HOUSING affordability is a long-held issue in both the developed and developing countries. With today’s households buckling under the strains of Covid-19, coupled with the house price surge buoyed by ultra-low interest rates and governments’ fiscal stimulus packages, housing affordability has never been more challenging.
Based on the median multiple approach developed by Demographia International, housing is considered affordable when the median price for the housing market is not more than three times the annual median household gross income. The 3.0 threshold is derived from the historical trend in six nations (Australia, Canada, Ireland, New Zealand, UK, and US) where housing affordability ranged between 2.0 to 3.0 until the 1980s or 1990s.
In the case of Malaysia, since the monthly median household gross income in 2020 is RM5,209, the affordable housing should have a market median price of RM187,524 instead of 295,000. A ratio of 4.7 indicates that house prices are seriously decoupling from people’s income, and thus, building of more affordable houses – set under certain ceiling price based on the 3.0 threshold – are needed to improve the homeownership among low- and middle-income groups.
However, a review on the country’s past house price-to-income ratio finds that the median multiple for Malaysia has been consistently exceeding the 3.0 affordable threshold, and tends to hover between 4.0 and 5.0. After hitting its historical high at 5.5 in 1995, the ratio went down and remained stable at the level of 4.0 for nearly two decades, until reaching another peak at 5.1 in 2014, and then fall back to the range of 4.0 to 5.0.
Despite the housing market consistently being benchmarked as “seriously unaffordable”, the country’s homeownership rate has been increasing from 67.3% in 2000 to 76.9% in 2019; indicating that the effect of weakening housing affordability on homeownership is, in fact, less significant than the one generally perceived. This directly poses the question on the suitability of using median multiple approach to assess housing affordability in the Malaysian context. It also challenges the widely accepted perception saying that young people now have become harder to get a foot on the housing ladder than their previous generation.
To better gauge the country’s housing affordability, so as to facilitate the development of a sustainable housing policy, measure on housing affordability that solely comparing house prices to the household income should be avoid. Instead, a method that is more reflective of a household’s ability to purchase a house by taking into account the households’ spending pattern, attributes, cost of living, and even the housing costs should be adopted. In terms of the scale of measurement, a city level is highly recommended as the housing market is localized and segmented in nature.
The housing crisis is likely to persist if we continue to simply gauge our housing affordability by benchmarking it with the 3.0 threshold, and then call for more affordable houses within certain price range to be built. Doing so will not only give rise to the question on whether it is even possible to build housing cheap enough to make it affordable to the lower-income group, but may also contribute to the problem of cross-subsidisation, thereby posing threats to the balance of the housing industry ecosystem, and even with the tendency of exacerbating the problem of oversupply in the affordable housing market segment.
This article was contributed by MKH Bhd manager of product research and development Dr Foo Chee Hung.
