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The most talked about property news this month that has got young people very excited is the government’s affordable housing initiative in Greater Kuala Lumpur where Malaysia’s largest population resides.
The initiative is in response to recent concerns that young people entering the property market are unable to purchase affordable homes and that to purchase one within their budget, they have to go further and further away from the city centre, thereby incurring additional costs for transport and infrastructure facilities.
It is a fact that almost all capital cities are expensive and if we compare our sales statistics for the Greater Klang Valley in 1Q2010 with that in 1Q2011, we can see that overall, property prices in Kuala Lumpur went up by an average of 10% to 12%, which, even in this current shaky world economy, is a fairly substantial increment. In some branded districts, prices have exceeded these figures.
Not allowing Malaysians to own affordable homes is not sustainable economically or politically as other socio-economic forces come into play. It was Singapore statesman Lee Kuan Yew who said: “People who have a stake in the ownership of a country are evolutionary and not revolutionary.”
The fact is that we have made attempts to build affordable or low-cost homes before, but the process of identifying suitable land for low-cost housing and forcing private-sector developers to build low-cost housing as a cross-subsidy in their own housing programmes on greenfield sites has been slow.
In reality, the idea of building low-cost homes is not something developers celebrate. This is no surprise given the rising cost of land, building materials, infrastructure and labour. Of course, the bill gets higher in areas with easy accessibility.
In Southeast Asia and certainly in the West, infrastructure costs are the responsibility of utility companies. For example, the electricity board lays the wires right up to the project and the water board the pipes. The telephone companies provide their facilities, as do the sewage companies. And so all the developer has to do is come up with a master plan, get it approved by the local council and as soon as the facilities are in, start building the houses.
But what happened is that due to sustained demand for property in Malaysia over the last 30 years, developers did not wait for the utilities to be built by the companies but paid for the infrastructure themselves and handed it over to the local councils without cost. This was an acceptable practice when the companies were all owned by the government and there were budget constraints. But today, all the utility companies are large corporations with billion-ringgit budgets and it seems unfair that the developers still have to pay the total cost of services. This eventually gets passed on to the consumer, forming a significant percentage of the cost of each house that is purchased.
National Property Information Centre (Napic) records of total volume of low-cost housing show that while we have a substantial number of low and medium-cost homes, the overhang in some of the projects is due to the homes being built in places where the consumer does not wish to stay for logistics reasons, such as lack of transport or services. Such houses have been a waste of resources both for the state governments and the private sector.
Most developers looking at building affordable housing under the new scheme are probably hoping that one of the resources would be free. It could be land, infrastructure, duties on imported products/materials used in construction or even a grant. Any of these would help reduce the cost of construction in such a way that houses become affordable.
It is worth mentioning here that China Vanke is the first private real estate developer in the republic to build affordable housing without a land subsidy from a government-sponsored programme. To steer ahead of the property curve, it concentrates on affordable housing areas and Tier 2 cities (starting with Shenzhen) with some exposure in Shanghai and Beijing. The demand from homebuyers in China is for units below 1,000 sq ft and for China Vanke, this category accounted for 53% of its sales in 1Q2011.
On the local front, the price of affordable homes has been fixed at RM220,000 to RM300,000. But as most consumers would be aware, there are no houses in this price range and with built-ups of 1,000 to 1,200 sq ft in the greater Kuala Lumpur area. Thus, it required creative effort by the government to come up with this pricing strategy.
But this is not enough to stop the project from degenerating into a political hot potato. Wherever there is low-cost housing within an urban conurbation, residents in the locality registering for the project have discovered, to their dismay, that many of the units have been reserved for the local political parties and for members of local councils whose family members may also have qualified for low-cost housing. Often times, these homes provide an opportunity to make a quick buck on the open market since there is a gap between their market value and the selling price established by the government as the benchmark for low/medium-cost housing.
This has been a problem in many countries around the world that are trying to keep affordable housing a transparent affair and preventing those purchasing such homes from selling them for a profit.
‘Claw-back’
One of the nations that has a very successful affordable homes schedule is Ireland. Its local authorities have a claw-back system. Under the system, should one of these homes is put back on the market within 20 years, the original owner would have to pay a certain amount of money back to the authorities. The amount is calculated based on the difference between the market value of the property (at the time of the original sale) versus the original price paid by the original owner — which would have been at a discount. The claw-back is valid for 20 years. However, after the first 10 years, the percentage of “pay-back” required of the original owner, declines by 10% a year.
This is how works: X buys an affordable home. Although its market value is RM300,000, he only needs to pay for it RM200,000, or with a RM100,000 discount. Should X sell the property for RM400,000 within 10 years of the purchase, he would trigger the “claw-back” and therefore have to pay to the authorities RM100,000 (being the discount he had originally enjoyed). X is also liable to settle all outstanding mortage payments, if any, for the same property.
However, should X decide to sell the same property after 15 years of purchase, and at, say, RM500,000, he will only trigger a 50% of the “claw-back” of RM100,000 (the discount), which works out to RM50,000. Again, X will be responsible to clear any outstanding mortgage payments related to the property.
What happens if the value of the property dips below that of the discounted price of RM200,000 that X has paid to the authorities? If this would happen within 10 years of the original purpose, X will still trigger the “claw back” and, therefore, has to pay to the authorities the RM100,000 discount already accorded to him. This would be in addition to any outstanding mortgage payments accrued.
This system has worked very well in Ireland. Clearly, it prevents any party from getting a clear advantage in flipping the property. In order words, it discourages speculation.
Malaysia has an urban population of 63%, which means that out of a total population of 28 million, 17.6 million live in towns, leaving 10.4 million in the rural areas. The forecast is that 70% of our population will live in towns and cities by 2020, with nearly 3.5 million young people migrating to the cities after they graduate.
Rural-to-urban mobility is not new or limited to Malaysia. In China, one million people relocate to an urban area every month and cities have been unable to provide adequate facilities fast enough.
There are many reasons for migration but job opportunities, lifestyle change and upgrading one’s worth are the main ones.
Greater Kuala Lumpur is said to have a population (depending on who you talk to) of 5.2 million to 6.47 million. If international standards are to be followed, Greater Kuala Lumpur should host 30% of total population or 8.4 million. This means the area will see an influx of two million people over the next eight years.
Transport, electricity, water and sewage services will come under tremendous pressure if no effort is made to expand these to cater for increased demand. The migration of labour to the cities will be a mixture of graduates and those unable to find employment in the villages, opening the door to long-term mechanisation of agriculture if the government is serious about reducing unskilled foreign labour.
Smart exploitation of resources and talent is essential for a small country like Malaysia with a large land mass. This should not be difficult unlike in countries like Indonesia, Vietnam or even Thailand, which face population pressures. We just need planning and, more importantly, execution.
This is the first of a series of articles relating to real estate by Kumar Tharmalingam, CEO of Malaysia Property Incorporated (MPI). MPI is a government initiative set up under the Economic Planning Unit to attract investments in real estate in Malaysia.
This article appeared in City & Country, the property pullout of The Edge Malaysia, Issue 872, Aug 22-28, 2011
