EARLIER this month, I was very fortunate to be invited to the Dialogue on Sustainable Development of Affordable Housing, organised by the National Mortgage Corp of Malaysia (Cagamas).
It was an insightful experience to listen to well-known industry experts exchanging views and deliberating on issues related to affordable housing.
The World Bank has once said housing is not only a global economic driver, but also an opportunity for poverty alleviation.
Although the poverty rate in Malaysia is low at around 0.6% as at 2015, addressing the need for affordable housing is still a must in order to prevent a social crisis.
In this case, the groups most vulnerable are the Bottom-40 (B40) and Middle-40 (M40) groups, amid a recent spate of rising costs of living.
The B40 group is classified as households earning RM3,860 per month and below, while the M40 households earn between RM3,861 and RM8,319 a month.
Therefore, it is a pressing policy matter to find a sustainable solution to provide affordable housing and also to keep house prices in check. While many governmental agencies have been set up for this matter, very few solutions have resulted out of them.
Focus should be on affordable housing
While there has been a plethora of opinions relating to this issue, most will agree that the key problem is the mismatch in demand and supply in the market.
The gap between the supply and demand was initially caused by rapid socioeconomic changes, urbanisation and evolving population structures.
Currently, the B40 group has a number of social housing programmes catered for them by several government agencies. Social housing is classified as low cost housing units, specially catered for the lower income groups or those classified under urban poverty groups, and are separate to affordable housing schemes.
Social housing schemes such as the Projek Perumahan Rakyat (PPR) are available for the B40 households. To qualify for these housing schemes, the typical household income needs to be RM3,000 and below. These low-cost units cost around RM35,000 to RM60,000 and are around 650 square feet.
In addition to PPR, there are several state–led social housing projects such as Rumah Selangorku, RMM Pulau Pinang, and DPR Johor to name a few.
On the other hand, to cater to the median population, i.e. the M40 group, we need to have affordable housing properties and developments, as they are not eligible for social housing or subsidies currently available to the B40 group. Hence, there should be more affordable housing options catered to the M40 group, who face numerous challenges obtaining a home of their own.
Houses should be priced within RM150,000 and RM350,000 to be considered under the affordable housing segment, however there is no official range stated by the government. Unfortunately, such properties are launched by developers in very few states, such as the Matrix developments in Negri Sembilan. It is rare to find developments priced within this range in Klang Valley, Penang, and Johor Baru.
According to the National Property Information Centre (Napic), less than 30% of new housing developments were priced below RM250,000 in 2015 and 2016.
PR1MA, the biggest project that deals with affordable housing, have properties priced between RM100,000 and RM400,000, although prices tend to be skewed more to the higher-end.
Going back to the issue of lack of supply
Currently, interventions in the housing market have been focused mainly on the demand side, such as policies allowing 100% financing or subsidising the cost of houses.
These types of policies may not be sustainable in the long run as consumers become further indebted, while house prices remain high. As affordable housing is a structural issue, not a welfare one, we need to tackle the issues on the supply side, which is to provide more affordable housing.
Under the 11th Malaysia Plan, the government has already outlined the need for affordable housing to alleviate the increasing cost of living.
The government targets to provide 606,000 new affordable houses during the course of the 11th Malaysia Plan spanning from 2016 to 2020, introduce an integrated database to match supply and demand dynamics, and establish a land bank for future affordable housing projects.
Issues at present
Essentially the problem with affordable housing all boils down to one of supply. Upon inception of the PR1MA scheme, the initial target was to build 500,000 homes by 2018, which was then revised down by more than half, to 210,000. Currently, six years after its first launch, only 4% of the revised target has been met.
The problem herein lies with land acquisition. PR1MA estimated that it would need about 12,500 acres for its initial plan of 500,000 units. However, it only ended up getting 108 acres, of which only 39 acres were suitable for development, barely enough to complete 1% of its target. Land scarcity is an issue, especially in the Klang Valley, as prime locations would usually be earmarked by private developers.
Getting around this issue is beyond the scope of PR1MA, as land issues are under the jurisdiction of state governments, which makes negotiations with government agencies and various stakeholders quite challenging.
Additionally, land cost is also an issue. Despite being an affordable housing developer, it is imperative that it also gains a profit, albeit at smaller margins compared to private developers.
With land near key economic areas being costly, most of the PR1MA houses are being built far away from the city. Location is also key when it comes to affordable housing.
For example, an individual working in Kuala Lumpur may find housing affordable in outskirt areas such as Sepang or Batang Berjuntai. However, the transportation cost can easily wipe off the savings from owning such a unit.
So what can be done?
In the end, sound and coordinated public policies are the key to addressing the affordable housing dilemma.
There have been a number of interesting suggestions to overcome the problem. In my opinion, Malaysia must have the political willpower to implement certain strong measures to entice developers to create sufficient supply of affordable housing.
The various agencies overseeing affordable housing issues should be combined into one single federal authority, with definitive control to deal with all agencies including state governments. My view is also shared by the government, who are mulling over the possibility of setting up a single authority body. Examples of this in other countries are the Housing Development Board in Singapore and the Department of Housing and Urban Development in the United States.
A single entity to oversee and coordinate affordable housing initiatives for the nation would promote greater strategic and operational cohesion at the national level. It would also result in more effective communication and stronger collaboration with key partners to advance the affordable housing agenda.
As a proposal, we may look at creating a Malaysian Affordable Housing Agency, with central authority under the Prime Minister’s Office, incorporating all affordable housing agencies under the Urban Wellbeing, Housing and Local Government Ministry. Bank Negara could play a major role in financing matters and regulation.
This way, the central agency can team up with private developers under the public-private initiative.
In key cities, there are parcels of under-utilised government land which could serve as an ideal location for affordable housing.
This new agency can effectively negotiate with state governments to release cheaper parcels of land to developers, solely for the purpose of affordable housing.
Land could be freed for these projects and can be given to developers at a lower cost, on the condition that house prices cannot exceed a certain ceiling. If needed, the agency could exercise the Land Acquisition Act 1960, with the help of the Federal Government. After all, these housing projects are for the rakyat!
Thirdly, the agency with the help of federal government should be able to strictly enforce developers to ensure that 30% of developments should be reserved for affordable housing especially in places with acute shortage of affordable housing units for the B40 and M40 groups.
Finally, in order to get the support of the developers, the government could also offer tax incentives to these developers. Tax incentives can be in various forms, such as tax exemption of 20%-30% of profit. To note, for affordable housing developments, we have read that the land cost is only 20% of total cost.
With all these measures in place, it would be easier to monitor the prices of affordable housing, especially for first time buyers from the B40 and M40 categories. I believe, that house prices can be fixed between RM100,000 and RM300,000, with a moratorium period of 8 years.
The moratorium period is of utmost importance to prevent speculative activities and to ensure deserving households benefit from these measures.
Consider implementing Industrial Building System
Other than land cost, the cost of homes also depends on the cost of materials used. However, without proper regulation, there can be distortion in prices between various suppliers.
Therefore, proven technologies and approaches as well as regulatory support can enable large scale, low cost housing production. The Industrial Building System (IBS) is a technique where the components used for building are manufactured in a controlled environment either on-site or off-site, which can reduce costs.
Not only does a uniform method make materials cheaper, it also reduces profiteering and increases productivity. However, the government needs to implement various rules and regulations to oversee developers and suppliers.
IBS is not a new concept, however the usage of this method is still low in the construction sector (around 15%-20%) due to several issues.
Currently, the construction sector supply chains are fragmented, which is not a conducive environment as the IBS supply chain requires close control of materials and resources management.
Implementation of IBS would be essential in moving Malaysia towards higher value-added supply chain activities. In the end, ensuring the well-being of citizens would eventually lead to spillover effects and economic prosperity as well.
Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd.