Cover Story: The disparity between income and house prices

This article first appeared in City & Country, The Edge Malaysia Weekly, on November 16, 2020 - November 22, 2020.
Many Malaysians cannot afford to own houses because the average monthly salary and wage they received in 2019 was RM3,224 (Photo by The Edge)

Many Malaysians cannot afford to own houses because the average monthly salary and wage they received in 2019 was RM3,224 (Photo by The Edge)

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When do you plan to buy a property? If Adam (not his real name) were given RM1,000 each time someone asked him that question, he would probably be able to come up with a decent down payment soon. Adam, who is looking to buy his first home, is not alone. We often hear people complaining that property prices are either too high or unaffordable. Let us put aside the fact that the location and type of property that one might love to own might be unattainable for the moment.

“Prices are too high. Even if I were to earn a gross salary of RM10,000 a month, after my expenses such as car loan, study loan and helping out my family, it is quite difficult for me to buy a property and still be able to save some money for the future. Also, I want to live somewhere convenient and strategic like Petaling Jaya and not in some godforsaken faraway place,” Adam says.

In September, the Department of Statistics Malaysia (DOSM) announced that the average monthly salary and wage received by employees in the country rose 4.4% to RM3,224 in 2019, from RM3,087 the previous year.

The data was obtained from the 2019 Salaries and Wages Survey Report, which provides the main statistics for salaries and wages, namely the monthly median and mean salaries based on demography and the socio-economy. There were a total of 9.2 million salary and wage recipients in Malaysia last year.

Chief statistician Datuk Seri Dr Mohd Uzir Mahidin was quoted as saying that the increase in salaries and wages in 2019 is in line with the performance of the economy, which recorded 4.4% growth at current prices in 2019.

And what about household income? In July, the Household Income & Basic Amenities Survey Report 2019 by DOSM showed that the country’s 2019 mean income was RM7,901 and median income, RM5,873.

According to technical notes provided by DOSM in the Household Income and Basic Amenities Survey Report, household income refers to total incomes received (accrued) by members of households, in cash or kind, which occur repeatedly within the reference period. It includes assets, investments and transfers. In 2019, household size was 3.9 persons.

CBRE | WTW managing director Foo Gee Jen notes that, compared with major cities in Southeast Asia and Asia, prices and rents of properties in Malaysia are known to be competitive, and offer good value for money in terms of space, quality and living standards.

In addition, property has been a reliable hedge against inflation in Malaysia in the past few decades. Foo believes all these factors make it worthwhile to own a property in the country.

“Despite that, property in Malaysia is generally regarded by Malaysians as unaffordable, mainly because of the disproportionate growth in house prices against income. The yearly increase in house prices has outpaced that in income [see chart]. Between 2010 and 2019, the average y-o-y increase in house prices of 7.9% surpassed income’s 5.6%,” he notes.

“Affordability was aggravated by the property hype during the 2010-to-2014 period, when property prices rose double digits annually — and peaked at 13.2% in 2012. The average annual appreciation for the 2012-to-2014 period was 11.2%.”

He observes that income has been catching up with house prices since 2017 as the latter moderated. He expects price appreciation to take a back seat moving forward, but notes that it is equally challenging to maintain income growth amid a pandemic, adding that the price and income gap needs to decrease for a longer period before affordability begins to improve.

Affordability and solution

How is “housing affordability” defined? Various models can be used to determine affordability but, in Malaysia, there is no consensus on the most suitable model. There are arguments on whether housing affordability should be measured as a short- or long-term financial capacity issue or based on the city-tier system.

In Malaysia, the most widely adopted model is the median multiple. Median multiple is median house price as a multiple of median annual household income.

According to VPC Alliance (KL) Sdn Bhd managing director James Wong, Khazanah Research Institute (KRI) defines housing affordability as a function of both house prices and income, and a yardstick of “affordable” is a median multiple of 3.0 times (see table).

“Based on the median house price of RM290,000 in 2Q2020 published by Napic [National Property Information Centre] and median household income of RM5,873, the housing price range that is affordable to those with this income level will be RM211,000 and below. Thus, most houses built by developers are deemed to be ‘unaffordable’ to the average Malaysian buyer,” he explains.

“Using the median household income 2019 published by DOSM and the affordable housing range based on KRI’s calculation of 3.0 times the median multiple, affordable house prices in most states are lower than the median house price. It appears that house prices are not within the affordability of the household, except for Putrajaya and Melaka.”

Foo emphasises that, while the debates on affordability modelling are generally academic in nature, the prevailing consensus is that affordability has to relate to local market dynamics and, thus, a realistic affordable price should be set according to localities instead of a national aggregated benchmark.

“Corresponding efforts should be undertaken to improve household earnings, which is perhaps the more sustainable way of bridging the gap between house prices and the income of Malaysians,” he says.

“The government needs to create high-value economic activities and employment. There should be concerted initiatives to attract multinational companies to Malaysia, which would in turn encourage knowledge transfer as well as bring in foreign talent. This would then effect a spillover in the form of a high-purchasing-power workforce and high-net-worth expatriates/foreign investors — these are the organic demand and value drivers for Malaysia’s property market.”

The reality?

As Foo has pointed out, many Malaysians have complained that house prices in the country are too high, a fact substantiated by the figures in the table,  which show that the median house price is far above the affordable housing price. Some would even argue that one can barely find a house with the aforementioned median house price, except for those in government housing schemes.

In fact, most house prices could be much higher than the median house price. Add to that other expenses such as maintenance fees, transport (public transport, car loan and petrol), food, insurance and entertainment, and one would be hard pressed to find any savings left over at the end of the month.

Take, for example, Kuala Lumpur and Selangor, which collectively have a larger population than other states, owing to urbanisation. If prospective buyer Adam were to opt for a RM470,000 property in Kuala Lumpur (as suggested in the table) and obtain a 90% loan at an interest rate of 3% for 30 years, the monthly repayment is about RM1,780.

If the property is a stratified property, he would have to pay a monthly maintenance fee and contribute to a sinking fund. There are also other fees, such as the monthly Indah Water bill, the half-yearly assessment tax and the annual quit rent/parcel rent.

In general, the maintenance fee in a condominium in Kuala Lumpur is 25 to 35 sen psf. Assuming the condo is 1,000 sq ft, at 25 sen psf, the monthly maintenance fee is RM250. That translates into a minimum monthly expense of about RM2,030 for the loan repayment and maintenance fee alone.

According to DOSM, the current household income is gross household income and includes income payable as tax and to a social security scheme. The final disposable income varies, depending on individuals’ eligibility for different tax reliefs and other payments.

Take, for example, the case of a young, single-income household of a married couple without children in Kuala Lumpur. With the median household income of RM10,549 and no other tax deductions, the estimated monthly household income after income payable is RM9,548.

The minimum monthly expense of RM2,030 is one-quarter of the estimated monthly household income after income payable of RM9,548.

But, what can you really get in Kuala Lumpur with RM470,000? How about a property with a built-up of at least 1,000 sq ft, three bedrooms and two bathrooms? A check on EdgeProp.my listings shows that there are many older, non-landed properties — especially apartments — priced at or below RM470,000 in various parts of KL.

As for landed properties, there are a limited number that fit the bill and they are all older townhouses as well as 1- to 2-storey terraced homes in Cheras, Kuala Lumpur, Kepong, Sri Petaling, Sentul and Wangsa Maju.

Property overhang is not oversupply

Data by DOSM and Napic suggests that between 2016 and 2019, the number of residential developments increased in tandem with household growth. During that period, about 100,000 new households were formed every year while the annual new completion of residential property was around 80,000 units.

Nevertheless, Wong notes that, based on DOSM’s estimate of a population of 32.65 million in 2020, against the existing total residential housing stock of 5.84 million units and the 2019 household size of 3.9 persons, the number of living quarters required is 8.37 million units.

“With this computation, it appears that there is a shortage in housing supply of 2.52 million units in Malaysia,” he says.

In 2019, residential properties contributed almost half of the country’s property overhang, with 30,664 units valued at RM18.82 billion. Serviced apartment overhang continued to form the bulk of the property overhang, with a total of 17,142 units worth RM15.04 billion.

Nevertheless, for property consultants, property overhang does not equate to oversupply. Instead, their interpretation is that “property overhang [is] due to the mismatches of location, pricing and product”, which has to be examined from a micro perspective.

Foo notes that this situation includes the lack of accessibility and amenities. “For instance, certain developments are located in no man’s land, with little to no support of infrastructure and amenities to be liveable. Apart from that, there are pitfalls relating to product specifications such as overly high density, poor build quality and shoebox unit.

“Location and product mismatches, to an extent, are more pronounced in affordable housing projects as a result of cost justification. Taking the development guidelines for affordable houses as an example, the minimum space requirement of 600 to 800 sq ft (which varies by affordable housing schemes) with three bedrooms is inadequate for long-term living by a typical four-person family. It has to be noted that KPKT [Ministry of Housing and Local Government] recently acknowledged this shortcoming and is looking to revise the guidelines.”

He observes that, because of price mismatches, there are also good products unsold — this is seen in the high-end market and involves serviced apartments with prices that are beyond the means of the mass market. He adds that now is the time to pick up some of these assets at bargain prices.

Meanwhile, Wong notes that there is no integrated data available on demand for and supply of affordable housing, income levels, affordability and pricing to enable developers to provide the right products and build in the right location with the right pricing.

“Market and feasibility studies are absolutely essential and should be made mandatory for housing developers seeking a bridging loan from the bank to ensure that there is adequate demand for the types of houses to be built in that particular locality and within the affordable price range,” he says.

“On the other hand, as land for housing development is purchased at high prices in anticipation that the property market will always hold well, many developers will not be able to sell houses that are affordable to a large segment of the population. This is a big dilemma in the property market.”

In conclusion, all related parties — the government, the authorities, property developers and banks — need to work together to solve the issue of disparity between income and house prices. The government should ensure that integrated data on demand for and supply of homes — based on various factors that include income level, affordability and pricing — is available.

While property developers should carry out studies on the developments to be built, authorities also need to make sure that approvals are given only to projects that match the  actual requirements and affordability.