Malaysian Property Market: Affordability and the National Housing Policy - Policy Ideas
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Policy
Ideas
№ 61
June 2019
Malaysian Property Market:
Affordability and the National
Housing Policy
Carmelo Ferlito
Carmelo Ferlito is a Senior Fellow at the Institute for Democracy and
Economic Affairs (IDEAS) in Kuala Lumpur and an Adjunct Faculty Member at INTI
International College Subang in Subang Jaya, where he teaches History of Economic
Thought and Microeconomic Theory and Policy
*
The views and opinions expressed in this paper are those of the author and do not necessarily represent IDEAS
*
I would like to thank Sanford Ikeda, Alain Bertaud and Stephen Malpezzi for their valuable suggestions and the useful research material
provided. I would also like to thank Ali Salman and Laurence Todd for their constant support and Adli Amirullah for his research assistance.
The usual caveat applies.
2 The Property Market, Affordability and the Malaysian National Housing Policy
Policy Ideas NO. 61
Executive Summary
Key Messages by a series of regulatory obstacles that
become supply-side bottlenecks.
• The industry is suffering a downturn that
might lead to a wider economic crisis. The Recommendations
negative stage experienced by the housing
sector is recognizable in the increasing • In order to face a downturn in the property
number of unsold units, in the declining market, this paper suggests primarily
number of transactions and the progressive acting to address home-owners’ negative
cooling down of prices. Failing to recognize equities. In the case of the emergence of
this fact would lead to the risk of being a severe mortgage crisis, loan condition
unprepared for an economic downturn. modifications should be helpful in seeking
to reboot homeowners’ damaged balance
• The debate on affordable housing is sheets in an effort to arrest a prolonged
incomplete if it is not contextualized in deleveraging process and more quickly
the realm of the general evolution of the restore household demand to levels no
property market. The current discussion longer dominated by negative home
is strongly unbalanced toward the issue of equity. Keep in mind that this should be an
affordability, while the property market’s emergency measure to be implemented
cyclical dynamic is disregarded; such a only in dramatic circumstances.
tendency could lead to a situation in which
the country will not be equipped to face • Fiscal discipline and strict down-payment
the consequences of the downturn that has rules are recommended. In particular, it
already started. would be important for the government
to monitor quantity and quality of the
• With regard to the affordability issue, the expenses, being clear on how eventual
present study argues that home ownership deficits are financed. With reference to
is less of a problem than what the political down-payment rules, mortgage, property
debate would tend to suggest: with 76.3 insurance, and property taxes should not
per cent of home ownership, Malaysia exceed 30 percent of income.
is performing better than neighbouring
countries. • Redesign of the fiscal system in favour of
consumption taxes rather than income
• The affordability issue is a complex one, taxes. A mix of GST and reduced income
and looking at it simply by looking at the taxes can be studied in order to ensure a
ratio between median house price and source of income for the government from
median income is simplistic and misleading; one side and to orient consumer attitudes
in order to decide what is affordable is a toward saving, and should to support re-
choice involving a trade-off between three building the monetary funds available for
elements: price, floor area and location. investment projects.
• The low-end market segment is not
disregarded by the private developers
because it is naturally unprofitable, but
because it is artificially made unprofitable
www.ideas.org.my 3
• The better way to generate affordable from the cost side. However, in order to
projects would be to remove regulatory emerge such kind of entrepreneurship
obstacles, starting with reducing the direct requires freedom to react to market signals
involvement of government agencies in and cannot be centrally designed, because
building low-cost homes. of the specific nature of entrepreneurial
discovery processes.
• In contrast with what is suggested by
the National Housing Policy, too-strict • A higher role for the rental market is
requirements for low-cost developments expected to emerge in the future. Under
(i.e. minimum size) should be avoided in this perspective, the government might
order to facilitate the interaction between consider Jacob’s proposal of guaranteed-
supply and demand, taking into account rent homes, where the central authority
the location and size factors, and therefore guarantees the loan for those developers
allowing lower income people to move investing in affordable projects, and partially
toward the economic heart of the country, covers the rent disbursement, in order
supporting thus not only their housing to make the projects both affordable and
issues but also promoting their possibilities economically viable. This method would
for a higher degree of social mobility. have the advantage of avoiding capital
expenditure from the government side, and
• Disruptive entrepreneurship will play a decreasing current expenditures whenever
key role in developing new technologies the subsidised tenants improve their
for making housing developments cheaper economic conditions.
Introduction
The present paper is a follow-up analysis in light
of my previously released study on the Malaysian
property market (Ferlito, 2018a). The debate has
evolved, and it is mainly focused on the issue of
housing affordability, judged primarily by the use
of the price/income ratio, which is a very limited
instrument. In this paper I reaffirm the necessity of
tackling the affordability issue in the realm of the
general property market situation, which in the
current scenario is facing a downturn readjustment
process.
The first section of the present work summarizes
my previous findings and extends them, taking into
account last year’s evolution. In section 2 I critically
discuss the approach to affordability and analyse the
recently released national housing policy. In section
3 policy recommendations are presented, both with
reference to the downturn phase of the property
market and to the issue of affordability, with special
attention to the possibility offered by the rental
market. Section 4 concludes the paper.
4 The Property Market, Affordability and the Malaysian National Housing Policy
Policy Ideas NO. 61
1. An introductory look at the While nothing very radical was included in the 2019
budget, in the past months the government has
Malaysian property market moved in two directions: on one hand it has issued
a new National Housing Policy (NHP), on the other
In Ferlito (2018a, 2018b) I analysed the evolution of it keeps pushing for the plan of building one million
the property market in Malaysia over the past ten affordable housing units in the next ten years.
years and observed how positive profit expectations
ignited a boom, generating an important wave of
I do not intend here to re-explore the development
investments and transactions in the housing industry;
of the property industry in Malaysia over the past
this wave was further propagated by credit expansion.
decade; however, it is important to re-stress some
It was observed that in 2012-2013 the expansion
of the main findings from Ferlito (2018a, 2018b) and
reached its peak and was followed by a period of
to move from there in order to see what is new
stabilization, while recent indicators suggest the tide
in the present scenario and how the government’s
reversed its course.
actions should be judged in light of the most recent
developments.
At the same time, the emergence of imbalances
in the property market was analysed. In fact,
First of all, I remain convinced that the debate
investors focused on high-end properties, leaving
on affordable housing is incomplete if it is not
unexploited profit opportunities in the affordable
contextualized in the realm of the general evolution
housing segment, which is characterized by a high
of the property market. I believe that the discussion is
degree of involvement of government agencies.
strongly unbalanced toward the issue of affordability,
My analysis suggested that the coming downturn
while the property market’s cyclical dynamic is
should be faced with the will of structural reforms
disregarded; such a tendency could lead to a situation
aiming to redefine the credit market and to restore
in which the country will not be equipped to face
household balance sheets. Such reforms should
the consequences of the downturn that has already
be accompanied by a shift toward consumption
started.
taxes, rather than income taxes, fiscal discipline and
monetary certainty, together with the removal of
It is well known that housing fluctuations often lead
barriers for new business opportunities.
to business cycles (Malpezzi, 2014, p. 1). As I recalled
in Ferlito (2018a, p. 5), the close connection between
Regarding the affordable housing market, my work
housing market behaviour and general economic
argued that a gradual government step back could
crises must be noted; for the American economy,
drive private initiatives toward a partially unexploited
Gjerstad and Smith (2014, pp. 268-269) have found
segment, achieving the double goal of increasing the
that most of the twelve smaller recessions between
number of available affordable housing solutions and
the Great Depression and the Great Recession were
helping private investors restructure their capital in
preceded by declines in housing investment. Housing
light of the downturn.
decline is a consistently superior indicator of both the
duration and the depth of recession than declines
Since the time of my previous work on this topic,
in firms’ fixed investments. To accurately study the
Malaysia has experienced a radical change in its
behaviour of the property market therefore means
political framework, and the new Pakatan Harapan
keeping an attentive eye on the possibility of more
coalition is now fully in power. The political bloc led
global economic turmoil.
by Prime Minister Dr Mahathir included the promise
for a radical approach to affordable housing in the
pre-election manifesto, and the new government
has often declared its intention to tackle the issue.
www.ideas.org.my 5
The downturn in the property market is attested by around 5%, the most recent data demonstrates
the most recent evolution in price dynamics; while a further deceleration: the housing price index in
Ferlito (2018a, p. 9) observed that since 2014 prices Malaysia decreased to 1.10 percent in the third
continued to increase, although at a slower pace, and quarter of 2018 from 1.70 percent in the second
since 2016 the pace has been constantly oscillating quarter of 2018.
Figure 1: Malaysia Housing Price Index – 2014-2019.
10
8
6
4
2
0
2014 2016 2018
Source: Tradingeconomics.com.
Figure 1 shows how housing prices have been moving final tally. The units go across the price range from
at a slow pace since 2018, contributing significantly to RM50,000 or less to houses costing more than RM1
the general slowdown of Malaysian prices. The price million» (Annuar, 2018). At the same time, the data
dynamics are consistent with the growing number of is consistent with the announcement from Rehda
unsold units. «The property market is facing a 48.35 about developers’ commitment to give a 10 per
per cent increase in unsold completed residential cent discount on new transactions. In fact, while we
units as of September 30 compared to the same experience a market downturn and an issue with
period last year. The Star reported that there are affordability, letting the crisis run its course is the
30,115 unsold units worth RM19.54 billion (up by best way to get prices to cool down, facilitating a
56.44 per cent) compared to 20,304 unsold units reconciliation between supply and demand. At the
worth RM12.49 billion last year. Based on a report same time, the construction sector contribution to
by the Valuation and Property Services Department GDP seems to be growing in a more unstable way
(JPPH), the overhang value rises to RM27.38 billion (figure 2) and is experiencing narrower and deeper
for 40,916 units if serviced apartments and small oscillations.
offices home offices (SoHos) are included in the
6 The Property Market, Affordability and the Malaysian National Housing Policy
Policy Ideas NO. 61
Figure 2: Malaysia GDP from Construction – 2010-2019.
16000
14000
12000
10000
8000
6000
2010 2012 2014 2016 2018
Source: Tradingeconomics.com.
Such considerations, moreover, drive us to say that On the other hand, even if the plan is not stated
the actual policy focus should move from affordability in the new national housing policy, the government
toward facing the downturn and the increasing still seems concerned with building one million
difficulties of the property market. I will discuss this affordable housing units in the next ten years, a
in section 3.1. measure which I strongly tend to discourage (the
reason why is explained below).
While the economic discourse, even in popular
newspapers, seems to be aware of the worrying Moreover, as mentioned below, in the attempt to ‘do
situation facing the industry, the policy debate on something’, governments often disregard the fact that
housing is almost entirely absorbed by the issue of affordability is a judgement based on three factors:
affordability. I will discuss the issue of affordability floor area, location and price per square meter. I
with reference to the Malaysian case in section 2.2. should add, following what I argued in Ferlito (2018a,
Here it is enough to mention that, on one hand, the pp. 22-23), that direct government intervention in
new government has been busy developing a new the low-end property market crowds out potential
housing policy, which does not appear revolutionary, private initiatives, which may be useful in the particular
and I say this with a positive emphasis. In fact, the new situation the property market is experiencing. Such
housing policy is mainly focused on the attempt to head-to-head competition between the public and
rationalize data collection, a step that could be useful private sectors can also contribute to keeping prices
in the partnership between institutions and private high; in fact, the more favourable conditions to which
developers and in defining the new framework government can subject its action (i.e. accelerated
regarding liveability standards. Such a limited scope approval processes, less stringent application of
of action is welcome, and it might allow the market standards, etc…) can raise the degree of risk faced by
to better work toward developing rational solutions private developers, and the higher risk is a pressure
to the current problems. There are, however, some factor on prices from the supply side (Hannah et al.,
exceptions, which I will mention in sections 2.2 and 1989, p. 30).
3.2, mainly related to the definition of too-rigid
parameters for new affordable projects, which may In the next sections, I will more deeply analyse
create supply-side bottlenecks and therefore move the issue of affordability in Malaysia and indicate
precisely against the target they intend to achieve. alternative paths to be explored.
www.ideas.org.my 7
2. A critical approach to housing As argued by Bertaud (2010, p. 40), most studies on
housing affordability in developing countries merely
affordability focus on the price and the composition of new
housing, drawing the conclusions that these new units
2.1 General considerations are unaffordable to the poor and the private sector
has no interest in entering that market segment, and
therefore the government should do something in
2.1.1 Introduction the form of direct investment or by forcing private
developers to intervene with imposed quotas of
The present section draws heavily on Bertaud affordable housing (in this regard the Malaysian case
(2018, chapter 6) and in general on the work is quite unique; see Rehda, 2018, p. VIII). Under the
done, together or separately, by Alain Bertaud, social pressure to do something in order to provide
Stephen Malpezzi and Stephen Mayo on housing acceptable housing standards at an affordable price
and urban development. Most of the considerations for all, government policies make mistakes, starting
presented below, therefore, can be found laid out with often ignoring housing location (Bertaud,
more extensively in their scholarly works. Moreover, 2018, p. 243). By focusing only on income (ignoring
Bertaud, Malpezzi and Mayo are, together with floor area and location), government turns people
L.H. Hannah, the authors of a World Bank Report, facing issues in getting shelter into a mere statistical
published in 1989, about the specific situation of the group, isolated from the rest of the community, a
Malaysian property market during the 1980s. statistical problem to deal with (Jacobs, 1961, p.
324). Moreover, most government action is based
The approach followed here is to place the housing on wrong data, thus drawing wrong conclusions: not
affordability discussion within the framework of only data from the informal sector are disregarded,
a critical analysis that takes into account both the but it also ignores that the existing stock plays a
demand side and the supply side. In fact, some crucial role in current transactions; there are indeed
«affordability problems are due to poverty, but in more transactions in the existing stock rather than
most cases, they are created or exacerbated by in the new supply (Bertaud, 2010, p. 40).
human-made constraints on the supply of land
and floor space» (Bertaud, 2018, p. 242). From this At the same time, «governments often exacerbate
perspective, it is appropriate to begin by mentioning the high cost of housing in a city by limiting the supply
that, for each household, the current level of of housing through regulations and underinvesting in
affordability is a combination of three elements: urban expansion». Green, Malpezzi and Mayo (2005)
floor area, location and price per square meter – or found, with reference to 45 cities in the United
square foot (Bertaud, 2018, p. 242). States, an inverse correlation between housing
supply elasticity and development regulation (figure
There is more; to say that a certain property 3). Supply elasticity measures how responsive supply
is unaffordable to lower-income households is is to price movements; in normal conditions, when
misleading. It would be more appropriate to state prices rise, producers respond with an increase
that «the minimum lot area allowed by regulations in supply. Demand pressure for a product (in our
is unaffordable to low-income households within x case, ‘affordable’ houses) tends to increase prices; in
number of kilometres from the city center», which the never-ending market process of coordination
means that the real issue is not affordability to between supply and demand, developers should
lower-income groups but «that the quantity of land respond with an increased quantity of the product
that is affordable is socially unacceptably small and in demand: the additional supply plays the role
is unserviced by infrastructure, transportation, and of readjusting price movements downwards.
social facilities» (Bertaud, 2010, p. 14). The inverse relationship between development
regulation and supply elasticity simply means that an
increase in regulation makes it more difficult for
8 The Property Market, Affordability and the Malaysian National Housing PolicyPolicy Ideas NO. 61
supply to adjust to the demand pressure and this, constraints would facilitate a readjustment of prices
in turn, keeps prices at high levels: fewer market toward lower levels.
Figure 3: Housing supply elasticities and development regulation.
Housing Supply Elasticities and Development Regulation
30
15
Supply Elasticity, Lagged RHS Vars
20
15
10
5
0
-5
10 15 20 25 30
MSA Regulatory Index
(Liner Fit)
Source: Green, Malpezzi and Mayo (2005, p.19).
Similar considerations can be found in Hannah et al. This is not the only way in which housing affordability
(1989, pp. iv-vi) with reference to the specific case escapes easy categorizations. In fact, scholarly work
of Malaysia during the 1980s. From this perspective, has revealed that housing is perceived as a necessity
Kevin Erdmann (2018, 2019) has shown how housing more than is commonly understood by policy
price inflation during the latest great housing bubble makers. Policy analysts «who use a single rule of
in the US was not only affected by the conditions of thumb (“households can afford to spend 20 percent
the credit market, but also by supply-related issues. of their income on housing”) or who implicitly
assume housing is a luxury (“rich households can
2.1.2 Measuring and facing affordability afford to spend 30 percent of their income but
poor households can only afford 10 percent”) are
making purely normative statements that are rarely
When discussing affordability, it is very important to grounded in actual revealed household preferences»
clarify that it is not easy to find a proper measure for (Malpezzi, 2014, p. 4).
it. First of all, it should be said that, when we say that
a person cannot afford a certain good, that person The easiest index to measure housing affordability
simply does not have a unit of that good (i.e., a car or is the price/income ratio (PIR) (Bertaud, 2018, pp.
a computer). However, when talking about housing, 247-253), which compares the median price of a
saying that housing is unaffordable to households dwelling with the median household income. While
with incomes below x means that «the trade-offs PIR is an index easy to calculate, it does not apply to
necessary for these households to rent [or to buy] rent, does not take into account location, and does
their current dwelling units are inadequate in terms not really say how much housing can be purchased
of rent [or loan] paid as a portion of income, floor for the median price. Moreover, a low PIR does not
area, quality construction, or location» (Bertaud, necessarily indicate a good level of welfare; it might
2018, p. 245).
www.ideas.org.my 9be due to economic stress or absence of demand what point the shelter consumption has fallen
(in turn signalling something wrong about the city below the socially acceptable level (Bertaud, 2018,
or the State under consideration). Therefore, while p. 266). The real question to be posed becomes:
PIR might be useful for identifying an affordability how many households live in a shelter below the
problem, it is too simple to be the driving force for minimum acceptable home quality? Household
a policy solution. income distribution should then be related to
housing consumption by income range. A policy
As suggested by Bertaud (2018, pp. 261-262), when focused simply on supplying a certain number of
referring to policies for a specific city, «it is necessary housing units is likely to miss its objectives. In fact,
to look at income distributions in which households while governments often declare that «the poor
with median incomes may represent only a very housing quality […] is due to a market failure», it is
small socioeconomic group. This is particularly instead simply due to poverty, as the market tends
true in large cities in developing countries, where to provide what people can buy (Bertaud, 2018, p.
incomes are more widely dispersed than in more 271). If government decides to enter the market of
affluent cities». housing for low-income households, Bertaud (2018,
p. 272) suggested five questions to be asked before
Income distribution should be matched with implementing any policy.
shelter consumption, and one must decide at
Figure 4: Five Bertaud’s questions.
1. How many households should be included? Expressed another way: How far
along the income scale should the goverment become a subtitute for the market?
2. What standards should be provided?
3. How many housing units should the goverment subsidize every year?
4. How many years would be required to provide a subsidized housing unit to all
potential beneficiaries?
5. What budget allocation would be required yearly?
Source: Bertaud (2018, p. 272).
10 The Property Market, Affordability and the Malaysian National Housing PolicyPolicy Ideas NO. 61
A useful tool for such analysis is to link income the figure below.
distribution with housing consumption, as shown in
Figure 5: Income and housing consumption – market outcome
Housing consumption per household
b
g f
Housing consumption of
households with income d
a Households Income
Number of households
c
d Households Income
Source: Bertaud (2018, figure 6.12).
The bottom panel shows the relationship between increases above zero, housing consumption initially
income and number of households (demand side). increases only very slowly. It then increases faster
The top panel shows the relationship between when household incomes reach the middle-class
income and consumption (supply side). «The vertical level» (Bertaud, 2018, pp. 271-272). To understand
axis displays an index reflecting housing quality the figure: a household with income d will consume
that includes floor area but also characteristics a quantity of housing g.
like connection to safe water. Alternatively, the
housing quality index could be replaced by only one In a nutshell, each housing policy aims to modify
parameter contributing to housing quality, such as the profile of the housing consumption curve (ab),
floor area per dwelling or water consumption per increasing the housing consumption of the lowest
person. income households. One way to achieve this target
is to remove supply side constraints (Bertaud, 2018,
The curve ab in the upper panel shows the variations pp. 273-275), such as administrative duties, minimum
of housing quality under market conditions in the floor space requirements, limits on design/technology,
absence of subsidies. The curve passes through the etc. While such a measure can produce benefits of
origin (0, 0), because with zero income the market different intensity on different income groups, and
allows only zero consumption. Usually, as income it may require several years to produce the desired
www.ideas.org.my 11effects, in the long run every household will benefit will never supply the so-called affordable units; it is
from it, and it is the option which presents two more enough to mention the several cases when, due to
strong advantages: regulation constraints on the provision of affordable
housing, the informal sector takes over.
• it is not costly for the government;
• it does not negatively interfere with the
market process of preference coordination;
rather, it helps supply meet demand more
quickly.
The government might instead decide to operate
from the demand side by nudging on housing
finance; however, only those who qualify for a
mortgage can have access to the additional credit. While the course of action is not easy to identify,
Moreover, if somehow the supply side were it should be noted that temporary mismatches
restrained by regulatory issues or by land availability, between supply and demand are at least partially
the ultimate outcome would only be to increase unavoidable, as the housing market is characterized
prices rather than housing consumption (Bertaud, by cyclical fluctuations, and the housing industry is
2018, p. 277). Among the supply side constraints, an industry requiring long-term investment projects
minimum requirements such as dwelling size should in order to see the fruits of those investments. This
be mentioned; their main result is to increase the means that the coordination process between
size of the informal sector. supply and demand is necessarily time-consuming
and, even in the absence of disturbances from the
Another type of support from the demand side, for demand or supply side, a certain cyclical dynamic will
the rental market, is constituted by rental vouchers: be observed. Such observation is consistent with
subsidies covering the amount of money necessary the model of the natural cycle developed in Ferlito
to low-income households for fully paying their (2014; 2016 chapter 3), applied to the Malaysian
rents. The implementation time plays a crucial role property market in Ferlito (2018a, 2018b).
for this subsidy to work; the presence of bottlenecks
from the supply side might result in increasing prices, The most fruitful policy is the one that places supply
as in the case of Malaysia during the 1980s (Bertaud, side reforms before demand stimulus, in order to
2018, p. 285). support improvement of a market in which supply
can more easily adjust to the signals coming from
Since the issue of affordability is so complex, and the demand side, in a process that will always unfold
different potential policies imply several undesired in time.
unintended consequences, it is necessary, before
deciding whatever policy to adopt, to first find the «I have often compared very restrictive urban
cause of high housing costs; second, the quantity of regulations to hard drugs and cities that practice
households affected by the problem needs to be them to drug addicts. Trying to suddenly remove
identified. Only after these two issues are clearly their drug fix creates severe side effects, because
settled can a housing policy be implemented; their organism is used to the drug and needs it,
moreover, it needs to be constantly monitored in its even as they are being destroyed by it. My guess is
intended and unintended outcomes (Bertaud, 2018, that any serious reformer should approach urban
p. 324).The first two steps are often ignored because regulatory reform in the same way as a doctor
governments assume that poor housing conditions develops a treatment for a drug addict: a progressive
for the lower-income households are necessarily due withdrawal planned over the long term» (Bertaud,
to market failures and that the real estate industry 2018, p. 329).
12 The Property Market, Affordability and the Malaysian National Housing PolicyPolicy Ideas NO. 61
2.2 The Malaysian case and the not be taken here as the measurement for the
affordability issue1. In fact, the topic is much more
National Housing Policy 2018-2025 complex and needs to be faced in light of such
complexity. The first point I wish to stress is the
In the present section I will discuss if there is an
home-ownership rate. In Malaysia it is still at 76.3
affordability issue in Malaysia and eventually to what
per cent (figure 6); even if, as with all average values,
extent. After such analysis, I will critically focus on the
the figure suffers from many limitations, looking at
policies that are implemented or proposed by the
it in comparison with other countries will help us
government in order to tackle the issue.
understand how the indicator is not pointing toward
a dramatic situation.
As mentioned above, the PIR is an indicator with
limited explanatory power, and therefore it should
Figure 6: Homeownership in Malaysia – 2016.
100% 4.1 3.3 Kuarters
7.1
7.3 Menyewa
19.6 23.0
80
60
Memiliki
76.3 73.7
40 85.6
20
0
Malaysia Bandar Luar Bandar
Source: DOS.
While Singapore scores among the top countries If home-ownership is not an issue in itself, what is
in the world for home-ownership (90.3 per cent), instead concerning people seems to be the dynamics
available regional data report South Korea with 56.8 of housing prices in comparison with wages, which
per cent, Japan with 61.6 per cent, Hong Kong with are perceived as stagnant. We will soon see if such
49.2 per cent and urban Indonesia with 67 per cent. a perception is correct or not, but, even if it is not,
The ratio is 65.5 per cent in Australia, 64.5 per cent perception is important in itself; in fact, what is
in the United States, 63.5 per cent in the United guiding people’s choices, which are also consumption
Kingdom, while 69.3 per cent is the average value choices, is the perception and the interpretation of
in the European Union. Looking at Malaysia from facts, rather than the facts themselves (see Ferlito,
a relative perspective, thus, we cannot say that the 2018c, 2019).
country is suffering from an ownership issue.
1
For a comprehensive analysis of the Malaysian case using PIR as the main
parameter, see Rehda (2018) and Ismail (2019).
www.ideas.org.my 13Figure 7: Malaysian Housing Price Index – 1997-2019.
60
40
20
0
-20
-40
2000 2004 2008 2012 2016
Source: Tradingeconomics.com.
Housing prices dynamics over the past decade are stronger in the last ten years (+6.5 per cent average
consistent with the cyclical dynamic discussed in annual growth); however, it is slowing down, and in
Ferlito (2018a, 2018b): while prices rose at a higher the past three years the average annual growth was
pace during the peak of the boom (2008-2012), their 4.8 per cent. As of 30 September 2018, the Malaysian
dynamics started to cool down afterward and the median housing price was RM 293,000, while the
latest increase was close to only 1 per cent. While average house price was RM 383,648 (EdgeProp.my,
in the past twenty years housing prices averaged 2018). What about wage dynamics?
a growth of 4.07 per cent per year, the pace was
Figure 8: Malaysian Average Wage – 2010-2017.
3000
2880
2800
2657
2600
2312 2400
2231
2200
2052
1916 2000
1816 1814
1800
2010 2012 2014 2016 2018
Source: Tradingeconomics.com.
14 The Property Market, Affordability and the Malaysian National Housing PolicyPolicy Ideas NO. 61
Even if during the initial phase of the property boom since 2010 has been 5.8 per cent. Figure 9 compares
wages grew slower than housing prices, they are housing price dynamics, inflation and wage increases
now gaining pace and the average yearly growth in Malaysia between 2011 and 2018.
Figure 9: Housing prices, inflation and wages in Malaysia, 2011-2018.
16
14
12
10
8
6
4
2
0
1-Dec-11
1-Dec-12
1-Dec-13
1-Dec-14
1-Dec-15
1-Dec-16
1-Dec-17
1-Aug-13
1-Aug-15
1-Aug-16
1-Aug-17
1-Aug-18
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31-Dec-11 31-Dec-12 31-Dec-13 31-Dec-14 31-Dec-15 31-Dec-16 31-Dec-17 31-Sep-18
House Price Index 10 12.2 9.6 7 5.8 5.5 5.8 1.1
Inflation Rate 3 1.2 3.2 2.7 2.7 1.7 3.5 0.3
Wages -0.11 5.62 7.1 8.72 3.63 14.92 8.39 5.20
House Price Index Inflation Rate Wages
Source: Our re-elaboration on Trandingeconomics.com data (2018 salary data are an estimation from Mercer; see Chin, 2018).
Figure 9 shows how housing prices rose faster than property market, the divergence between them and
inflation over the past eight years, but since mid-2017 housing prices will be further reduced. If we look at
they are converging and most probably consistently Malaysia’s general deflationary process and at wage
contributing to the Malaysian price decline. At dynamics, we can be confident that, at least in the
the same time, wages are accelerating more than short run, housing will be less unaffordable than it
proportionally and it is reasonable to assume that, used to be.
with the overall downturn experienced by the
www.ideas.org.my 15It is in light of the scenario described above that (by raising construction costs) and force people to
the new National Housing Policy needs to be compromise in favour of a location far away from
contextualized and judged. The five focuses their workplace. Instead, a market approach, leaving
highlighted in the NHP 2018-2025 are: supply to meet the actual demand requirements,
may lead, ceteris paribus, to the creation of smaller
1. ensuring quality standards in the provision units but closer to the economic heart of cities and
of housing for everyone; thus to job opportunities. How to choose when
faced with the trade-off between location, price and
2. improving accessibility to the market and floor space should be left to individual choice, which
the ability to own a home; avoids preventing opportunities because of too-
strict regulations. The (unintended) consequences
3. ensuring a quality and cohesive on the general economic environment should not
neighbourhood; be disregarded: «these rules are most binding in
cities that are centers of innovation and job growth,
4. improving coordination between thereby limiting opportunities for people to move
development and transportation systems to those areas in pursuit of economic opportunity.
for a better quality of life; Restricting access directly hurts individuals who
would like to move to a specific city in pursuit of
5. strengthening the institutional capacity to economic opportunity if the housing supply were
implement the NHP. not a barrier. However, in the long run restricting
access to urban centers of job growth and innovation
Focus 1 is quite critical and, while appearing to be is also detrimental to national economic growth and
oriented toward meeting the needs of the poor, the income mobility as people are barred from living
way it will be implemented may generate distortive where they could be most productive» (Ikeda and
and even regressive effects. As mentioned by the Washington, 2015, p. 25). It should be noted that
NHP, quality housing refers to the provision of recently the mayor of Kuala Lumpur supported
housing that meets minimum standards and is well the creation of micro-houses (Soo, 2019), thereby
maintained and equipped with facilities and aspects moving against the government idea of providing
of comfortable ventilation; the government intends houses with minimum size requirements; this is an
to develop objective measurements for housing example of how the lack of coordination between
quality. It is not yet clear which criteria will be used policy makers might lead to even higher regulation
in defining such parameters, but it is important to costs. But this is not the whole point: neither the
stress how a too-restrictive approach may lead in government nor the mayor are right in themselves;
the opposite of the desired direction. Ikeda and as argued by Ikeda (2004, p. 261), the issue «is not
Washington (2015) provided theoretical evidence “planning versus no planning,” but rather “who
and empirical support for the belief that minimum should do the planning” […] local knowledge
size requirements, parking requirements and even that is relevant to the success of a community is
the more recent smart growth regulations have contextual, at least partly inarticulable, and thus
the effect of increasing the cost of housing: this difficult if not impossible to transmit effectively to
«effect makes everyone in cities with high housing central authorities. […] whether society makes
costs poorer by reducing the income that they the best use of that knowledge will depend on
have available to spend on other goods» (Ikeda the extent to which public choosers are willing to
and Washington, 2015, p. 19). We stressed above rely on nongovernmental mediating organizations
how the issue of affordability should be treated by and emergent social institutions». Therefore, while
considering the trade-off between three elements: issuing certain minimum safety standards, as much
price, floor area and location; imposing, for example, as possible other standards should be left free to be
minimum size requirements for the development discovered by the interaction between supply and
of affordable housing can increase the price factor
16 The Property Market, Affordability and the Malaysian National Housing PolicyPolicy Ideas NO. 61
demand – which is a process of dynamic discovery Focus 4 is very important when it stresses
that happens over time and thus not possible to plan the importance of developing infrastructure; it
in advance – in order to make the choice among encounters the fact that location is an important
the three elements of the affordability trade-off as element in judging affordability. In this respect,
consistent as possible with people’s expectations complexity should be taken into account. No
and prevent the emergence of barriers to general solution is preferable ex-ante; a serious study should
economic growth. be conducted on the different costs and benefits
provided by different transport solutions, with
Focus 2 is mainly devoted to the promotion of reference to specific areas, not focusing simply on
new technologies in the development of affordable public transportations stricto sensu, but also on the
housing and to new financial solutions. These are possibility of implementing the road system.
two important points. First of all, a well-developed
financial system can indeed create better support Few words need to be spent on the government
for new buyers entering the game. Secondly, new plan of building one million affordable housing units
technologies are key to enhancing competition in the next ten years, with an average of 100,000
and bringing prices down. Regarding the financial units per year. Actually, the plan is not explicitly
perspective, my advice is not to implement artificial mentioned in the new housing policy; however, the
credit situations in which the financial system is point is among the promises in the Pakatan Harapan
creating, rather than supporting, demand for new Manifesto (Pakatan Harapan, 2018, p. 22) and is
houses. As explained in Ferlito (2018a, 2018b), such widely discussed in the policy debate (see, among
a scenario would be harmful in several ways: creating others, Perimbanayagam, 2019). The debate is about
financial instability for people (in a country with a high the actual possibility for the government to deliver
household debt), creating discoordination between such a high number of homes when the previous
consumption and investment decisions, and keeping ruling class failed at it; additional arguments are
house prices high. On the issue of technological brought about the eventual cost to be paid for such
development, instead, while it is clear that it is key an ambitious project. These issues are relevant but
for new affordable housing solutions, it opens the misleading; in fact, the real question to be asked is
question on how disruptive entrepreneurship not whether the government can fulfil the promise,
is actually generated and whether technological but rather, does the market need those houses, with
development can be a result of central planning; certain features, at a certain price, within certain
this issue will be touched on in the next section on locations? That is not possible to answer in advance.
policy suggestions. By nature, government is operating outside the
market and therefore will never be able to acquire
While I agree with the general purpose of Focus the knowledge necessary to implement a sound
5, as each policy should be monitored after it is entrepreneurial plan, based on actual market needs
implemented, Focus 3 seems to be concerned with (knowledge problem: Hayek, 1937, 1945), and will
the creation of good neighbourhood spirit; it is not never be able to judge whether its plans were
clear how it will be implemented, but I am quite profitable, as the prices linked with government
sceptical of the fact that such a spirit can indeed housing projects are not coming from the market but
be created by a central planner. In this respect, arbitrary political figures (calculation problem: Mises,
where government should focus is in keeping the 1920). Following Hayek, in fact, we must distinguish
community safe in order to promote the level of two types of knowledge, which I call technical
mutual trust, as it is such mutual trust that guarantees, knowledge and entrepreneurial knowledge; the first
in a densely populated settlement such as a city that type is the knowledge about how to do things, while
is characterized by a high degree of diversity among the second type regards when and where to do what.
its members, the emergence of entrepreneurship While a central planner (whether the government,
and therefore of economic development (Ikeda, an agency or a team of experts does not make any
2004, p. 250). difference) can eventually possess
www.ideas.org.my 17the technical knowledge, it can never acquire the and fiscal policies, focused on monetary easing
second type of knowledge. It is therefore easy to and fiscal stimuli. However, as experience in the
understand how the problem does not consist in the USA demonstrated with particular reference to
government being able to build one million housing the Great Recession (Gjerstad and Smith, 2014, p.
units, which is merely a technical issue that is possible 279), traditional policies failed to properly address
to overcome with technical development; the real the problems faced after the housing bubble. First
issue is the possibility for the government to be able of all, in fact, monetary easing should be recognized
to deliver something that can actually be absorbed as one of the items that fuelled the bubble and
by the demand, whose features are going to change therefore cannot be used as a potential remedy.
dynamically over time. The information relevant for This was true for the American case, characterized
entrepreneurial decisions is, by nature, dispersed in by the development of special financial instruments
individual minds, unarticulated, tacit, ever-changing which increased household risk, but it is also true for
and often non-directly transmissible; it arises through the Malaysian situation. Moreover, the high level of
inter-individual interaction in the market dynamically Malaysian household debt (83.8% of GDP) suggests
and over time; a central planner would never be a balance sheet crisis situation, similar to the one
able to possess it and, even if the planner were analysed by Gjerstad and Smith (2014), where we
able to capture it for an instant, it would already find «large inventories of homes on the market and
have evolved with the genuine novelty created the central bank might lose control over housing and
by the mere passage of time. Entrepreneurs too mortgage markets having therefore limited ability to
cannot have perfect access to such information, but, stimulate a recovery. Government deficit spending
playing within the market, they are better exposed might be ineffective for the same reason: Too many
to the transmission mechanism which involves households […] are mired in negative equity, and
that information. Such a mechanism happens with the financial system stalls in the slow process of
the mediation of prices, which are indeed the diverting income into debt reduction» (p. 279).
objective synthesis of billions of dispersed subjective
evaluations; without the dynamic market process, While it will be difficult to manage the outbreak of the
prices could not emerge and could not exercise their crisis, it will be important to prepare the institutional
function of transmitting the relevant entrepreneurial ground in order to reduce the consequences from
information. Again, government action, happening future boom and bust cycles and to manage the
outside the market, would also not have access to period that separates the housing market from
real prices, and therefore would lack the necessary the bust. Gjerstad and Smith (2014, pp. 281-282)
instruments to evaluate the economic sustainability suggested first a restructuring of property rights
of its plans (see Ikeda, 2004). to limit the consequences of financial imbalances
between borrowers and lenders; one measure is to
3. Policy proposals introduce stricter down-payment rules. The authors
remind us of the tradition, backed by experience,
according to which mortgage, property insurance,
3.1 Proposals for the crisis and property taxes should not exceed 30 percent
of income. Moreover, whereas the loan originator
As mentioned above, I believe that the main concern compensation fee should be determined by the
for the next policy discussions and actions should market, «its time distribution must be geared to
be the downturn of the property market and its the time profile of borrower payments so that an
potential consequences for the Malaysian economy. originator cannot off-load the risk to a third-party
Here I am going to recap the main points suggested lender; loan default must have consequences for the
in Ferlito (2018a, pp. 24-25). originator of the loan and induce due diligence in
the originator’s own self-interest» (p. 231).
Over the past decades, the outbreak of an economic
crisis was always faced with a mix of monetary
18 The Property Market, Affordability and the Malaysian National Housing PolicyPolicy Ideas NO. 61
Moreover, although I am not keen in suggesting a The suggestion to remove tax- and transactions-cost
higher level of government intervention when taking barriers to the formation of new businesses moves
into account exceptional situations, like a deep crisis, in the same direction (Gjerstad and Smith 2014, p.
I agree with Gjerstad and Smith (2014, p. 283) when 245). This would help the economic system seek
they suggest that in such cases public policy should a path toward a capital reorganization consistent
target homeowners’ negative equity. Gjerstad and with the new economic scenario, avoiding blocking
Smith (2014, pp. 236-237) suggested to do «for resources in industries which do not offer profit
households what the Fed sought for the banks […], opportunities.
seeking to reboot homeowners’ damaged balance
sheets in an effort to arrest a prolonged deleveraging From the government’s perspective, it would be
process and more quickly restore household important to work more on the importance of
demand to levels no longer dominated by negative fiscal discipline. Uncertainty over how deficits will
home equity». Among bad options, this might be the be financed creates regime uncertainty (Koppl 2014,
one with the least damaging consequences. p. 133). Fiscal discipline moves together with a path
toward monetary stability and confidence that such
From a fiscal perspective, it might be useful to follow stability will not suddenly evaporate (Koppl 2014, p.
what Irving and Herbert Fisher proposed regarding 135).
a shift from an income to a consumption tax
(Gjerstad and Smith 2014, pp. 284-285). Applying 3.2 Proposals for affordable housing
this argument to the Malaysian case, tax reform
shifting from an income tax toward a consumption
3.2.1 Remove distortions from the supply
tax might bring out positive effects. A consumption
tax, which tends to shift consumer orientation to the side
future and favours saving, could be the best remedy
for more sustainable long-term investments. This As mentioned above, I believe that the most fruitful
could further enrich Malaysia’s economic system. A effort would be to focus on the removal of supply-
consumption tax should replace, or partially replace, side bottlenecks, in order to allow the supply to
the present income tax – not simply add to it. more easily adjust to the signals coming from the
Simply adding new taxes could dramatically frustrate demand. As demonstrated by Hannah et al. (1989)
economic activity. A shift of the fiscal burden from with reference to the Malaysian case in the 1980s,
income to consumption, instead, could drive better the set of regulations involving the local property
quality growth. Following Fisher and Fisher’s logic, market is impeding the private sector from acting
business income would be taxed only once at the effectively in support of demand; this lack of action
individual-household level and only insofar as it is from the supply side is not only failing to provide
consumed. Hence, all business taxes would be shelter for low-income people, but also keeping the
abolished (Gjerstad and Smith 2014, p. 285). This prices on the high side because of demand pressure.
is not the direction taken by the new Malaysian Revision of the institutional framework «designed
government. A mix of GST2 and reduced income to increase the supply of low-cost units» should be
taxes can be studied in order to ensure a source designed in such a way as to increase the possibility
of income for the government from one side and for the supply to meet market preferences «by
to orient consumer attitudes toward saving, and so removing the cost distortions created by some of
support re-building the monetary funds available the legal minimum standards. The removal of those
for investment projects. Such a measure, moreover, distortions stimulates developers to produce more
would help to move the household debt outside the low-income plots where the demand is the greatest
red zone in which it is presently located. and not necessarily where land is the cheapest»
(Bertaud and Malpezzi, 2001, p. 410). The last
2
Good and service tax.
www.ideas.org.my 19sentence again emphasizes the fact that affordability
is not only a matter of price but also of location and
size.
The issue of making the supply curve less inelastic is
more crucial than what is commonly understood. As
argued by Malpezzi and Wachter (2005), «inelastic
supply curves can give rise to “boom and bust”
markets, and are the real cause of market instability,
rather than “speculators”» (Malpezzi, 2014, p. 5).
Malpezzi (2014, p. 5) also argues that such cycles
are exacerbated «by badly designed government bumiputra quotas in low-cost housing projects
responses to rising housing prices by one-time and the compulsory affordable housing quotas for
programs to get the market moving, as in a “Million private developers. Both these measures impede
Houses Program;” […] The analysis suggests it would the supply moving in the direction signalled, via the
be more effective to tackle rising prices by improving price mechanism, by the demand. Similarly, and as
the efficiency of the supply of developable land, and previously discussed, all the too-strict requirements
real estate generally, including the development that surround the building of affordable homes, such
of an appropriate regulatory framework for real as minimum size, impede a sound coordination
estate. Reform measures that tackle the root causes between supply and demand and, as argued above,
of inelastic supply have the effect of flattening the have regressive effects and in the medium run can limit
supply curve and moderating the boom and bust general economic growth. The same considerations
cycle, reducing risk for investors». apply to the extra regulatory costs created by
different forms of subsidies (Hannah et al., 1989,
What are the factors that are presently contributing pp. 59-60). My suggestion here is that government
in Malaysia to the inelasticity of the supply curve agencies involved in the provision of homes should
for affordable housing? First of all, the government be frozen in their power to act. Similarly, all the other
agencies involved in the provision of affordable elements limiting the elasticity of housing supply
housing3 (see Ferlito 2018a, pp. 26-27): here the and the involvement of private developers in the
problem is not to reduce them from twenty to six, as low-end segment, such as the bumiputra quotas
proposed by the government, as the knowledge and and time-consuming and contradictory regulations
calculation problems explained above will apply in or minimum size requirements, should be quickly
any case. The point is that direct government action removed to allow supply and demand to react faster
in the field will necessarily create obstacles to private to mutual signals coming from the price system and
attempts to enter that market segment. Moreover, as to allow a better and free choice when facing the
previously discussed, such direct intervention usually trade-off between price, floor area and location.
does not take into account the affordability trade-off
of the three basic elements (price, size, location). In The point to be made clear is that the low-end
a less evident but equally distortionary way, other market segment is not disregarded by private
regulations are impeding the mode and speed of developers because it is naturally unprofitable, but
an adequate private supply of affordable housing because it is artificially made unprofitable by the
by private developers; I should mention here the regulatory obstacles mentioned above.
3
The Government is considering to shut down one of these agencies, PR1MA (Aziz,
2019), because of its poor economic performances. It is a good start, but the mo-
tivations behind the move are the proof that the government did not realize that
such outcome was and is unavoidable because of the knowledge and calculation
problems described above.
20 The Property Market, Affordability and the Malaysian National Housing PolicyPolicy Ideas NO. 61
3.2.2 The importance of creative destruction by alert entrepreneurs. From a policy perspective,
thus, the role of government should not be that of an
The current national housing policy suggests that entrepreneur – this would be ontologically impossible
the government is aware of the positive effect – but to remove obstacles, such as transaction-cost
that technological development can exercise on barriers and direct business involvement, which
prices, bringing them down. However, the process might disincentivize the formation of new businesses
of technological development, which, following (Gjerstad and Smith 2014, p. 245). This would help
Schumpeter (2011), becomes innovation when the economic system seek its path toward a capital
applied to the production process, is not something reorganization consistent with such new possibilities,
that can be developed ex-cathedra via central avoiding blocking resources in industries which do
planning (as Schumpeter, 1942, seems to suggest), for not offer profit opportunities.
the same reasons described above when analysing
the knowledge and calculation problems. 3.2.3 The rental market, with a modest
proposal
The phenomenon of creative destruction, the
competition between the emergence of something I believe that the rental market will play a growing
new in the economic system and the struggle role in the Malaysian market in the future. I see this
for survival played by what is old, is, as suggested not only because of merely economic considerations;
by Schumpeter, the essential fact of capitalist I also base my analysis on cultural factors that are
development. The battle for new elements (new often disregarded in policy discussions, but that can
products, new markets, new methods of productions, be decisive in understanding the complexity under
etc.) to emerge is happening in the market and, in examination4. From a purely economic perspective,
the market, it brings along a downward movement it is easy to understand that, since Malaysia is on a
of prices. In order to be carried out, innovations fast track to become a developed country, it is not
need special types of people – entrepreneurs – realistic to expect that housing prices will be where
that are, first and foremost, alert to unexploited they were before the development process. Do not
profit opportunities (Kirzner, 1973). When their forget that between 1976 and 1982 housing prices
alertness generates economic ventures able to play rose by an average of 18.6 percent per annum, and
a disruptive role in the market process, they are in the same period household income rose by only
creative entrepreneurial actors in the Schumpeterian 10.8 per cent per annum (Hannah et al., 1989, p.
sense – a situation that can be judged only ex post 6); the current dynamics, described above, seem less
(Ferlito, 2015 and 2018d). discouraging. In the present evolutionary scenario,
the housing market should be analysed considering
However, such alertness can be exercised only in it as a whole, including an increasing role for the
the market and thanks to the signalling role played rental market.
by the price mechanism; for this very reason,
entrepreneurship, being the response to stimuli As previously mentioned, I believe that such a trend
arising in the market, cannot be planned by any will not be driven simply by economic factors, but
single player outside it. also by cultural elements. As demonstrated by
preliminary studies on the evolution of spending
If technological development applied to affordable habits, the generations currently entering the housing
housing is therefore welcomed, in order to emerge market from the demand side are living between the
it requires a high degree of entrepreneurial freedom cultural pressure from previous generations about
to maneuver so that market signals can be captured
4
In contemporary economics Don Lavoie has probably been the strongest ad-
vocate of the importance of cultural studies for economic analysis, followed by
Emily Chamlee-Wright and Virgil Storr. See, in particular, Lavoie and Chamlee-Write
(2000), Storr (2013), Storr and Grube (2015).
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