Housing affordability

WHAT is the meaning of the word "affordability"? According to a business dictionary, it is a conclusion drawn from the analysis of the life cycle cost of a proposed acquisition; that the purchase is in accord with the resources and long-term requirements of the acquirer. A shorter and simpler explanation would be one's financial means in relation to a purchase.

Context and circumstance

With that, we probe a little further, questioning one's financial means where house purchase is concerned. Is the average income earner able to purchase a roof over his head and live reasonably comfortably today? How much would he or she need to earn? And if good employment and better salaries are found in the main cities and big towns, are there affordable houses readily available in these urban areas? What kind of price tags do affordable houses come with? How affordable is affordable? Ultimately, the big question is, is there an issue where housing affordability is concerned?

To answer all this is Dr Yeah Kim Leng, dean of the School of Business at the Malaysia University of Science and Technology (MUST). Yeah has a Masters in Business Administration and holds a PhD in Agricultural and Resource Economics, specialising in development economics. He was previously the group chief economist of a local rating agency and managing director for its research and consultancy firm. Prior to that, he held the post of senior analyst at the Institute of Strategic and International Studies Malaysia where he was involved in research on various national economic policies.

According to Yeah, housing affordability is a complex socio-economic issue with important political implications. "First, let me explain what housing affordability is. It is basically the ability or inability to own a house or have a permanent roof over one's head," he says. With that, we ask then, how do we know when housing affordability becomes a major concern. "At the national level, we track overall affordability in several ways. One index compares house price increases with income increases. If the ratio is below one, then the rise in income has not kept pace with house price increases, indicating a decline in housing affordability. We can track this by state and by housing segment."

For a clearer picture, refer to the graphs below taken from a research headed by Yeah in 2012.

"Another index is calculated by assuming that not more than half of the gross monthly household income goes into repaying the loan taken to buy the house. If there are a few bread earners living in the same house who contribute to the payment of the property, then not more than 50% of their combined income should go into paying the instalment/rent of their house." This index is useful to provide a gauge on affordability by house price and income segments," explains Yeah.

Points in question

Yeah further shares about the issues pertaining to housing affordability. He claims there are three main issues which are:
1) the rapid rise in house prices across all segments;
2) insufficient supply to meet demand; and
3) mis-match in the supply of affordable homes.

"House prices have increased tremendously, especially in the last five years. Looking at house prices some 10 years or more ago, there was a gradual increase of about 3.2% in the prices every year. But in the last five years, the average annual increase has risen to 9.7%. At the rate prices of houses are increasing, it is not sustainable as the rate of income growth is not rising as fast. And if house prices continue to spiral at the rate it is rising at, the housing market will either face a soft landing or a market crash, depending on how high it peaks," informs Yeah. The positive outcome is that it will lead to a more gradual and sustainable rate of increase in house pricing, one that is in line with the rise in income.

Touching on point two, Yeah says, "According to census figures published by the Department of Statistics, there were 6.8 million households compared to the 4.8 million housing stock in 2012.

Rental properties made up 20% of the housing stock. This means that the total number of households that did not own a house summed up to about 3.8 million. We then subtract the incoming supply of 0.73 million units, and the planned supply of 0.62 million units, and found there was still a housing shortage of 2.5 million homes." Yeah then cited the 200,000 additional new households (based on yearly estimated figures), concluding an estimated shortfall of 2.7 million housing units, still.

We deliberate the fact that house prices within the KL metropolitan city and Klang Valley have sky-rocketed, so much that it is rare to find one within the city limits for less than RM1 million. This leads to his third point of which Yeah expounds, stating that the current housing supply in urban areas are hugely beyond the reach of the low and middle income groups. "Research showed that 55% of the 6.8 million households have a monthly income of less than RM4,000, which points to the fact that this segment of society can only afford houses priced around or below RM360,000."

Interestingly yet frighteningly, we arrive at many implications on how just the affordability issues could slowly but surely affect lifestyles, and eventually the socio-economic health and political stability of the country. (See Graphs C and D)

Addressing the issues

As it took years for such issues to crop up, likewise, good foresight, the collaboration of various industry-related players and governing bodies, effective monitoring of enforced rules and time, can bring positive change. "Monetary, fiscal and housing policies need to be aligned, looked into and perhaps fine-tuned to smoothen out soaring house prices so it does not exceed an average of 3% to 4% annually over several years. This can be achieved through a combination of supply-side and demand-side measures," Yeah recommends. On the supply side, he adds that given Malaysia's relatively low population density, the challenge is to increase supply of homes that are priced to the pockets of the masses. "There is a need to cap expectations and sentiments that house prices only go north. But as seen in the recent property market crash in the developed economies, prices can fall 30-70%.

On the demand-side, rising house prices have ignited speculative demand, especially for those who see property investment as a hedge against inflation," he adds.

Yeah also raises the fact that we must be aware that urban housing trends and lifestyle changes need to cater to the ever-changing demographic needs and patterns. He urges the government to intervene, especially to boost the chunk of the housing shortage problem, which is to accommodate those in the low and middle income segments with affordable housing, especially in urban areas. For a start, he highlights some areas that could be examined and further explored, such as:
• provision of adequate and cost-effective basic amenities and transport infrastructure;
• release of state-owned land for housing;
• establishment of public-private partnerships in township developments;
• promotion of industrialised building systems (IBS); and
• innovations in low- and medium-cost building design, construction and financing.

Still, although figures and charts may determine one's capability of owning a house, there are other factors to bear in mind – the list of additional expenses that come with owning a house and running a home. These include electricity, water and sewage bills, not forgetting the twice-yearly property assessment tax and annual quit rent. For owners of high-rise units, there is the management, maintenance and parking fees, along with today's internet, telephone and cable or satellite TV charges, plus a longer list of household and lifestyle expenses, which are higher if one has a family to upkeep.

** Research and graphs are based on figures taken from a Department of Statistics survey done in 2012. - By The Sun Daily

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