The question of housing (Part 1): Understanding the problem

By Zairil Khir Johari | July 16, 2012
The Malaysian Insider

JULY 16 — As far as Penang is concerned, housing has become a hot button issue. Critics are aplenty and everyone, from the locals at the kopitiams to the expatriates at the cocktail bars, seems to have an opinion on it. However, before lamenting about the housing situation in Penang, one first needs to understand it.

The general grouse is twofold. Firstly, it is said that housing prices are exponentially increasing with no signs of a slowdown. Secondly, complaints are heard that there is not enough housing to cater for the lower-income groups. The fear is then raised that the shortage of low-cost housing coupled with ever-increasing property prices will eventually drive people out of the state, especially from the island.

Now, the first contention is admittedly true. There is no denying the fact that property prices are on the rise, having averagely increased by 50 per cent over the past five years. However, the causes of this phenomenon are often misunderstood. On the second count, to say that there is an undersupply of low-cost housing is inaccurate. In fact, it is a statistical fallacy. Both require further explanation.

It is not unusual for property prices to be competitive in urban city-states, especially on islands where scarcity of land results in stiff competition for any available inch of space. Consequently, high land prices will motivate developers to maximise their gains by building for the high-end housing market.

At the same time, one cannot discount the major role of fiscal, monetary and development policies in driving house prices up. Of late, there has been a national drive to encourage home ownership through low interest rates and easy credit — all ingredients for a speculative property market.

Compounding this is the sell-then-build model of real estate development and the “house-flipping” ploy by developers. For example, walk into a property fair today and the salespeople do not even try to sell you houses to live in. The usual sales pitch will attempt to convince you to put in a downpayment (creative financing now typically allows a mere five per cent), before whispering in your ear that since no interest payment is required for the duration of the construction period (usually around three years), you would be able to make a killing by “flipping” it to the market before construction ends and your payments begin. After all, they would assure you, property prices will only go up.

This has created an oversupply of high-end condominiums as developers rush to fulfil the speculative demand. As a result, typical high-end condos in Penang would not be very well lit up at night, owing to its average 15 to 30 per cent occupancy rate, though they never fail to be oversold.

Finally, notwithstanding the increasing cost of construction materials, property prices are also affected by confidence. This is a self-inflicted situation, in which the more successful Penang becomes, the more FDI is received, the more international attention is gained and the better the local economic situation becomes, it naturally follows that there will be more interest in Penang, leading to more investment and, consequently, higher property prices.

So yes, houses are expensive and constantly trending upwards. Yet as we have seen, it is not so simple to pinpoint a specific cause. There are many factors at play, most of which are beyond the state’s control, like the national fiscal, monetary, development and home ownership policies that encourage speculative gains through capital appreciation. Similarly, solutions to this problem require a collaborative commitment from all stakeholders, including both state and federal policymakers.

We now move on to the second common complaint. The general perception is that there is a dearth of low-cost housing, especially on the island. This is an issue that is often played up by various quarters, often for political reasons. However, the facts may be surprising.

Matching the latest census with data on housing stock in Penang actually reveals that there is a significant housing stock surplus of about 21 per cent. Delving deeper into the data, one would find that the oversupply actually occurs in both the high- and low-end markets.

For example, there are 152,048 families or 40 per cent of households in Penang that earn up to RM2,700 in household income per month. Based on a 30-year mortgage at BLR 6.6 per cent with a five per cent downpayment, this will qualify them for property costing under RM150,000, of which there are 306,896 units. This equates to an oversupply of about two to one.

This trend is similar even if we go lower — to the bottom 20 per cent of families earning less than RM1,800 household income per month. There are 76,024 families in this income range, while available units for which they qualify number 120,448. In other words, there is more than enough supply to serve demand. Data also indicates that this is the case for housing stock for the highest-income group.

So what is all the fuss about? Now, the real problem only reveals itself when we consider the middle-income groups. Families earning between RM2,700 and RM6,200 in household income per month would be able to afford property ranging from RM150,000 to RM350,000. However, while there are 152,048 families in this income range, there are only 81,966 units that fit their price range.

This deficit of around 70,000 units is significant, and means that middle-income families seeking to purchase houses are left with three options: consider smaller and cheaper houses which may not match their standard of living, continue to live in their family homes or, in the worst case, begin to look for options outside the state. And as the middle class continues to grow, so too will this problem. This is the real hot potato that the state has to contend with.

That said, it is clear that the problems of housing price inflation and housing stock mismatch are not as simple as they are made out to be. At the same time, state policies alone will not be able to solve these problems are they require a holistic approach that includes federal-level intervention through a revision of regulations such as house loan interest rates, mortgage repayment tenure and downpayment ratio. Real property gains tax should also be reappraised, as the current 10 per cent for properties sold within two years and five per cent for properties sold within five years is not enough to deter speculative investment.

Further understanding of these gaps is required. In part two of this article series, I will examine and elucidate the state’s role in housing policy and, specifically, what the state government of Penang has done and should do in the future to address this important question of housing.
Zairil Khir Johari is a chocolate purveyor, chicken rice enthusiast and noodle lover. When he’s not preoccupied with any of the above, he is also a politician.

  1. #1 by ENDANGERED HORNBILL on Monday, 16 July 2012 - 12:54 pm

    Penang govt must do what is right for the people of Penang. And there are no 2 ways about it.

    First, Penang must arrest the speculative fervour, if speculation is the root of the current high prices. There must be steps to ensure that a bubble does not grow so large that would prove messy when it bursts. Learn from Spain’s property bubble. Horrendous!

    Secondly, Penang must look into affordable homes for workers without which there will be no manufacturing industry and no SMEs; then Penang will just suffer.

  2. #2 by Jeffrey on Monday, 16 July 2012 - 3:45 pm

    ///It is not unusual for property prices to be competitive in urban city-states, especially on islands where scarcity of land results in stiff competition for any available inch of space///- Zairil Khir Johari

    Every inch? Explain the vast difference between price on an inch on East side of Penang (Balik Pulau – RM20 -RM28 per suqare foot) from that of West side (near the QueensBay) (RM400 per square ft?) Sure West side is not developed compared to East side but such a wide difference when less than 25 minutes separate these places? The travelling distance from Underdevloped west side to Developed East Side of Penang Island is only 20-25 mins of normal driving? Why to travel from West to East side of KL will take easily longer than ½ hour! To go from KL to Kajang is greater distance, yet people will take KL’s development is spreading Southwards to Kajang to make it part of larger KL and prices in Kajang go up to level nopt far behind KL- but same thinking is not so for Penangnites when they look at the development on the East side and view the West side (which is only 25 minutes away) as if it were the undeveloped Wild West Frontier – hence only RM20 for Land under First Grade Title! Infrastructure? Sure that counts but if one is looking at the basic road, the road that serves West side of the Island is a continuation of and about same width as that of Batu Ferringhi yet look at Ferringhi’s prices! Of course there’s a difference but that vast difference? Certainly not every inch as you say and the mindset of developed part from undeveloped part and concept of distance etc is very different from Penanites’ perspectives! All this point to a the speculative element in strong play over in Penang. The players don’t even care they pay their registration fees for land dealings the same way as the stamp duty of the instruments of dealings, both based on transaction amount! This does not happen in rest of the states.

  3. #3 by k1980 on Tuesday, 17 July 2012 - 9:01 am

    ..the state only needed to pay a small amount of compensation to developers if it decided to cancel hillslope projects..

    Just how small is ‘small’?
    ‘Small’ as in the case of Shahreezuk who got away with her ‘small’ loan of RM250million?

  4. #4 by Loh on Tuesday, 17 July 2012 - 1:14 pm

    ///Every inch? Explain the vast difference between price on an inch on East side of Penang (Balik Pulau – RM20 -RM28 per suqare foot) from that of West side (near the QueensBay) (RM400 per square ft?)///–Jeffrey

    Tell me where you can get at that price in Balik Pulau on which one can build a house.

  5. #5 by on cheng on Tuesday, 17 July 2012 - 4:35 pm

    One should not purchase a house or apartment more than 60 months salary or income (maximum), otherwise, it would be very tight financially ! In fact 50 months’ salary (income) will be more manageable

  6. #6 by Jeffrey on Tuesday, 17 July 2012 - 8:52 pm

    ///Tell me where you can get at that price in Balik Pulau on which one can build a house.///

    I have not enquired about a small plot for a house but land(s) of several acres for many houses and other development for developers, yes, but strangely no takers. I’ve seen one piece just 2 months ago (fronting sea).

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