HOUSING AFFORDABILITY AMONG POTENTIAL BUYERS IN THE CITY OF KUALA LUMPUR, MALAYSIA Abstract- This paper investigates housing affordability problem in Malaysia. It reveals the state of income, purchase and repayment affordability for home ownership in the City of Kuala Lumpur. The study shows that the potential house buyers are severely affected by the affordability problem. Low income (individual and household) has been the most significant cause of affordability problem. The finding suggests that the potential buyers afford houses which are lower than published eligible amount. The problem is further exacerbated by lack of active government s interventions in the provision of affordable houses and the reluctance of financiers in providing loans to some house buyers. The research anticipates that housing affordability problem will escalates further and most of the respondents which represent the most susceptible group to poor are at the higher risk of being excluded from the opportunity to own a house. Keywords-Housing affordability, potential buyers, Kuala Lumpur 1.0 INTRODUCTION The need to provide appropriate and affordable houses to different groups of urban dwellers introduces a new dilemma especially in developing countries such as Malaysia. Aminah and Chai (2012) explore and relate urban poor to housing affordability problem and show that the price escalation of houses causes a new dilemma in home ownership as house prices are too high and are beyond reachable among certain income groups. It is not the only low income group hit by the housing affordability problem but the middle class is also affected. The middle class makes up the majority of Malaysians, are salaried workers who have their money deducted monthly and still have to pay more at the end of the year. Those from middle class are neither rich nor poor but with the continuous price hike in the essentials of living, many are drifting towards the poor category. Even worse,
2 they are not qualified for most of the financial aids. One typical example is the starting salary of graduate, which is around MYR1800 to MYR2000. The young generation is struggling to start their life in the city of Kuala Lumpur. The increased in cost of living is a real case as JobStreet (April 2014) shows that in Malaysia, a majority of fresh graduates were struggling to make ends meet. The survey shows that approximately 77% of the fresh graduate said that their salary does not leave them with any savings after spending on essentials such as car and study loans. The average pay across industries in Malaysia for fresh grads appear to be MYR2,100 per month, but 60% of the respondents said that they have to ask for higher-than-average salaries of at least MYR3500 (30% even expected to be paid as high as MYR6500) in order to cope with the increased cost of living. Housing affordability is one of the controversial issues in the developing and developed countries such as Malaysia. It is important to realize that the complexities of the affordability problem vary from one locality to another and affordability housing scenario in Malaysia signifies there is a lack of affordable housing especially for the middle income group. As the public housing programmes intended to cater the low-income group, the free market is gradually skewed towards high-priced properties. As a result the middle income group is trap in the between what available and qualified for. Although various efforts to overcome affordability problem in Malaysia, the nation is facing a dilemma of affordable housing that is unaffordable. The affordable housing scheme, which is an addition to the My First Home Scheme for units costing between MYR100000 and MYR220000, will see stratified units priced between MYR220000 and MYR300000 being built for those with a household income of less than MYR6000 a month and who do not yet own a house. But the scheme failed as very little applicants has successfully gained an access to financing. This paper analyses housing affordability dilemma among middle to low income group in the city of Kuala Lumpur, Malaysia. This group represents the potential house buyers. Kuala Lumpur, the capital city of Malaysia attracted influx of rural migrants which contributed to affordability problem as house price rising beyond reachable. The paper reveals the root of housing affordability from the potential house buyers. An analysis of income, purchase and repayment affordability is undertaken to explore in-depth the affordability dilemma among respondents in the City of Kuala Lumpur.
3 2.0 HOUSING AFFORDABILITY Affordability is referring to the ability of a person in providing something, which is usually referred to his ability in financial terms. Affordable housing is used to illustrate residential units that total housing costs are deemed affordable to those with median income. Anirban et.al (2006) mentioned that house affordability is a condition when people have the potential to save certain portion of their income to buy a house, as well as to pay for other expenditures in their working period. The statistic by Department of Statistic, Economic Planning Unit, Malaysia (2008), shows the average monthly household income is MYR3686. 57.8% of the families are members of this group and 29.3% are above average. Malaysia is classified as an upper middle income group ($3,976-$12,275) by World Bank Country Income Classification. The City Hall of Kuala Lumpur uses MYR3000 per month as poverty line; hence those who earn less than MYR3000 per month in Kuala Lumpur are considered poor. In 2009 Malaysia was also signified by the World Bank as low income increment country whereby an average annual increment of salary in Malaysia is merely 2.6% for the past ten years. An analysis by Aminah and Chai (2012) indicates that the most frequently transacted house prior to 2008 was priced between MYR150000 to MYR200000. However after 2008, the most affordable price is between MYR 200000 MYR250000. The price of houses (for all type in the City of Kuala Lumpur) increased gradually as observed from 2000 and recorded double digit growth as depicted in Figure 1.0. The worst hit is terrace housing which is highly demanded and most affordable amongst Malaysian. Current Kuala Lumpur residential property is about MYR485000 which is roughly 9 times the average household annual income of MYR54000. Figure 1.0 40 30 20 10 0-10 -20 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Terrace 10-0.7 12.4 1.1 4.4 5.9 5.8 9.1 10.3-6.6 11.8 28.8 High Rise 2.7-5.1 3.5 2.1 5.4 2 0 3.2 2 7.2 11.7 19.6 Detach 13.2 11.1-5 -1.6 9.2 15.8 18.2 11.9 8.2-10.3 29.9 0.7 Semi Detach 14.4 4.4 4.2 4.5 17.6 7.3-5.3 27.6-8.8 2.7 25.8 19.8 Growth in House Price: The City of Kuala Lumpur
4 To some buying a house becomes unaffordable. The concern over housing affordability problem is also highlighted in the Malaysia National Housing Policy which aimed to provide a direction and basis for the planning and development of housing development and to provide affordable and accessible house for the people to own or rent a house. In relation to affordability, Gan and Hill (2009) distinguish the concept of purchase affordability, repayment affordability and income affordability. While the purchase affordability considers whether a household is able to borrow enough funds to purchase a house, the repayment affordability considers the burden imposed on a household of repaying the mortgage. Income affordability simply measures the ratio of house prices to income (in many cases used median house price and median income). The general rule of allocating only one third of monthly income to pay for housing seems to be less applicable in Malaysia. In 2000, on average Malaysians used only 21.7% of the income for housing and the slice is even smaller in 2009 as an average Malaysia spent only 16.7% of their income on housing due to greater consumption on other basic needs such as food, transportation and accommodation (Malaysia Economy Report, 2010). Aminah and Chai (2012) recognise several ways of determining affordability amongst potential buyers. The median multiple can be used to indicate the income affordability based on the scale adopted. One of the typical examples is Demographia International Housing Affordability Survey. The backward calculation is used to determine the affordable houses for respondents. However, the best indicator to affordability is to ask the potential buyers, the price afforded by them. This will provide the accurate indicator for the most affordable houses by the respondents and pursued in this research. 3.0 DATA COLLECTION This research utilizes secondary data that revolves around macro-economic and housing. A review on housing industry in Malaysia and the concept of affordability forms the essential part of the research. A questionnaire survey on the targeted group was carried out in Kuala Lumpur area. The questionnaire designed to capture socio-economic aspect of respondents on income (individual and household, spending pattern, future housing plan and views on current housing situations). A total of 939 respondents aged between 21-35 years old involved in the survey. The 21-35 year cohort is expected to face housing dilemma especially in the City of Kuala Lumpur. 49% respondents are within 21-25 years
5 old, 31% are 26-30 years old and 20% 31-35 years old which comprises of 54.1% male and 45.9% female. The median income used to compute the median multiple for the respondents. Median multiple (median house price divided by gross before tax annual median household income) is used to rate housing affordability. The Median Multiple is widely used for evaluating urban markets, recommended by the World Bank and the United Nations and is used by the Harvard University Joint Centre on Housing. The following table illustrates the use and scale recommended for affordability index. Table 1.0: Demographia International Housing Affordability Survey Housing ffordability Rating Categories Rating Median Multiple Severely Unaffordable Seriously Unaffordable Moderately Unaffordable Affordable 5.1 & over 4.1 to 5.0 3.1 to 4.0 3.0 & under (Source: The World Bank, United Nations, Harvard University Joint Centre on Housing, 2012) 4.0 ANALYSIS AND DISCUSSION The survey reveals that more than 50% of the respondents are earning below RM3000 per month. Majority of the respondents in the City of Kuala Lumpur are within poor category as defined by the City Hall of Kuala Lumpur. The average for the respondents is around MYR2500 which more or less confirmed the finding by BBC News Magazine that average monthly income for Malaysian is MYR2888 in 2012. The state of income is expected to influence the affordability which is discussed in the subsequent sub sections. As profound earlier, Malaysian spend less than 20% of their income for housing. An analysis of the most frequently transacted houses is less than MYR200000. An analysis is focus on income, purchase and repayment affordability among respondents. From the median extracted, median multiple is calculated. The backward calculation performed to derive the affordable house price for each
6 group of respondents. This is compared to the eligible amount published by the government on the entitlement for the housing loan as visualized in Table 2.0. Table 2.0: The median income, median multiple, entitlement and affordable amount. Group Individual Household (years) Med HAI Eligibility AH Med HAI Eligibility AH All 2250 8.87 255000 81000 2751 7.25 280000 99000 21-25 2001 9.97 205000 72000 2557 7.80 280000 92000 26-30 2751 7.25 280000 99000 2751 7.25 280000 99000 31-35 3750 5.32 380000 135000 5250 3.80 400000 190000 Med = Median HAI = Housing Affordability Index AH = Affordable Houses (in MYR) Based on the above table, affordability in relation to income, purchase and repayment is discussed below; 4.1 Income Affordability The income affordability is measured through median multiple using formula (1). Median income of respondents (individual and household) and the median house price in the City of Kuala Lumpur are used. The HAI is Affordability Index (HAI) = Median House Price Annual Median Income...(1) As shown in Table 2.0, the median multiple or affordability index for the sample is greater than 5.0 which indicate with income gathered, the respondents are in the state of severely unaffordable. All groups are significantly affected by housing affordability. The extreme median multiple for group 21-25 years old (9.97) shows that affordability is the worst among others. The table indicates that in either segmented by individual or household income, the respondents are trapped in the situation of severely unaffordable. It is clear that the young generation: 21-25years is mostly affected. Although the index is improved for 26-30years, they are still facing the affordability dilemma. As compared to other groups 31-35 years old is within seriously affordable to buy median price houses. The calculation of HAI based on household income also exhibits similar pattern but with some improvement in the value of HAI. The median household income
7 for all is MYR2750, MYR2750 and MYR5250 for group 21-25, 26-30 and 31-35 years old respectively. This slight improvement has not change the severely unaffordable situation among respondents except for 31-35 years old. This signals that affordability is serious among younger household compared to others. As youngsters are working and live up the city, their need and problem require serious attention. From the market analysis, the reluctance of private developers to come up with the lower price housing schemes implies that government must interfere in housing affordable provision. 4.2 Purchase Affordability Table 1.0 illustrates median multiple 3.0 and below indicates affordable state. Median house price in the City of Kuala Lumpur is RM239397 which leaves the respondents in the severely unaffordable state. Backward calculation is performed to explore the price affordable by respondents. In order to achieve the affordable index of 3.0 (affordable), the affordable prices are computed and shown in Table 2.0. The affordable houses under the individual income segment range from MYR81000 to RM135000. With the median of individual income, the most affordable house is MYR81000. The 20-25 years old group affords a house of MYR72000, 25-30 years old (MYR99000) and 30-35 years old (MYR135000). This is contrast with the eligible amount for loan of between MYR200000 and MYR380000 as illustrated in Table 2.0. Based on household income, the affordable houses are MYR99000 for all respondents. The affordable house for 20-25, 26-30 and 31-35 years old is MYR92000, MYR 99000 and MYR190000 accordingly. This is far less than the published loan entitlements that are MYR280000 and MYR400000 as indicated in Table 2.0. As a result of this constraint, the respondents inclined to choose condominium, apartment and terrace houses as the price of these are lower than detached units. The deviation between published eligible loan and affordable price is shown in Figure 2.0. 500000 400000 300000 200000 100000 0 400000 280000 280000 280000 190000 99000 92000 99000 2751 2557 2751 5250 ALL 21-25 26-30 31-35 MED INCOME AFFORDABLE ELIGIBILITY Figure 2.0 Eligibility and Affordability
8 4.3 Repayment affordability The research explores the repayment affordability among respondents. The following repayment schedule is developed to gain an insight into the matter. The table is based the survey indicates that Malaysians are willing to pay about 20%- 30% of their monthly income for the housing installment. Table 3.0: Backward Calculation on Housing Repayment Term of repayment (years) Amount Allocation 10 15 20 25 30 of Loan (%) 70,000 729 540 447 393 359 20 3645 2700 2235 1965 1795 30 2430 1800 1490 1310 1197 80,000 833 616 510 450 410 20 4165 3080 2550 2250 2050 30 2777 2053 1700 1500 1367 100,000 1048 778 646 570 522 20 5240 3890 3230 2850 2610 30 3495 2593 2153 1900 1720 150,000 1573 1167 967 855 782 20 7865 5835 4845 4275 3910 30 5243 3890 3230 2850 2607 200,000 2097 1556 1292 1140 1043 20 10485 7530 6460 5700 5215 30 6990 5186 4300 3800 3476 The table shows that if someone is intended to borrow MYR80000 for 20 years loan he will have to pay MYR510 per month. If he chooses to allocate 20% of his income, he needs to have a household income of MR2250 or alternatively he opts to allocate 30% of his income, household income should be MYR1700. In an extreme case if one with an income of RM3000 wishes to buy a house of RM200 000, the repayment will be MYR1556 per month for 15 years tenure, MYR1292 for 20 years, RM1140 for 25 years and RM1043 for 30 years. This will consume about 34% to 38% of the gross monthly income. This high proportion will certainly cause problems in financing approval as financier will normally or may consider net income. High commitments are normally leading to unsuccessful loan application. The respondents are asked about the amount that they are willing to pay for their monthly installments as this would be the best affordability indicator. The most
9 affordable amount to be paid is skewed under RM2500 per month. The lower income group comprises those earn less than RM2500, indicated their affordability of less than MYR1000 amounts of installment per month. The highest percentage is for MYR1001 to MYR1500. Next is between MYR1501 to MYR2 000. However as shown earlier, based on HAI and purchase affordability, the reality of repayment affordability is tabulated in Table 3.0. As expenses on food and transportation tend to rise and be prioritised by Malaysians, the expenses on housing has to be reduced. 42.5% of the respondents are willing to allocate between 11 20% of their current income for future housing installment. In general about 80% of respondents are willing to allocate less than 30% of their income for future housing installment. 4.3 General Remark The above discussion suggests the fact that the level of affordability amongst average Malaysian in the City of Kuala Lumpur is a house of less than MYR300, 000 or to be more accurate is MYR200000. As shown in Table 5.14 and 5.15, the respondents prefer houses between MYR100000 to MYR200000. The most frequently transacted residential units are housed between MYR25000 to MYR100000 per unit. The share of more than 40% for each year indicates that this range of price is the most affordable and sought after by the buyers. This is followed by the house of MYR100000 to MYR250000 which captured more than 30% of the volume of residential transaction. Unfortunately, the supply of such units is very limited especially in the city centre due to high land cost and low profit margin in such development. This creates housing stress in the city which calls for government s direct intervention to take leading role to control price and exercise proper measure to avoid unhealthy and unsustainable increase in property price. The move to curb house price increase (between 10-20% per annum) which is not corresponding to salary increment (less than 10% per annum) requires serious address by the government. The respondents call for government involvement in financing issue especially in relation to credit deregulation in Malaysia. 5.0 CONCLUSION The research investigates the severity of housing affordability problem among respondents in the City of Kuala Lumpur. The young generation is seriously affected despite educated and work to live up the city due to low income. Although the older seems to better, they are still seriously affected by housing affordability problem. To address this, the provision of houses in the City must consider the units that demanded and afforded by each group. The short term solution will be
10 to provide more renting units as transited before the income is sufficient to buy the houses. Research should be undertaken to identify what is needed so that the right house are afforded by right citizen. REFERENCES Aminah Md Yusof and Chai Chang Saar. (2012). Relative Poor and Accessibility to Home Ownership in the City of Kuala Lumpur. Paper presented at International Conference on Social Science (ICSSS 2012) San Diego, United State of America 1-2 November 2012. JobStreet (April 2014). Retrieved from http://www.jobstreet.com.my/ Anirban M, Francis, K.W. Wong. and Eddie, C. M. Hui. (2006). Relationship Between Housing Affordability And Economic Development In Main China: Case Of Shanghai. Journal of Urban Planning and Development, 132(1), pp 62-70. Economic Planning Unit, Malaysia. (2008). Official Website of Economy Planning Unit, Malaysia. Retrieved from http://www.epu.gov.my/en/the-malaysianeconomy-in-figures-2008 Gan, Q., and R. J. Hill. (2009). Measuring Housing Affordability: Looking Beyond the Median. Journal of Housing Economics, 18(2), 115 125. Malaysia Economy Report. (2010). Monistry of Finance Malaysia. Retrived from http://www.treasury.gov.my/index.php?option=com_content&view=article&id=1 712%3Alaporan-ekonomi-20102011&catid=73%3Asenarai-laporanekonomi&Itemid=174&lang=en