A Review of Housing Affordability in the City of Kuala Lumpur

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1 A Review of Housing Affordability in the City of Kuala Lumpur J. Johan 1, a*, A. M. Yusof 2,b and C. S. Chai 1,c 1 Faculty of Civil Engineering, Universiti Teknologi Malaysia, Johor, Malaysia 2 School of Graduate Studies, Universiti Teknologi Malaysia, Johor, Malaysia a julaida264@gmail.com, b aminahyusof@utm.my, c cschai2@live.utm.my Keywords: Affordability; Urban area; Housing Affordability. Abstract. Housing has been a main agenda for every nation due to the fact that it forms a basic need for every citizen. However, the desire to own a house is limited to the affordability level of a household. The capability to own a house represents the economic stability of a family which indirectly reflecting the poverty level of a country. In Malaysia, National Housing Policy (NHP) is formulated to address the low and middle income groups difficulties in housing ownership. Through the Tenth (10th) Malaysia Plan, 78,000 units of affordable houses are built to cater local requirement of affordable housing. Therefore, it is essential to identify what are the contributors of housing affordability problem and how to measure the affordability level. This paper visits a conceptual scenario of housing affordability problem in Malaysia and indicators of housing affordability. It provides an understanding on how to identify, analyze and measure housing affordability especially in the local scenario. It also presents real pictures of affordability level among citizens in City of Kuala Lumpur. The findings are essential for the policy makers to formulate housing development plan meanwhile it is vital for developers to determine affordable housing price. Introduction Housing is needed for various reasons. Predominantly, housing serves human basic need. Their need for shelter and family s activities had later extended to the economy activities such as for investment. Housing acts as an economic activity, a symbol of achievement, social acceptance and as an element of urban growth [1]. Housing availability and its quality reflects the socio-economic development of a country. A nation with good housing facilities will produce a stable and growing community, better health condition, secured and education among citizens [2]. It is also an asset that can be develop into more profitable aspect, i.e as an investment and as a long term financial security. It is also the biggest item of non-food household expenditure [3,4]. Housing development also contributes to geopolitics as it will change the patterns of population distribution based on races and its composition, ownership and the percentage of voters and political power in an area [5]. Affordability issues has become a global phenomenon evolved numbers of housing market around the world [6]. For home buyers, having enough capital or money to buy a house is the most crucial requirement. Thus, affordability is related to their financial capability. Minister of Urban Wellbeing, Housing and Local Government, Datuk Abdul Rahman Dahlan confirmed that Malaysia is facing affordable housing problem. The dilemma faced by not only low income but middle income groups. The housing market is inclined to higher-priced properties while the existing public housing programmes are focused to low-income group. Nevertheless, these programmes are inadequate to fulfil the demand arise from rural-urban migration and moderate growth rates of household incomes. Scarcity of land bank in certain high-demand areas, and increasing of construction cost are several factors contributing to high house price [7]. Malaysia National Housing Policy aims at increasing the quality of life among Malaysians through providing enough, comfortable, quality and affordable houses in the market. In developing countries, mostly the housing policies are enacted to allocate affordable housing, especially for the lower income or its targeted group. Thus, 10th Malaysia Plan (10MP) is set to provide 78,000 units of

2 affordable houses being built within these upcoming years. Under the People s Housing Program (PHP), the Government targeted to build 38,950 units, while the Ministry of Rural and Regional Development tackling the issue of low-income groups and squatters by focusing to build 39,050 units affordable houses [8]. This paper visits a conceptual scenario of housing affordability problem in Malaysia and indicators of housing affordability. The paper is expected to provide an understanding on how to identify, analyze and measure housing affordability especially in the local scenario. It also demonstrates the practical application of affordability in the local context. The results are essential for the policy makers to formulate housing development plan meanwhile it is vital for developers to determine affordable housing price.. Definition of Affordability Affordable housing is defined differently by different people in different locations. The perspective of affordable housing to policy makers and financial institution is the capability of a person to buy a property and qualify for the mortgage loan based on his or her income level. Meanwhile, for house buyers, despite of been qualified for a mortgage loan depends on their income level and being capable to buy a property, it also means that they could maintain a minimum standard of living [9]. The affordability was explained in terms of the challenges of a household in balancing the cost of actual or potential housing and at the same times their non-housing expenditure within the constraints of their income [10]. Meanwhile, Kuang and Li [11] define the affordability through the relationship between household income and household. Housing is considered as affordable when the ratio of expenditure-to-income is reasonable. An individual is able to own a house if their income is enough to pay for a house and other non-housing consumptions such as food, clothing, education and others [12]. For renters and owner occupiers, housing affordability is the cost for housing services and shelter and it is related to a given individual s or household s disposable income [13]. Housing affordability has no specific definition. The affordability is hard to be practiced especially to define the most appropriate geographic scope for housing markets, suitable definitions to represent the individuals and households and their changing circumstances over time [13]. Variant in definitions result in difficulty to measure the housing affordability because of imprecise and changing definitions of housing cost and income and lacking of easy computable and interpretable methods [14]. Affordability Issues An increasing number of population in all cities around the world cause rapid urbanization. Thus, the demand for housing increases by time. Housing problems and its possession have a quite long rise in Malaysia. One of the issues is the supply of low cost and affordable houses are unable to meet the demand of urban population. House affordability problems thus manifested by various sources such as income, house price, and financing availability. This situations led many Malaysians prefer to rent rather than buying a house staying with their parents after marriage due to inability to buy a house [15]. A study on household expenditures ratio to the income for lower and middle income groups found that household income influenced the affordability level to buy and own a house. In general, income seems to be the most significant driver to affordability problem. Despite this general rule, Aminah and Chai [16] suggest that Malaysians are allocating around 20% of their income to housing. In some areas, the house prices are beyond reachable people with average income of that locality. As one of the vital component to economic development, housing market in Malaysia evolved when more residential properties turns to form of investment. During Q to Q2 2012, Malaysian House Price Index recorded the highest average increase of house prices of 9.1 percent per year, which exceeding the average annual increase of 3.2 percent in the previous 10 years. This trend is noticeable, particularly in Kuala Lumpur, Selangor and Penang [17].

3 The availability of bank lending is one of the factors that contribute to affordability level. When a high availability of credit offered by a financial institution, lower lending rates provided to borrower [15]. The demand for housing will be increased with more credit available [18]. Growing in housing demand leads to higher housing prices. Housing price may significantly affect household borrowing. It can be seen when the housing interest rate is low, more potential home buyers able to make some investment through buying a house. The housing market expansion gives huge impact on financial stability. House price changes will directly and indirectly effects on the ability to them repay debts and the increasing of demand for credit by household, especially when the increasing of housing prices was not accompanied by strict lending standard. It will result in excessive debt accumulation of household and housing developers. It worsens if the house price fell sharply; position of banking institution affected [17]. Despite been extensively discussed, effort to come up with an indicator to measure the affordability is almost non-exist. As a result, it is hard to objectively discuss the affordability problem in Malaysia. Housing Affordability Index Housing affordability indexes developed around the world to measure the affordability level. The usefulness of each depends on the availability of the data required. One of the indexes can be used to measure the housing affordability index is Median Multiple. It is developed by Demographia Housing Affordability Survey. It utilises the median house price and median income to compute the rating upon which each rating represent meaning as shown in Table 1. This model was used by Harvard University Joint Center on Housing and was recommended by the World Bank and United Nations [19]. HAI = Median house price (1) Gross (before tax) annual median household income Median Multiple is easily understood; reliable and essential structural indicator for measuring the health if residential markets and facilitates meaningful and transparent comparisons of housing affordability. It also considers the affordability level within nations at all level. In addition, it is an advantage for using Median Multiple as it is can be used to make a comparison between international countries [19]. However, the measurement is focusing on one of the affordable housing element such as the home buyers, but not involving the renters either in public or private sectors. The index is interpreted in Table 1.0 Table 1.0 Housing Affordability Rating Categories Housing Affordability Rating Categories Rating Median Multiple (MM) Severely unaffordable 5.1 to over Seriously unaffordable 4.1 to 5.0 Moderately unaffordable 3.1 to 4.0 Affordable 3.0 and under Practical Application of Affordability Index The affordability indexes are developed using socio-economic information gathered from the potential house buyers in the City of Kuala Lumpur. The survey using structured questionnaire was carried out on 900 (2012) and 384 (2014) respondents.

4 A sample of Median Multiple calculation is conducted to compare the housing affordability level of Kuala Lumpur in 2012 and Based on the study conducted by Aminah and Chai [20] in analyzing the housing affordability index in Kuala Lumpur, it is found that the median income and median household income for the respondents is RM 2500 in Similar study is repeated to review the housing affordability level through Median Multiple in It is found that the median income and median household income of the respondents are recorded as RM3, 000 and RM5, 000 respectively. The Median Multiple for housing affordability is shown in Table 2.0. Table 2.0 Median Multiple for the City of Kuala Lumpur in 2012 and 2014 Property Types RM (Median) MM- RM MM- Individual (Median) Individual MM- Household Single Storey Terrace 396, , Double Storey Terrace 620, , Semi-Detach 2,431, ,515, Low-cost flat 70, , Flat 121, , Condominium/apartment 434, , The table shows that for the respondents are in the region of severely unaffordable as far as housing is concern. This is especially true for houses like single storey terrace, double storey terrace, semi detached and condominium. The only affordable housing in Kuala Lumpur is low cost flat, recorded house price of RM 70,000 in 2012 and RM 89,000 in However, the housing affordability level in 2014 is slightly improved compared to 2012 in terms of increment in median income. There is an average of 12.3% increment in housing property from 2012 to Meanwhile the current income is increase at 16.67%. Therefore, the increment in current income is unable to sustain the high rising house price in Kuala Lumpur. Even with the median household income of RM5, 000, respondents are affording for low cost flat and flat in Kuala Lumpur only. In determining the affordable houses, a backward calculation is performed. Based on the backward calculation in Median Multiple, the affordable rate is at 3.0. Therefore, the affordable house price for the current citizens in Kuala Lumpur is RM 108,000 and RM 180,000 for individual and household affordability level. Based on the affordable house price, the available houses in the market is low cost flat, flat and medium cost apartment. The findings are similar to the study of Aminah and Chai [20] and Azriyati et. al. [21] in determining the affordable house price in Kuala Lumpur is at RM 150,000 to RM 200, 000 only. Conclusion The paper reveals that housing affordability problem is originated from various sources such as low income and high house price. The affordability level can be identified using Median Multiple. The paper demonstrates the serious affordability problem among Kuala Lumpur City dwellers and suggests the suitable and affordable housing based on the income and the respondents preferences. Acknowledgements The authors would like to acknowledge the financial contribution granted by the Ministry of Higher Education and Universiti Teknologi Malaysia (Vot No. 06H57) for financial assistances in undertaking this research.

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6 Reference to other sources of information: [7] Sri Ayu Kartika Amri and Sharifah Norfaezah Wan Ahmad Makki Mashor (2014) lebih mencabar. Mymetro. Harian Metro, The New Straits Times Press (M) Berhad. Access on 27 February [8] National Housing Policy (2013). National Housing Department, Ministry of Housing and Local Government, Malaysia. [9] Chang Kim Loong (2014). Affordable housing: The buzzword. StarProperty.My [17] Bank Negara Malaysia (2012). Perkembangan Risiko dan Penilaian Kestabilan Kewangan Pada Tahun Laporan Kestabilan Kewangan dan Sistem Pembayaran 2012.