrace houses can cost as much as RM500,000. Who can afford such houses? Even those earning RM10,000 a month would have difficulty servicing loans for a RM500,000 house which used to cost between RM 140,000 and RM 200,000 several years ago” (The Star, 2 October 2013).

There is a housing boom in Malaysia. Lots of houses are being built. The problem is the supply of reasonably priced houses falls far short of the need for such houses as the table below documents.

Table One: Houses built by the private sector in Malaysia, 1 January 2006 – 31 December 2010

Source: Ministry of Housing and Local Government’s answer to parliamentary question put by the Member from Sungai Siput

We will be arguing later in this paper that around 70-80 per cent of the 1.7m families who do not yet own their own houses can only afford houses that are cheaper than RM70,000. Seventy per cent of 1.7m is 1.2m.

But of the 552,600 houses built by private developers between 2006 and 2010, only 16.2 per cent of them or 89,843 were priced below RM70,000. This clearly demonstrates the problem created by relying on profit-driven entities to provide for the housing needs of our people.

The prime minister outlined several initiatives that the government intends to take to address the housing problem, when tabling the 2014 budget. The government’s plans as mentioned in the PM’s speech are summarised in Table Two below.

Table Two: Government plans to address the shortage of affordable houses

a. PR1MA = Program Perumahan Rakyat 1Malaysia, implemented by 1Malaysia People’s Housing Corporation

b. Syarikat Perumahan Negara Berhad = National Housing Corporation, a company under the Minister of Finance

c. Answer to parliamentary question No. 56 on 18 November 2013

d. The Ministry of Rural Development also builds houses – but in rural areas. It was not mentioned in the context of affordable housing for the urban population by the PM in his speech.

e. Ns = not specified in the PM’s speech

Source: Prime Minister’s Budget Speech on 25 October 2013

Is the BN government’s approach to the housing problem adequate?

We need to consider the following issues:

1. What is the current need for reasonably priced houses?

According to Datuk Abdul Rahman Dahalan, the Minister of Urban Wellbeing, Housing and Local Government, 25.5 per cent of Malaysians families do not own houses (The Star, 25 October 2013). (Does this number include the families who own houses but not the land their houses are on – the ground tenants?)

Based on the 2010 Household survey by the Statistics Department, 57.5 per cent of government employees and 67.1 per cent of workers in the private sector owned houses. (Parliament question No 145 on 2 October 2013 answered by the Ministry of Urban Wellbeing, Housing and Local Government.)

As there are 6.8m households in the country in 2012 (Answer to parliamentary question No 12 on 8 November 2012 by Ministry of Higher Education), that would mean that there are at present 1.7m families who do not yet own houses. Most of these households would be in the lower-income categories with monthly incomes of less than RM5,000. (Forty per cent of Malaysian households have monthly incomes of less than RM3054, and another 40 per cent have monthly incomes between RM 3054 and RM 6955).

(Based on the 2012 Household Income Survey, the poorest 40 per cent of Malaysian families comprising 2.55m families had monthly household incomes between RM204 and RM3,054, while the richest 20 per cent of malaysian families had monthly household incomes of between RM6,955 and RM182,251. Answer to parliamentary question 454 on 18 July 2013 by the PM’s Department.)

In addition to the 1.7m who do not own their homes, we must consider the fact that there were 120,000 marriages registered in Malaysia annually. Most of these newly wed couples will also join the waiting queues for reasonably priced houses.

2. What do we mean by “reasonably priced houses?

Let us first look at the loan repayment schedule. At present most banks would want the loan repayment period to end before the borrower reaches the age of 60 years. Given this, the maximum repayment period that a 35-year-old man can expect is 25 years. The chart below summarises the monthly repayment required for bank loans depending on the loan repayment period.

Table Three: Housing loan repayment schedule

a. Apparently the current interest rates are BLR minus 1 per cent for housing loans below RM100,000 and BLR minus 2 per cent for housing loans above RM100,000. BLR at present is 6.6 per cent

b. The figures in brackets gives the total amount that the house-buyer will have to pay to settle the loan for his/her

RM50,000 house.

Source: Information from banks based on interest rates in November 2013.

3. The next issue we need to consider is how much a family earning RM3,000 per month is able to put aside for servicing its housing loan – because, according to the reasoning in the section above, a large number of those in need of first homes will have household incomes of less than RM3,000 per month.

Many people glibly cite the one third rule of thumb – implying that most families can afford to put aside a third of their total income for housing. We need to analyse that assumption. What is the expenditure on basic needs in a family with three school-going children?

Table Four: Expenditure on basic needs for family with three children

Notes:

a) Some may argue that tuition is not a basic need. But given our school system today, is it possible to dispense with private tuition and still expect our children to perform well? Isn’t education a basic need for all families?

b) Is a car a basic need? It wouldn’t be if we had good public transport. But in the absence of that, it would be difficult to manage with just a motorbike if one had three children.

c) Is a medical insurance policy a basic need? Given the lack of specialists in government hospitals, many families feel the need to have a back-up policy so that they are covered if the government services are too slow.

d) As of 30 September 2012, there were 2,088,056 students who had taken PTPTN loans.

Answer to Parliamentary Question No. 12, 8 November 2012

The table above brings to light several pertinent points:

– the inadequate provision of basic needs such as education, transport and health care mandates Malaysian families to make alternative arrangements. This then reduces the amount of funds the family can commit to servicing their housing loan.
– A household income of RM3,000 is barely enough to meet the basic needs of a family with three children. And we did not put in entertainment, expenses for festivals and family occasions e.g. weddings, financial help for the parents of the couple, savings for their children’s college education, the couple’s savings for their old age etc.

How much can we reasonably ask such a family to put aside every month to service their housing loan? Perhaps RM300 might be “reasonable” but that would mean that they may have to compromise on several of the items listed in the table above. RM300 a month for a 25-year loan repayment period would mean that such a family could only afford to buy a house costing RM50,000.

If a household with a monthly income of RM3,000 can only afford a loan with a monthly repayment figure of RM300, what about the 40 per cent of Malaysian families with incomes of less than RM3,000 per month?

4. How about families with household incomes between RM3,000 and RM7,000 – collectively they make up 40 per cent of Malaysian households. What is the reasonable amount for the repayment of their housing loan? I think here the one third rule of thumb can be applied with a modification as given in the formula below:

Housing loan repayment figure = 1/3 of the monthly household income in excess of RM3000 plus RM200.
That would mean that the reasonable repayment figure for a family earning RM 4000 per month should not exceed RM530 a month [1/3 x (4000 – 3000) + 200]. The reasonable bank payment figures for other income levels are summarised in Table Five below.

Table Five: Reasonable housing loan repayment amounts by household income category

So is the government’s response to the housing crisis adequate?

From the discussion above we can see that the majority of the 1.7m families who do not yet own a house cannot put aside too much towards servicing their housing loans – for our estimation is that about 75 per cent of them would have household incomes below RM3,000 and most of the remaining 25 per cent would be in the RM3,000-5,000 category.

Most of them would not be able to afford the payment sums required by the PRI1MA scheme – but this, with 80,000 targeted houses is the main effort by the government to meet the housing needs of ordinary Malaysians in urban areas (Refer to Table Two above).

In fact, even for graduates with incomes that place them within the middle 40 per cent of Malaysian household incomes i.e. RM3,054 and RM 6,955, the PR1MA scheme will put too high a burden on them. If this is the situation for graduates, then how about other Malaysians? (Based on the 2012 Household Income Survey, the poorest 40 per cent of Malaysian families comprising 2.55m families had monthly household incomes between RM204 and RM3,054, while the richest 20 per cent of Malaysian families had monthly household incomes of between RM6,955 and RM182,251 – Answer to parliamentary question 454 on 18 July 2013 by the PM’s Department.)

According to a written reply to parliamentary question number 230 at the second session of parliament in 2013, household debt in Malaysia increased from 60.4 per cent of GDP in 2008 to 74.0 per cent in 2010 and to 85.1 per cent in 2013. If one factors in the fact that share of national income accruing to households is only about 58 per cent*, this means that household debt in 2013 is 147 per cent of annual household income! This is only the average figure. The debt ratio for poorer families would be much higher. The bottom 80% of the Malaysian families are severely stressed out by their debt burden!

(*This 58 per cent figure is based on the following:
i) Reply in Parliament to Question Number 63 on 12 June 2012 – the Malaysian per capita household income in 2009 was RM1,168 per month. ie RM 14,016 per year.
ii) Per capita GDP in 2009 = RM24,055 (in 2009 prices). This is given in page vii of Economic Report by the Ministry of Finance for 2009/2010
iii) RM14,016 as a percentage of RM24,055 is 58.3 per cent.)

The PR1MA scheme appears to be another poorly thought out adhoc response to a very real problem faced by the Malaysian public. Consider this – PR1MA envisages a long repayment period of about 30-35 years. What is the likelihood of one or more recessions affecting Malaysia in that period? Taking a conservative estimate of one recession every 10 years, the PR1MA borrower would have to weather three or four recessions before his or her loan is paid up. What are the chances of both the borrower and the spouse not suffering siginificant loss of income during all these recessions? The likelihood of them losing their home seems to be quite high!

If we insist on relying on commercial banks to provide housing loans to our population, shouldn’t we then legislate that 10 per cent of the housing loan repayment be paid into a body like the EPF every month to create an emergency fund which can be drawn upon if the buyer’s household incomes falls because of a recession. This would mean that the the maximum loan repayment accruing to the bank can only be 90 per cent of the figures listed in Table 5.

One of the programs listed by the PM in his budget speech, under the Ministry of Urban Wellness and Housing, is promising, for it commits the government to subsidising each house to a cost of RM30,000. But the number of houses targeted for 2014 is only 10,000 – not even 1 per cent of the current need for housing!

See Part 2 here.

The views expressed in Aliran's media statements and the NGO statements we have endorsed reflect Aliran's official stand. Views and opinions expressed in other pieces published here do not necessarily reflect Aliran's official position.

AGENDA RAKYAT - Lima perkara utama

1. Tegakkan maruah serta kualiti kehidupan rakyat
2. Galakkan pembangunan saksama, lestari serta tangani krisis alam sekitar
3. Raikan kerencaman dan keterangkuman
4. Selamatkan demokrasi dan angkatkan keluhuran undang-undang
5. Lawan rasuah dan kronisme

Support our work by making a donation. Tap to download the QR code below and scan this QR code from Gallery by using TnG e-wallet or most banking apps: