Housing Policy: Developers as Money Lenders? Really?
Good morning. I have been busy last few days with political stuff. More headaches and more heartaches. The office is nevertheless pushing ahead with policy work and we are on track to issue our first paper in the next two weeks. We are also starting to look at budget 2017.
Just a quick note on the Minister Noh Omar’s proposal to give money lender licenses to housing developers to charge 12% to 18% interest rates to finance house purchase. This crazy suggestion is a knee jerk reaction to the demands of housing developers to counteract a dire housing market. Currently, banks are only giving 50% to 60% financing on property and as a result, houses are not selling. In searching for a solution, the ministry is suggesting to turn housing developers into moneylenders! All illogical policy solutions serve to only mask these 3 fundamental issues about housing in Malaysia.
The 3 fundamental issues are:
1. Developers are making too much profits. On average over a period of 10 years, 8 years making big profits and 2 years property slowdown, housing developers make an average profit before tax returns around 15% to 20%. It’s an industry of high margins and very expensive goods. In short, it’s the best game in town.
These companies are able to make these incredible margins due to several factors. Efficiency, economies of scale, good designs, understanding the market. Those are good for the industries and buyers. However there are also some who make big margins from a kowtim culture. Getting land cheap from state governments. Getting extraordinary approvals and plot ratios from councils. Getting discretionary waivers on bumi lots.
2. The people are stuck in a middle income trap. For every household who receives BR1M, and that’s a staggering 70%, you can basically write them off as potential house buyers of properties above RM250,000. So what we have is a situation where most housebuyers (the top 30% non BR1M reciepients) already own a home and possibly a second home for investment. In addition, the top 5% are powerful speculators. Wives of the rich and powerful indulge in house buying. House buyers clubs have sprung up. There is nothing wrong with what rich people want to do with their money, but the housing “problem” is really about the top 5% and top 30%, because simply the bottom 70% are priced out of the equation. So if the housing market wants to really recover, we need to get 70% to be house buyers, which means their wages and wealth situation need to improve. The current dire housing market situation indicates that there is just so many houses a rich tai-tai can speculate on.
3. Failure to provide social housing. If the bottom 70% cannot afford to be in the housing market then something must be done to enable them to at least own an asset (wealth building). We all understand that property is a sound investment, whereas owning a car is an investment folly. In order to get the bottom 70% into the market requires meticulous and honest social housing policies. The current policies fall far short of these objectives with the creation of slums and slum landlords (my office will be preparing a policy paper on this soon – so stay tuned for that). With social housing in place, the bottom 70% can trade up to better properties when their financial situation improves. That is how the current market can be sustainable in the longer term, by empowering a culture of house ownerships for the bottom 70%.
So understanding the dynamics of all 3 factors; housing developers are too profitable, the housebuyers are only limited to 5% and 30% of the population and the lack of culture of house ownership for the 70%, we can start to craft a proper policy on housing.
Perhaps we should not interfere too much with the market, but we should at least cut out corruption and abuses of power which fuels obscene profits of certain developers. We must also focus on wages and also on social housing.
But what we cannot do is to ignore these fundamentals and just give housing developers licenses to be money lenders.