My Say: How the social market can solve housing problems

This article first appeared in Forum, The Edge Malaysia Weekly, on October 18, 2021 - October 24, 2021.
The Khazanah Research Institute found in 2019 that houses are ‘seriously unaffordable’. (Photo by Low Yen Yeing/The Edge Property)

The Khazanah Research Institute found in 2019 that houses are ‘seriously unaffordable’. (Photo by Low Yen Yeing/The Edge Property)

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Malaysia’s property market declined significantly in 2020, falling 9.9% in volume and 15.8% in value, according to the Valuation and Property Services Department.

In its last Financial Stability Review, Bank Negara Malaysia highlighted that there remains a significant number of unsold properties, particularly in the private residential sector, with a structural overhang of unsold units in the finished, under-construction and planned categories, especially in the “affordable homes” segment.

Bank Negara defines affordable homes as those that cost less than 30% of gross income to finance, and that fall within a price-to-income ratio of less than three. However, from 2014, this ratio for the average house has ranged from 4.0 to 4.4 of median income and the Khazanah Research Institute found in 2019 that houses are “seriously unaffordable”.

When you have houses available at an “affordable” price but no buyers at that price, then you have a market failure. This has many causes, which include poor information about the quality and therefore the prices of different properties, even in similar locations. It may also be due to poor coordination among buyers and sellers, a situation often intermediated by agents who encourage higher prices to get higher fees.

Psychological effects also play a role. When developers have invested heavily over three to five years to build homes, they often cannot bring themselves to cut prices to the prevailing market levels if this results in a lower margin on the costs and is deemed to be inadequate compensation for the risks they faced. There may also be collusion among developers to stop each other “giving in” to market pressures, which would bring prices and profits down for everyone.

Developers often misprice their units compared with the possible price that eligible customers can pay. They prefer to leave units empty rather than cut prices, perhaps in the hopes that the market will pick up. If they see optimistic economic forecasts from Bank Negara, even in a pandemic, they may well feel that it is worth waiting for demand to return. They are also often not in need of making quick sales. Another scenario is that a competitive marketplace does not exist for certain types of homes, leaving developers relatively free to offer schemes on their own terms.

We also have owners who buy units “off-plan”, that is, before they are built, for investment purposes and they are willing to leave them empty rather than bring prices down. This raises the issue of the inequality of wealth in Malaysia where very wealthy people do not even place their assets on the market because they do not need the fruits of the sale.

Housing finance a key market failure

Financing packages are biased because they are often based on income multiples rather than the ability to pay. They are also often designed to be more affordable for financing new properties, sometimes on 100% or even 110% mortgages, than financing the resale of older properties where down payments are difficult to afford. This effectively constrains the competition from secondary markets, which would otherwise cause new-house prices to fall.

Whatever the cause of market failure, we know that if left to itself, the housing market will not solve these problems for reasons we fully understand. To get a good outcome that is close to the best market solution, we need to apply policy interventions to try to replicate the preferred market outcome. In the social market economy, this is called ordoliberalism, loosely translated as ordered-liberal markets.

What have been the mistakes made in policy?

Basically, government policies have tried to reduce the supply price by subsidising building costs, and on the demand side, they have tried to offer various funds, discounts and financial schemes to help buyers.

But the subsidies have not reduced the supply price and it is likely that developers take the subsidies but still hold prices above the actual cost of building. They can afford to wait because they have income from the subsidy. This causes the supply of houses at unaffordable prices to be in excess of market demand, and these units go unsold.

There has also been bad planning. Many developments are in remote locations where people don’t want to live. Often, logistical infrastructure such as roads, shops, schools and other amenities are not in place because local authorities or planners do not coordinate with each other.

If the housing market is not reformed, we will continue to have empty units and people who want to buy but cannot afford to.

So, what needs to happen? Where do we start?

Key issues that need attention include the inequality of wealth, which may be solved with a property gains tax or the possible tightening of procedures on multiple property ownership. We also need to address the mismatch of buyers who prefer affordable units and builders who offer more-expensive units.

Buying homes at three times annual income is also problematic. The median household income in 2019 was RM5,873 or around RM70,000 per year. This would provide only RM210,000 for housing finance and so at least 50% of Malaysian households cannot afford houses. We need to decouple financing from income because on the demand side, incomes are basically too low so people cannot get financing, cannot afford the down payment and have other debts and living costs so that they cannot service the financing even if they can get it. This is true for combined household incomes and is worse for single people. Of course, there are also more single-people households now.

A partial solution to this problem would be to have a two-generation financing scheme, in which the income of multiple generations can be taken into account based on the normal practice of inheritance of the family home. While this does not break the income link, it makes housing more affordable.

Another interesting alternative would be for Malaysia to promote a “house use” option rather than, say, a “house ownership” approach. Long-term renting or leasing rather than ownership should be an option. Looking at it from an Islamic perspective, one of the main basic needs is to “fulfil provision of shelter to everyone” and this does not necessarily mean asking everyone to own a house.

Actually, it would be better to look at a more equitable social market in housing to offer a clearer solution. House prices for social housing could be fixed at cost price. The housing could be offered using rent-to-buy schemes with affordable repayments.

Financing would then be decoupled from income levels, which is the cause of the problem now, and would instead be based on repayment affordability. This could be done through different agencies at federal and state levels or even private cooperatives.

Within a social market, the principle of subsidiarity focuses on individual responsibility to provide for themselves and their dependents, and the principle of solidarity promotes the support of those less well-off through social policies when they cannot support themselves.

This is where the third sector can come in to provide housing projects that have a social impact, funded by social impact bonds (SIBs), or from an Islamic perspective, socially responsible investment sukuk (SRI Sukuk).

These can be taken up by corporations as part of their corporate social responsibility (CSR) efforts or even be open to corporate and retail investors looking for returns with a social impact. Housing for the B50 or B60 could be financed through SIBs or SRI Sukuk, where investors have a choice of getting a return or where endowments and waqafs finance these projects.

How difficult will reforms be?

Reform is difficult when dealing with multiple parties, all of whom have a legitimate interest in the business. Ownership of development companies, land rights and other property rights mean that you cannot just expropriate units to reallocate or sell them. This requires changes in the law.

However, where the developer is a government-linked company at federal or state level, then this ownership status can be leveraged to get it to cooperate with reform. It is a clear benefit of government ownership.

What is the best-case scenario?

The best-case scenario is complete reform of the housing market to remove the property overhang. Subsidising of development costs should end because this just benefits builders and has not reduced the price-to-market.

Where people can finance through normal mortgage-backed schemes, the free market will prevail. Where incomes are too low to raise a sufficient mortgage, then rent-to-buy schemes can be used. Also, a more general reform of the rental market to give more rights to tenants would make renting more attractive for many.


Dr Mohamed Aslam Haneef is a Professor of Islamic Economics at the International Islamic University Malaysia. Dr Geoffrey Williams is a Professor at the Malaysia University of Science and Technology. 

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