A simple approach to the complex housing market

LETTER | In fundamental economics, we learn about the basics of demand and supply. When supply exceeds demand, the price of the particular goods will eventually fall and vice versa. 

However, the same theory does not seem to apply to the housing market. Over the years, statistics keep showing that the property overhang unit is increasing, but we do not see any fall in house prices, or at the most negligible reductions.

Why is that so?

One possible explanation is that housing is not just any ordinary product, it is a complex issue which involves many factors. Land availability, for instance, is very limited, especially in rapidly developed areas such as greater Kuala Lumpur. When land becomes scarce, demand exceeds supply, leading to an increase in price.

I believe the most important factor is the difference in understanding of the housing market between developers and buyers. 

Developers obviously have a better understanding of the market compared to buyers. They will try their best to put themselves in the best possible position, which is maximising their profit. Buyers on the other hand usually have no insider information, putting them in a worse off position.

Moving away from economics, buyers have themselves to blame as well for prices skyrocketing. By owning a house, one is seen as successful in life. How often have we heard of youth being judged by whether they own a house by the age of 30?

I believe developers have taken advantage of this culture by conveniently raising the prices of property. Buyers with their obsession of owning a house, in addition to their lack of knowledge, will still find a way to purchase properties which are overvalued.

However, developers often argue that banks are not approving loans, resulting in an oversupply problem. 

A quick check on the Bank Negara Malaysia website shows that the housing loan approval rate was at 72.1 percent in the second quarter of 2018. The question here is how do we determine the optimal loan approval rate? 

Nevertheless, I believe that banks have their standards and guidelines on approving loans. Banks cannot be too lenient, we must learn from history of what happened during the 2008 financial crisis and make sure it does not happen again.

Since we cannot tackle the problem through the price of the property and loan financing, the next focus is definitely our income level. The argument of insufficient income has also been raised for years, Bank Negara even came out with a living wage of RM2,700 in 2018. 

In contrast, our current minimum wage is only at RM1,100, less than half of the living wage stated by the central bank. 

Income level is potentially more complicated than the housing market, affecting by factors including education, productivity, technology, foreign cheap labour. Structural reform is needed to overhaul our labour system, which will take years if not decades.

Since the market cannot work itself, the government is expected to step in. In the Pakatan Harapan manifesto, they promised to build one million affordable housing in 10 years. 

Policies such as the National Housing Policy and National Community Policy have been launched aiming to improve the housing market situation. In the short term, schemes including rent to own and FundMyHome Depositku have been introduced. These schemes are welcome, as buyers need not pay huge down payments, which often is the biggest challenge for them.

I believe these policies are definitely welcome, as it provides future direction for the housing market. However, these are long term solutions, but the government will not stay in power forever, thus short-term measures are in their best interests. 

Both schemes mentioned are good in helping low-income groups own homes, but it might potentially lead to an even more undesirable situation. 

Firstly, the income of buyers is still the same, but they are merely taking more loans, it is a short-term measure without solving the real issue of affordability. Secondly, if the government steps in every time there is overhang, developers will not be afraid to continue charging the same prices.

So, what can we do if we cannot solve in terms or pricing, financing, income level and even government intervention?

The answer is simple, rent a home instead of buying one. 

There is an increasing trend of youth mobility, casual employment and smaller family sizes. Combining these together, it might be able to explain why overhang is high, as more and more youth choose to rent and not to purchase homes. From this viewpoint, the plan to introduce a rental act is a good start.

I agree that owning a house is important, as it gives us a sense of security. For the middle-aged population, it safeguards their retirement, but the bottom line should be to purchase only when we can afford it. 

It is completely normal if youth cannot afford homes, they will eventually able to do so as they age and have higher incomes. With this shift in mindset, developers realising that overhang units cannot be sold will reduce the price over time.

The housing market is complex. As buyers, we should not focus too much on this complexity, however. It is not rocket science, we just need to spend according to our capability. 

As for the government, long-term guidelines and planning should be the priority. In the short-term, aid should only be focused on those who really need it.

The views expressed here are those of the author/contributor and do not necessarily represent the views of Malaysiakini.