Middle-income urbanites and young adults are increasingly confronting the dilemma of unaffordable houses as prices move beyond their means. KINIBIZ examines the dilemma and asks what qualifies as affordable housing to the average Malaysian household.
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If you have just started a young family, and along with your spouse are wage earners in the Klang Valley, and are currently scouting for your first property, you are likely to find yourself encountering a number of problems. Where can you find the right property with the right location, the right price and the right attributes?
You may despair but you are not alone in facing the Malaysian housing dilemma.
First-time homebuyers, especially those from the younger generation and those from lower- and middle-income group, constituting about 50% of the Malaysian population, are not able to purchase their own property today, according to the National House Buyers Association of Malaysia (HBA).
That’s how it feels for Alya (not her real name), 28, who recently welcomed her twins. Together with her husband, her household earns between RM6,000 to RM8,000 a month but she finds that prices for houses that suit their needs are too high.
“The right ones are too expensive, while the ones we can afford are not suitable,” said Alya to KINIBIZ. “Often the affordable ones are too small and in poor locations.”
Kevin, 26, agreed, saying that he and his wife just want a safe house in a location that fits nicely between their respective workplaces. “Prices are unbelievable. Some intermediate houses are up to RM450,000 at where we’re looking.”
So what could we deem as affordable housing which falls within the means of first-time homebuyers?
“Affordable housing” is a buzzword much thrown about lately due to the increasing urgency of the matter, but the term itself may well imply different things to different groups of people.
To policy makers, financial institutions and even property developers alike, “affordable housing” simply means that you can “afford” to buy a property and can qualify for the mortgage loan based on your projected income level.
However, such definitions fail to take into account that, for homebuyers, “affordable housing” does not just mean qualifying for mortgage loans in the initial stage, but also the ability to maintain a minimum standard of living after apportioning a significant chunk of their household income for the monthly repayment of a 30-year housing loan.
Note that this is even before a car mortgage, another expensive purchase, and other forms of spending are inserted into the equation, which may then distort both Alya’s and Kevin’s ability to qualify for a house mortgage in the first place.
Defining ‘affordability’
An objective benchmark to measure the affordability of property prices is to compare it against the annual household income, a method that is commonly used to determine the affordability of property prices especially in urban markets. This method is endorsed by the World Bank and the United Nations.
When property prices are measured as multiples of the annual household income, a multiple of 3.0 or less is considered affordable, a multiple between 3.1 and 4.0 is perceived to be moderately unaffordable, a multiple between 4.1 to 5.0 is seriously unaffordable, and a multiple of 5.1 and above is deemed severely unaffordable.
The optimal target for homebuyers is to purchase a property priced at a multiple of three times their annual household income or less.
With a national median annual household income of RM55,020, an affordability ratio of three means that half of the Malaysian population can only afford to buy a house that is under RM165,000. But houses affordably priced within this range, as both Alya and Kevin could attest to, are increasingly hard to come by.
Realising that this may be difficult to achieve, homebuyers should try to reach for the lower-hanging fruit – a multiple of no more than four times annual household income, according to HBA secretary-general Chang Kim Loong.
But what is the reality on the ground in the housing market? We compare the above affordability index to prices of intermediate double-storey linked houses and condominiums at selected locations to find out.
Based on the affordability index, it is clear that all the property prices in areas like Kajang, Kota Damansara and Puchong come under the category of being either “seriously unaffordable” or “severely unaffordable”, with their affordability index ranging from 5.41 to 9.85, based on the median household income in Kuala Lumpur and Selangor.
The situation is similarly bleak for condominiums in the same areas, with their affordability index ranging from 4.61 to 6.36, effectively locking most aspiring first-time homebuyers out of the property market.
“Price increase in one area can spill over to the surrounding areas and cause the prices of such nearby locations to be pushed up.
“Thus an increase in property prices in central Kuala Lumpur can push up prices in say, Cheras, which in turn can push up prices of properties as far as Kajang and beyond,” explained Chang.
The annual household income used in the affordability index also assumes the combined income of both working spouses. In the case of individuals, single parents or households with a single income stream, the situation is compounded, and it therefore becomes more cumbersome for these groups of people to own their first homes.
The issue of housing unaffordability is substantiated by a piece of research by Khazanah Research Institute called ‘State of Households Study’ published last year, which found that house prices in general are not affordable at 5.1 times of the median annual household income.
In fact, it would be wrong to assume that the situation of housing unaffordability is only privy to urban folks in the Klang Valley.
Institut Rakyat’s Malaysian Housing Affordability Survey 2014, which ranks states in Malaysia according to the affordability of an average house to the typical family, shows that the most severely unaffordable state is Sabah, with an affordability ratio of 11.41, followed by Sarawak (9.04), Kuala Lumpur (8.22), Selangor (5.88) and Penang (5.83).
The three most affordable states are Malacca (3.16), Negeri Sembilan (3.71), and Johor (4.20). However, average house prices for these states still exceeded three times the annual income of each state’s median household income.
The same research projects Malaysia’s national housing affordability index at 5.79 times the annual median household income, which is also considered “severely unaffordable”.
“Sabah and Sarawak suffer from a combination of weak household incomes and house prices that are far higher than the national average, with average prices comparable to that in Selangor,” Institut Rakyat’s executive director Yin Shao Loong told KINIBIZ.
Elaborating further, Yin said there are a lack of affordable houses being built in Sabah, with the supply of properties in general being geared towards higher-end buyers.
What can the average household afford?
KINIBIZ illustrates what an average Malaysian household can afford given the current property market.
Using the annual median household income statistics of Kuala Lumpur as the benchmark citing an annual income of RM91,440 or RM7,620 a month for instance, we are able to assume the following: (a) homebuyer maximises loan repayment which is said to be one-third of gross income, (b) homebuyer takes 90% margin of financing after making a 10% downpayment, (c) homebuyer takes a 30-year housing loan, and (d) interest rate at base rate (currently at 6.85%) less 2.5%.
The homebuyer will then be eligible to take a mortgage loan amounting to RM567,000, with a monthly loan repayment of RM2,540.
The property value in total would be RM630,000, constituting a bank loan of RM567,000 and a 10% downpayment of RM63,000.
“On its own, such a property may still seem affordable to the homebuyer. However, after factoring in the basic household expenses of the current sandwich generation (referring to couples with young children and aging parents), the financial situation of the homebuyer could reach distressing levels,” said Chang.
A property of RM630,000 is 6.89 times the household income of RM91,440, falling under the “severely unaffordable” category according to the affordability index.
“The above expenses are actually really basic without much leisure pursuits being factored in. Still, the family is left with only RM194 per month or 2.55% of gross income in savings and they will not have enough cash reserves to cater for any unexpected emergencies,” explained Chang.
Therefore he true “affordable housing” benchmark for a household income earning RM7,620 per month lies within the range of RM300,000 (3.28 times the annual household income) to RM400,000 (4.37 times the annual household income), leaving homebuyers with more cash reserves or savings every month, he added.
If we go by such standards, first-time homebuyers who are single, or households which depend on a single income stream, can only afford properties worth half the above amount, ranging anywhere between RM150,000 and RM200,000.
This is not too far from the national average, where half of the Malaysian population can only afford properties costing no more than RM165,000. Nevertheless, when was the last time we saw a property launched at this price tag bearing a Kuala Lumpur or Selangor address?
“I hope house prices can be more affordable for those who are just beginning to work or start their own families,” said Alya. “Because these are the people who need houses but most cannot afford to buy one.”
A Bursa-listed property developer that KINIBIZ spoke to revealed what it considers as “affordable housing” – below RM500,000, an apparent gap with what the average household could comfortably afford, and clearly without taking into account various other monthly household expenses to maintain a minimum standard of living.
It is no wonder that average urban folks like Alya and Kevin are unable to afford their dream homes that do not require either taking up a back-breaking mortgage, or moving out to a distant and bland housing estate far from their urban workplaces which would then involve mind-numbing daily commutes.
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