This article first appeared in Forum, The Edge Malaysia Weekly on July 15, 2019 - July 21, 2019

I believe that the rental market will play a growing role in the Malaysian property market in the future. From a purely economic perspective, housing prices are predicted to increase in tandem with Malaysia’s rapid progress toward becoming a developed country. But cultural elements play a role too.

As demonstrated by preliminary studies on the evolution of spending habits, the generations currently entering the housing market from the demand side are living between the cultural pressure from previous generations about the importance of saving for and buying a property as soon as possible and the new, more present-oriented and dynamically evolving mentality, which emphasises the role of entertainment expenditure such as travelling or new communication devices.

In such an evolutionary scenario, a different role might be conceived for the government in facing the shelter issue. A solution that overcomes the problems created by subsidies, vouchers and direct government housing investments is the so-called guaranteed-rent method, suggested by Jane Jacobs — an activist who influenced urban studies — in 1961.

According to her, this is a way to introduce “new construction gradually instead of cataclysmically, of introducing new construction as an ingredient of neighbourhood diversity instead of as a form of standardisation, of getting new private construction into blacklisted districts and of helping to unslum slums more rapidly”.

With the implementation of this method, Jacob adds, “The physical units involved would be buildings, not projects — buildings to go among other buildings, old and new, on city streets. These guaranteed-rent buildings would be of different kinds and sizes, depending on their kind of neighbourhood, the size of the plot and all such considerations as normally influence the size and type of more or less average dwellings.”

The system of guarantees suggested by Jacobs would move in two directions. The government would guarantee the mortgage for developers who secure a loan from the traditional financial market or, alternatively, act as a money lender to developers. The second action from the government side is to “guarantee to these builders (or to the owners to whom the buildings might subsequently be sold) a rent for the dwellings in the building sufficient to carry them economically”.

In exchange, the builder would be required to select tenants from the group of people designated by the government agency in charge. By examining the applicant’s income, the agency would decide how much of the economic rent could actually be paid and make up the difference — if a household’s income improved, its proportion of the rent would go up, and the proportion provided by the subsidy would go down. If a household reached the point of paying a full economic rent, it would be of no more concern for the public authority.

The most important difference with a traditional programme of public housing is that with the guaranteed-rent method, the capital costs are not directly borne by the government. With this system, they would be kept in the rent equation when defining the total economic rent to be received by the builder. Real estate taxes could also be incorporated in the rent determination. Moreover, the agency in charge should not be involved in the details of construction standards — such a choice would be left to developers and determined by market conditions.

Such a solution implies a lower financial burden for the government, a burden that would decrease if the households renting these units improved their economic conditions. This would be all the more true, and likely to happen, if no restrictive barriers were imposed on location. This would create the possibility for the poor to choose dwellings closer to the economic heartbeat of a city, increasing their chances for social mobility. At the same time, the risk of the emergence of slums, devoted to poor people, in locations that would ultimately keep them poor, would be avoided, or at least drastically diminished.

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

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