Selangor Journal

Property Glut

Owning a home is part of the “Malaysian Dream.” It allows people to take pride in a property and engage with a community for the long term. However, homes are expensive (at hundreds of thousands of ringgit — or more), and most people need to borrow money to buy a home.

In the late 2000s, that dream came into reach for a record number of people. After the 2008 (US Subprime Mortgage Crisis) property correction, from 2010 to 2015 property prices in Malaysia have appreciated between 30% to more than 100% especially within the Klang Valley and Penang. Back then interest rates were low, allowing purchasers to get relatively large loans with a lower monthly payment. In addition, since home prices increased dramatically, buying a home seemed like a sure bet. Banks believed that homes make good collateral, so they were willing to lend against real estate and earn revenue while things were good. Developers too took advantage of optimistic purchaser sentiment by pricing residential properties far beyond what ordinary Malaysians could afford.

 

Supply Outstrips Demand

Buoyed by the confidence of these purchasers, developers began supplying residential properties at a rate that far outstripped the demand for these properties. “Supply-demand imbalances in the property market have increased since 2015. Unsold residential properties are at a decade high, with the majority of unsold units being in the above RM250,000 price category,” Bank Negara Malaysia explained. Bank Negara Malaysia added that the glut is caused by developers selling these units at above RM250,000 beyond what most Malaysians could afford. Further, according to Bank Negara Malaysia, currently, there were 130,690 unsold units at the end of 2017, with 83 per cent priced at above RM250,000. At least 61 per cent of the unsold units were high-rise apartments.

According to Faizul Ridzuan, Founder and Chief Investment Officer of Far Capital Sdn Bhd, a boutique property consulting firm, the reason for the unsold units is a result of the property bull run from 2010 to 2015. “After the global financial crisis in 2008 and 2009, the property market experienced a bull run from 2010 right up to 2015 when cheap interest rates and lack of supply created a pent-up demand for residential properties. Developers became overconfident and would just launch anything certain that the market will buy up whatever was on offer. Most of the unsold units we see today are from the property bull run era of 2010 to 2015.”

 

Upward Trend

Due to the high number of unsold units, many are worried that the property market is going on a downward trend which will affect the value of their property. Faizul Ridzuan begs to differ. “When people talk about a property cycle, people have the misguided belief that when the property cycle goes down, property values drop. However, if you look at the index, in the last 30 years, there was only three times when property values have dropped. This was during the Asian Financial Crisis in 1998 and 1999 and in 2016 where because of the property bull run era, if you look at the data, the prices of properties that went up from 2010 to 2015 were from 10% to 15% a year, an exception that exists once every 30 years. It was not a market norm of a rise in prices from 3% to 5% a year. If anything, the value of properties did not drop but the number of transactions involving properties have slowed down. This means that the number of transactions involving property in 2016 and 2017 is comparable to that in 2008 and 2009.”

While the number of transactions involving property has slowed down, Faizul is hopeful that the market will see better times ahead because Malaysia’s economy is doing better than expected and developers have been adjusting their strategy to launch more affordable products after the federal government imposed an indefinite freeze on approvals for luxury property developments to control a nation-wide oversupply of luxury projects. “The new property launches today are cheaper than what was 3 years ago. These days you can get a high-rise condominium with a built-up of 1000 square feet priced for less than half a million and within walking distance of the MRT and LRT.” Affordable homes are also being offered by the federal government and the Selangor government to meet the market demand. As at 31 October 2017, a total of 1,813 units of Rumah Selangorku have been completed and this number will increase to 3,394 towards the end of the year. With the number of affordable homes being built by agencies of both the federal government and state government, Bank Negara Malaysia has suggested that a single agency be set up to handle affordable housing.

 

Double-edged sword

Besides affordable housing, another interesting phenomenon in Malaysia’s property market is the influx of Chinese investors, Chinese developers and Chinese contractors. The effect can be two-fold. “On the one hand, the housing products and services that they offer will create healthy competition in our local housing market. On the other end of it, most of the products being offered are luxury housing products which in general the locals are unable to afford. Historically, what we have seen is, in all major property market crashes, the locality that gets affected the most is the locality with the high number of foreigners. After the Asian Financial Crisis in 1998 and 1999, the state of Johor was the only local market that did not recover up until 2010 when all other states in Malaysia recovered by 2003. This is because when there is a high influx of foreigners purchasing property, and if there is a market crash, what follows is a high number of NPLs and abandoned housing projects. This is also why back in 2008, you could buy property in Johor far cheaper compared to 1998 and 1999,” explained Faizul Ridzuan.

 

Lingering Effects

The influx of Chinese developers flooding the housing property market set off a chain of events that will continue to unfold for years to come as legislators, purchasers, bankers, and business people scurry to reduce the effects of the oversupply of property on the Malaysian housing market. The Malaysian public got to see “how the sausage is made” and was shocked to learn how leveraged the world is.

The lasting effect for most purchasers is that it’s more difficult to qualify for a home loan than it was in the early-to-late 2000s. Even though the home loan process is now more cumbersome, hopefully, the financial system is healthier than before.

 

Better Access to Housing

 One of the foremost challenges facing humanity is affordable housing, especially for the urban poor. In Asia alone, 30 per cent of the urban poor live in slums. For the urban poor in developing countries, living in slums or informal settlements has become the norm, with an estimated one billion people living in slums. As market-driven approaches cannot solve social justice problems, it is important to identify mechanisms for the state to ensure housing affordability in urban areas.

The state of Selangor introduced various initiatives to democratise home ownership so that the people of Selangor can gain access to quality, comfortable and affordable houses in urban areas. In collaboration with private developers, the Selangor government has built various types of Rumah Selangorku in strategic locations. A total of 29 development projects have been granted the APDL approval and are expected to provide a total of 20,331 units of Rumah Selangorku in stages towards 2020.

Besides Rumah Selangorku, in an effort to appeal to millennials who prefer social mobility, the Selangor government introduced the Smart Leasing Scheme for millennials wishing to take out a housing lease of 2 to 5 years. Due to the overwhelming response from millennials, in 2018, the Selangor government increased the allocation to an additional RM 50 million for the purchase of houses in strategic locations to be leased out to those who qualify. To date, 861 such houses are owned by the Selangor Housing and Development Board – Lembaga Perumahan & Hartanah Selangor (LPHS) purchased at a total cost of RM 123.14 million.

The Selangor government also introduced the Smart Selangor First Home Buyers scheme with an allocation of RM 15 million. This scheme enables Selangor citizens to own Rumah Selangorku types B and C. Under this scheme, the Selangor government will advance a down payment of 10 percent subject to the purchaser having obtained financing from a bank or financial institution. This advance is in the form of an interest free loan that must be repaid within a specified term to the Selangor government. About 1,000 buyers particularly those among the millennials will benefit from the scheme.

These schemes show that affordable housing initiatives are desirable to ensure equitable outcomes in the housing market. Government intervention and regulation are needed to strike a balance between competing objectives – public interest, social inclusion, profit and commercial feasibility. The government, private developers and the public have to work together to achieve mutually satisfying outcomes.

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