Penang’s (and Malaysia’s) property prices, scary and untenable — Ong Ee Cheng
JULY 15 — I just met up with a high school friend. She and her husband are both doctors who have been practicing for several years. They can’t afford a house in Ipoh, let alone one in Penang. If two doctors can’t buy a house, who can?
Property prices are scarily expensive in Penang. We try to justify Penang’s prices by comparing them to Singapore’s or Hong Kong’s. However, it boils down to expenditure versus income, i.e., affordability. Let us assess the income levels, and correspondingly, job opportunities, in the three isles. The job markets in Singapore and Hong Kong are very different from the jobs available in Penang. Singapore and Hong Kong are investment, banking, and finance hubs. Furthermore, you could probably find a job armed with a university degree in almost any field in Singapore and Hong Kong. The job market for university graduates in Penang is almost exclusively the domain of engineers (in addition to your usual suspects — doctors, lawyers, etc.). Let’s face it, the representative Penangite is still the char koay teow seller, the small business owner, the secretary.
A 1,500 square foot condo in Tanjung Tokong is priced at RM 800,000. If you pay off your mortgage over 25 years, you’ll be paying approximately RM 5,000 a month, which means that you’re earning RM 15,000 a month, or RM 7,500 each if you’re purchasing the property as a couple. What percentage of the population makes RM 7,500 or more a month?
Escalating prices and stagnant wages translate into increasingly unaffordable housing, and the situation is not sustainable. A few scenarios lie ahead: (a) prices fall, either rapidly or gradually, (b) we get trapped in the Tokyo housing model where it takes two or three generations to pay off a shoe-box apartment, (c) middle-income professionals get priced out of the island.
We like to imagine that we are somehow immune to the forces that govern the rest of the world. Everyone is rushing in to buy, believing that property prices will continue to rise. Developers are grabbing every piece of prime real estate left, and building high, both literally and figuratively. We don’t have to look too far back to see the possible hazards lying ahead of Penang — the 2007 U.S. subprime mortgage crisis, the 2009 Dubai debt crisis. The Penang (and Malaysian) property market is in tune with Asia’s and Australia’s, which saw prices skyrocketing the past few years. However, prices have already started falling in Singapore, Shanghai, Brisbane, and Mumbai. Analysts expect property prices in Asia and Australia to fall by 25% to 50% over the next few years.
Price is the mechanism which brings supply and demand into equilibrium. It is not foolproof, however, as in the case of Penang (or Malaysia), when consumers overestimate their ability to pay, and end up with an undesirable outcome, whereby it takes two (or even three!) generations to pay off a piece of property.
At the end of the day, whether prices fall, and how fast they fall, depend on the holding power of property owners. If they have the liquidity to hang on to their property for decades, through recessions and financial crises, then the rich get richer, the poor get bailed out by the government, and the middle-income professionals get shoved off the island. That is a sad, sad day, indeed, when the Penang we know becomes the holiday abode of wealthy foreigners.
The government has introduced some measures to “manage” the property market, but these measures are about as effective as a toothless tiger. Let us consider two of them.
First, higher taxes are imposed on property bought and sold within two years in an effort to curb speculation. However, development projects are usually in the works for a few years. Some projects don’t require any payment aside from the initial deposit until after you receive the keys to the property. Hence, it’s entirely feasible to “buy” a property when it’s launched, pay nothing for two years or however long it takes for the property to be built, and sell it as soon as it’s completed — without having to make a single monthly payment. Clearly, two years is far too short a time frame; higher taxes should be imposed on properties resold within five (or more) years of purchase, or within two (or more) years of completion.
Second, there are rules restricting foreigners from purchasing property costing below a certain figure, and that figure was recently raised to RM 1 million. That is too little, too late. Since a remotely nice apartment on the island costs close to RM 1 million these days, a price floor of RM 1 million does next to nothing.
So, what has gone wrong?
1. There has been absolutely no city planning or housing planning for the past fifty years. It is quite obvious to the casual observer that there is an oversupply of luxury condos (occupancy rates are estimated to be between 15% and 30%), and a severe lack of options for middle-income professionals on the island. These observations are backed by the Penang Institute’s October 2011 research papers, which further argue that there is an oversupply of low-cost housing.
2. Lax regulations have resulted in a speculators’ playground. Bank lending should be tightened up (irresponsible lending led to the mortgage crisis in the U.S.). A 10% downpayment should be required, and mortgages should be designed to be completed within 25 years. Mortgages for all properties should not exceed a third of gross household income. The capital gains tax should be increased from the current 5%. (Compare that to 10% in Singapore and 20% in China). Properties resold within a certain number of years without due cause (relocation to a different city, etc.) should be highly taxed.
3. We’re so keen on promoting our real estate to foreigners when we can barely keep our country functioning. Malaysia Property Inc. was set up in 2008 with the express aim of selling RM 20 billion of real estate to foreigners within ten years. Why? The only people who benefit are the developers. The locals get priced out of our own country. We need to stop that nonsense right away. Foreigners should be charged higher duties on property, as Singapore has started doing. If we can give the Bumiputera a 5%-7% discount on housing, why can’t we protect the housing interests of our own people?
We don’t need more houses. We just need affordable houses.
* Ong Ee Cheng reads The Malaysian Insider.
* This is the personal opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insider.