Ideas: Home affordability and social mobility

This article first appeared in Forum, The Edge Malaysia Weekly, on June 24, 2019 - June 30, 2019.
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The home affordability issue, which is widely discussed in the Malaysian policy debate, is a complex one. The easiest and most widely used index to measure housing affordability is the price/income ratio (PIR), which compares the median price of a dwelling with the median household income.

While PIR is easy to calculate, it does not apply to rent or account for location, and does not really say how much housing can be purchased for the median price. Moreover, a low PIR does not necessarily indicate a good level of welfare — it might be due to economic distress or absence of demand. Following urban planner Alain Bertaud’s view, I believe it is more appropriate to say that the current level of affordability for each household is a combination of three elements: floor area, location and price per square meter or per square foot.

Focus 1 in the recently launched National Housing Policy (NHP) 2018-2025, which stresses the topic of home affordability, is devoted to ensuring quality standards in the provision of housing for everyone. When judging specific policies, an economist cannot disregard the importance of their consequences, which may be intended and unintended. While appearing to be oriented toward meeting the needs of the poor, the way Focus 1 will be implemented may generate distortive and even regressive effects.

As mentioned by the NHP, quality housing refers to the provision of housing that meets minimum standards and is well maintained and equipped with facilities and aspects of comfortable ventilation. The government intends to develop objective measurements for housing quality. It is not yet clear which criteria will be used in defining such parameters, but it is important to stress that a too-restrictive approach may lead to the opposite of the desired direction.

There is both theoretical and empirical evidence to support the idea that minimum size requirements, parking size requirements and the newly-introduced smart-growth regulations would increase the cost of housing in Malaysia. I mentioned above how the issue of affordability should be treated by considering the trade-off between three elements: price, floor area and location.

For example, imposing minimum-size requirements would increase the cost of construction and prices, forcing people to compromise in favour of locations further from economic centres. Alternatively, a market-based approach would leave supply to meet actual housing demand requirements — the predicted outcome, ceteris paribus, being smaller units closer to the economic hearts of cities and, therefore, job opportunities. Balancing the trade-off between location, price and floor space should be left to consumers’ individual preferences and the possibility for the supply side to react to them.

The (unintended) consequences on the general economic environment should not be disregarded. Restrictive rules are most binding in centres of innovation and job growth, thereby limiting opportunities for people to move to those areas in pursuit of economic opportunity. To prevent access to the most economically vibrant areas of a city directly hurts individuals who would be at disposal to move where economic opportunities are if the housing supply were not a barrier.

As suggested by academician Prof Sanford Ikeda and researcher Emily Washington, in the long run, limited access to the economic heartbeat of a city or a country penalises both social mobility and general economic growth as people are prevented from living where they could provide a higher contribution to the production process.

Therefore, while issuing certain minimum safety standards is important, other standards should be left free as much as possible to be discovered by the interaction between supply and demand — a process of dynamic discovery that happens over time and thus is not possible to plan in advance — in order to make the choice among the three elements of the affordability trade-off as consistent as possible with people’s expectations and prevent the emergence of barriers to general economic growth.

In a nutshell, in implementing the NHP, too-strict requirements for affordable developments should be avoided in order to facilitate the interaction between supply and demand, taking into account the location and size factors, thus allowing lower-income people to move towards the economic heart of the country, supporting not only their housing issues but also promoting possibilities for a higher degree of social mobility and, at the same time, their potential contribution to economic growth.

Carmelo Ferlito is senior fellow at the Institute for Democracy and Economic Affairs (IDEAS)

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