Housing unaffordability in the face of rising inflation

WE refer to the article “Inaffordable” published in the sun 4th July. Housing (un)affordability is often attributed to the high price-to-income ratio of housing, where market housing prices are rising rapidly, leading to a huge disparity between household incomes and housing prices.

With a ratio of 4.72 in 2020 – derived from the median household income of RM5,209 and the median house price of RM295,000 – the country’s house prices fall into the ‘severely unaffordable’ category as indicated by the multiple median approach; therefore, building more affordable homes to meet mass buyer demand is necessary to help improve the level of housing affordability in the country.

At first glance, increasing the supply of affordable housing appears to be a viable measure not only to reduce the mismatch between supply and demand for housing in the market, but also to improve home ownership. ownership among low-income groups, especially in areas with rapidly increasing housing stock. costs.

But that wouldn’t, in and of itself, make a significant dent in the country’s housing affordability issues.

This is partly because housing affordability is not just a problem faced by low-income groups, but is likely to occur across all income groups, whether they be rich or poor.

Especially under the current prevailing economic front, with growing inflationary pressure and soaring material prices, the major contributory factor to housing unaffordability is more the decline in household income and rising cost of living.

In fact, with 29% or 10,158 units overhang, 41% or 25,952 unsold units under construction and 42% or 10,046 unsold units not yet built that come from homes priced below RM300,000 in Q1 2022 (1Q’2022), it is obvious that people lack the discretionary income to afford what is on the market.

In circumstances where households are generally cash-strapped and may even need to make unrealistic compromises in other areas of their lives if they intend to commit to servicing any home loan coupled with the interest rate hike announced by Bank Negara Malaysia (BNM) recently, soaring borrowing costs mean that so-called “affordable homes” are no longer “affordable” to the general public in the actual hour.

Therefore, today’s housing unaffordability is an economic problem that is deeply tied to the country’s weak economic performance, rather than the mismatch of the housing product and prices in the market.

Moreover, there is actually no shortage of affordable housing in much of the country.

For example, by comparing the existing housing stock (representing supply) with the total number of households (representing demand) in the state, Rehda Selangor shows that there is no shortage of affordable housing in Selangor , the state being the most urbanized in Malaysia.

As of 4Q’2020, the existing stock of houses (including service apartments) in Selangor stood at 1,683,147 units, 41% of them or 694,836 units were priced at RM300,000 and below, this which can be considered “affordable homes” that meet BNM’s definition.

These “affordable houses” come mainly from a wide range of product categories, ranging from low-cost apartments (26.4%), condominiums or apartments (25.2%), townhouses (18. 1%), apartments (13.9%), cost houses (9.8%), apartments with services (2.9%) etc, see Figure 1.

If we were to compare the stock of houses below the price of RM300,000 with the number of households financially eligible to purchase a property priced up to RM300,000, we find that the state actually has enough affordable houses . to serve the targeted households: 694,546 houses against 655,876 households, see Figure 2.

The supply of affordable housing in most districts exceeds the demand (number of households), including those located in the Klang Valley region.

Above all, remember that there are affordable homes under construction and in the planning stage.

As long as the supply rate exceeds the demand rate, there should be no shortage of affordable homes statewide.

Instead, what should be of most concern is the excessive construction of price-controlled affordable housing, with a high number of unsold units, low take-up and poor marketing.

Recent statistics released by the Department of Statistics Malaysia revealed that the number of dwellings in Malaysia stood at 9.6 million in 2020, compared to the number of households which reached 8.2 million.

Of this number, approximately 1.9 million or 19.4% of the dwellings are vacant.

In the case of Selangor, there are 2,101,896 dwellings against 1,836,410 households, and up to 343,562 dwellings or 16.3% are vacant.

The highest percentage of vacant dwellings at the administrative district level due to new completions or for rent or sale are found in Sepang (71.3%), Gombak (62.9%) and Petaling (62.9%) .

Suppose the main driver of the problem is the purchasing power of severely debilitated people, the construction of affordable houses at controlled prices (like PR1MA, RSKU) which aim to increase the home ownership of the low income group will never be able to improve housing affordability because we are going to end up asking whether it is possible to build housing cheap enough to make it affordable for the low income group.

Moreover, the experiences of existing affordable housing programs with controlled prices like PR1MA and RSKU have shown that the construction of these houses is only viable through cross-subsidies of other housing products targeted for different income groups, which which not only contributes to a skewed market that promotes the launch of high-end products, but also tends to exacerbate the problem of oversupply in the affordable housing market segment.

The government should realize that when wages and salaries fail to catch up with continuously rising commodity prices, the level of housing affordability inevitably declines.

To opt for a long-term solution to tackling housing unaffordability, the government should move away from an approach that simply aims to build more affordable homes to focus on ways to further stimulate the creation of housing. jobs, income growth, as well as helping industries and businesses. to survive, grow and transform, all of which are key drivers in driving the country’s economy.

To complete the picture of solving the problem, the measures should not only be limited to financial support for buyers, but also include ways to incentivize builders to provide homes, such as facilitating improvements in cost, productivity and process efficiency, providing incentives for technology transformation as well as improving the ability of the housing market to meet dynamic and growing demand through data accessibility and transparency.

Doctor Foo Chee Hung is Principal Investigator of MKH Berhad and James Tan Kok Kiat is the CEO of Suntrack Development Sdn Bhd. Comments: [email protected]

Comments are closed.