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Tuesday, July 17, 2012

The question of housing (Part 2): Towards a sustainable solution

By Zairil Khir Johari | TMI

I have previously written about the housing situation in Penang, in which there is a stark mismatch between supply and demand. This mismatch takes the form of an oversupply of housing stock at both the lowest and highest range of income earners, while there is an undersupply at the middle-income range.

For the bottom 40 per cent of income earners, the number of affordable housing stock doubles the number of families at that income range. At the opposite end, there are more luxury residential developments compared to the number of households at the highest income bracket, though this represents a completely different problem altogether.

However, the real problem of housing in Penang is the unavailability of housing stock to supply the middle-income earners. Currently, there is a shortage of 70,052 units for this group of typically newly-wed professionals and young middle-class families.

This glaring affordability gap threatens to be a serious problem, especially considering the fact that Penang is a middle-income state with a higher-than-national average mean household income of RM4,407 per month.

Affordability, of course, is a subjective issue. One can easily point out that since there are surplus units at the low-cost range, these families could simply purchase houses that cost under RM150,000. However, the prospect of living in a cramped two-bedroom flat in a building that would unlikely be well-maintained and potentially having crowded neighbouring units housing low-skilled foreign labour is unlikely to be what a young aspiring family earning a joint income of RM5,000 would be looking for. At the same time, a three-bedroom apartment in a nice neighbourhood would probably cost more than RM350,000, which would be out of their reach.

This acute mismatch did not, of course, occur overnight. The demographic trends have always been there, but flawed development and planning policies throughout the decades have led to a situation in which the construction of housing stock does not meet the demographic needs.

There are two major reasons for this. Firstly, the role of providing social housing has been outsourced to the private sector without sufficient controls or informed guidelines by the government. In line with the national housing policy, developers are compelled to allocate a portion of their housing project as low-cost units (30 per cent in Penang, ranging from 20 to 40 per cent nationwide depending on the state).

By imposing this obligation — euphemistically described as “corporate social responsibility” — upon developers, the government is in fact shirking its responsibilities in an unsound manner. On what basis is this arbitrary quota derived? The 30 per cent figure was introduced in 1982 — is it still relevant today? Does it reflect demographic demands and future growth projects? What about geographical and socio-economic distribution?

Also, this blanket strategy means that it is the same requirement (with some variations depending on the state) on all developments with only minor regard to other factors such as its gross development value, selling price, housing type and location.

As a result of this uninformed policy, we have often ended up with sub-standard products as developers seek to cut corners to protect their bottomline. Furthermore, it is precisely such policies that have exacerbated the uneven development of housing stock, particularly in Penang. This is because most new housing projects tend to be high-end developments, and since they are forced to abide by the quota they end up building more low-cost housing that may not necessarily be needed.

Secondly, this supply and demand mismatch is also caused by market factors. As I have explained in my previous article, intense competition, costly land prices, and demand for high-end housing encouraged by a speculative property market and irresponsible lending policies virtually make building houses at the affordable range financially unattractive. When faced with the option of building medium-cost houses that will generate narrow margins or “upping” it to a high-end development and prospectively making much more, it is a no-brainer which option a developer would choose.

Therefore, this mismatch dilemma is a result of unintuitive housing policies on the one hand, and market failure on the other. In such a situation, the only conceivable solution is for the state to take ownership of the problem.

Recognising this gross deficiency, the Penang state government has begun to make changes. Instead of simply forcing developers to fulfil the low-cost housing quota, financial contribution is now allowed in lieu. Though the quantum can potentially be increased, this policy change is by far an improvement, as it is now no longer a blanket strategy but one that takes into account the size, price, location and type of development that is going to be built. By collecting money instead of forcing developers to build low-cost units, the state will then have revenue to channel towards more pressing housing needs.

In addition, the state government has announced the introduction of stiffer foreign ownership laws in a bid to curb foreign speculation. Under the new regulation, there will be a minimum value of RM1 million for foreign property purchases (RM2 million for landed property) on the island.

However, there is still much more that can be done. The state should also push the market in the right direction by instituting an intuitive system that taxes the “wrong” type of housing developments and “rewards” the right ones. For example, if the state is in need of a particular type of housing, then higher levies should be imposed on the other types, with a scale that is proportionate to the gross development value of the project.

At the same time, a holistic housing policy is not sufficient if it is only concerned about managing market forces. The state must also play a direct role in the provision of affordable, quality housing, and that means actually building or subsidising them. This is especially so in Penang, where there is a stark undersupply of housing for the middle-income group. That said, the state’s role does not end by simply providing stock to fill the gaps, but it must also be involved in overseeing development guidelines, ownership control, maintenance policy and a resale mechanism to control speculation in social housing. On this note, the Penang state government has taken active steps in the right direction by allocating an unprecedented RM500 million for direct intervention via an affordable housing fund.

In the bigger picture, revisions to quit rent and assessment rates are also necessary, and should be designed in such a way as to tax larger and more expensive properties in order to increase the cost of speculation. Conversely, smaller and cheaper properties should enjoy reduced rates. There should also be no exemption for unoccupied property.

Looking ahead, perhaps it is also timely for new, bold and creative ideas. As the saying goes, there are many ways to skin a cat. As high housing prices will always be an issue for a water-locked island, it may also be useful to think beyond the “ownership” model. There are many options to consider — full rental, rent-to-own, or perhaps even a co-share ownership model with the state.

Finally, housing development must never be approached in a piecemeal fashion. Its policies should necessarily form a logical part of an overall land use plan that must take into account future socio-economic needs and changing demographic trends. Ideally, it should also go hand-in-hand with changes to federal policies, as factors such as fiscal and monetary policies play an influential role.

Though the housing problems in Penang may appear to be peculiar to the state, the truth is that its underlying factors are similar throughout the country. Thus, what is required not only for Penang, but also for the rest of Malaysia, is a total rethink of our outdated and unsustainable housing and planning policies at both state and federal levels.

The question of housing (Part 1): Understanding the problem

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