Making houses more affordable

Photo: Bloomberg

MALAYSIA, through the Local Government and Housing Ministry, will lead the conversation on affordable housing through its chairmanship of Asean in 2025. Ahead of the Asean Summit on May 26-27, we must seriously consider a shift in the way we think about housing affordability in this country.

It is important to recognise that when we talk about housing affordability (or in this case, the lack of it), what we are really saying is that either (1) houses are too expensive, or (2) that people are not earning enough, or (3) that both statements are true.

What Malaysia has been doing so far is to try to prop up the income side of the equation with what is called demand side interventions. We say that people are not earning enough to afford the houses being built, so let’s help them by giving them subsidies or making it easier for them to get cheaper financing with a longer tenure to buy property. What this approach really does is artificially inflate the ability of people to get housing. What it does not do is align housing prices with a level people can afford.

In 2010, when the government made it easier for people to get cheaper mortgages, both by allowing longer loan tenures and by increasing loan-to-value ratios, house prices escalated – by as much as 23% between 2012 and 2014. When you artificially prop up people’s ability to buy houses, over time, houses will remain unaffordable and people will continue needing help to buy. This is not sustainable.

What we must do instead is to acknowledge that the lack of housing affordability is a symptom of a housing market that is broken. To fix it, we must make sure that the institutional structure encourages housing pro­ducers to build houses that people want and can afford.

That is, housing developers must find out what types of ­houses people want to buy. They must determine if they can build such houses (by accounting for all costs involved, i.e. compliance costs, land costs, etc). They must then raise capital to build those houses, either by taking a loan, courting investors or using their own funds.

Only then do they build houses. And only when the houses are completed should they be made available for purchase.

None of these activities should be undertaken by the buyer. What buyers should do is look at the finished product, compare it with others in the market, and decide if they want to buy. This way, competition among housing developers will dictate the price of houses and the developers’ profit.

If we allow the producers of housing to transfer the risk of housebuilding to the consumers, be it the construction or commercial risks related to housing development, like what we are currently doing in our system through the sell then build approach, the demand-supply mismatch will never be solved.

Because why would it? Develo-pers have no incentives to make sure that what they are building is wanted by the market. They do not take on the commercial or construction risks of development. The true costs of house building are not reflected in their profit and loss estimations.

Of course, this is an oversimplification of the process, but it underlines the structure of incentives.

We must allocate the costs and risks of housing development back on to those who stand to profit the most from it, the developers. Only then can the market work more efficiently.

If we want the market to be more responsive to the demands of the rakyat, if we want houses to be more affordable, the institutional structure must allow this to happen.

The simplest way to do this – that is, to realign the risks and incentives of actors in the sector – is to transition to a build-then-sell system for housing delivery. This is what is needed if we ­seriously want to improve housing affordability.

DR NUR FAREZA MUSTAPHA

Research associate

Khazanah Research Institute

The Khazanah Research Institute researches pressing issues and recommends national policies.