The Malaysian housing problem
Malaysia has a housing problem.
There are too many unsold properties, and many Malaysians’ aspirations of becoming landlords are evidently left wanting.
Embracing the latest fintech buzzword, the government looks to crowdfunding as the next frontier of home-financing.
During the budget speech on 2 November, Malaysia’s Minister of Finance unveiled policies aimed at assisting Malaysians to become home-owners. The policies announced include the approval of a “private sector driven ‘Property Crowdfunding’ platform” which will serve as an alternative source of financing for first-time home buyers.
Explicitly, the example provided by the Minister illustrated that a home purchaser will be able to acquire a selected property by putting down 20% of the purchase price, with the 80% balance to be filled up by investors looking to bank on a potential appreciation in the property value over time.
Not much else was disclosed during the 2019 Budget speech, beyond the Minister’s claim that this financial innovation will be the first in the world, and if successful, will transform the affordability of homes for first-time home buyers.
Two days after the budget speech, EdgeProp launched a first-of-its kind innovative home-ownership scheme for first-time home buyers in a ceremony officiated by the Prime Minister of Malaysia and attended by the Finance Minister. The scheme, dubbed FundMyHome, allowed buyers to own a residence, simply by putting down 20% of the purchase price, with the 80% balance to be filled up by investors looking to bank on a potential appreciation in the property value over time.
If there was a perfect example of a coincidence, this would be it.
Datuk Tong Kooi Ong, chairman of The Edge Media Group, believes that the FundMyHome scheme leaves no one out of the ecosystem. The scheme will help home-buyers and developers alike. The problem of escalating home prices, according to Tong, is not the lack of supply, but rather, the indebtedness of Malaysian households, which impacts their ability to borrow.
Funky economics aside, the answer, according to Tong, is for first-time home-buyers to purchase their residential unit through FundMyHome. Instead of increasing debt, the scheme actually reduces it, says Tong.
How does FundMyHome work?
To participate in the FundMyHome scheme, prospective buyers pick a property listed on the portal, pay 20% of the price, move into your new home (or rent it out, it’s up to you!) and in 5 years, decide if you want to stay or sell. Through FundMyHome, buyers won’t have to worry about monthly repayments. Aside from other costs like management fees, insurance and quit rent, owners can choose to live in their property without paying anything else!
Imagine being able to own a property, and not having to pay any instalments for the foreseeable future.
It almost sounds too good to be true.
A closer look at the scheme points to a mechanism that transfers the risk from housing developers to buyers and investors.
The 20% equity paid up by the buyer will be set aside, to be earned by the developer in 5 years time (provided that the price of the home appreciates 20% by then). On the other hand, developers will receive 80% of the total value of the property, courtesy of investors. As far as the developer is concerned, ownership of the property is shifted from them to buyers and investors. Getting 80% of the value of the property is always better than keeping unsold stock.
During the 5 year term, buyers can decide to stay, or rent out the property. At the end of their tenure, the buyer has to decide whether they would like to sell the property, or to refinance, either by getting a mortgage, or through FundMyHome. Either way, 6 months prior to the end of the scheme, the property must be revalued, at the buyer’s expense of course.
The buyer may refinance via FundMyHome if he decides to continue staying in his home. If the property’s value has appreciated, the buyer will be required to top up some funds in order to sustain the 20% share in the new valuation (because for some reason, though house value has gone up, his equity value has not). Strangely enough, in the same period, the investor’s equity portion in the property has appreciated. Because financial magic.
The scheme’s website makes no mention of what happens if property value has gone down and buyer decides to refinance. Perhaps no extra money is required and buyer can continue to renew the scheme indefinitely, and stay at the property without any commitments, until the value of the property increases. This would of course be the best case for the buyer, not so much the investors.
If the buyer decides that he wants to sell the property, he will need to vacate the house at the end of tenure and hand the sales administration of the house over to FundMyHome, who will act in the interest of the investors (even if you technically own the house).
According to the payout table provided by FundMyhome, in order for the buyer to make any money after five years, the house value needs to appreciate by more than 30%:
The buyer can expect to recoup his investment if he manages to sell at, or above the original price he bought his property at. People familiar with the concept of time value of money will no doubt confirm that the RM60,000 received in 5 years is worth less than RM60,000 today.
Also, the table illustrates that with an appreciation of 30% in 5 years, the buyer looks set to make a profit of 10% on his initial equity. This translates to just about 2% in simple returns a year, for five years.
We at Saluran Betul think that banks can offer better rates on their fixed deposit facilities. Achieving a 30% return on a property within 5 years may be a little bit of a stretch too.
Particularly for properties within states that have high overhang such as Selangor, Kuala Lumpur, Penang and Johor. It is also worth noting that these states have began to experience zero to negative growth in house prices in previous quarters. Coincidentally, a majority of houses listed for sale on FundMyHome is from Selangor and Johor.
If things turn out unfavourably, the buyers stand to lose a portion or all of their initial deposit. In the event that the buyers decide to vacate, would they have enough funds to pay for a deposit on another house? If not, perhaps the buyer will have to resort to renting out a property, or to rent the house that they own(?) from the investors, at a yield of 5%.
For investors, finding a buyer at the right price could take some time if the residential property market continues to be soft. What could potentially happen is that investors will end up with a portfolio of properties that can’t be sold because the price isn’t right. If they eventually manage to sell off the property, then it would make sense to evaluate if the returns received, if any, are worth the time.
Developers would also have already received 80% of the property’s selling price at the start. This is ample capital for the developers to continue running their business. It’s not unheard of for developers to be giving out hefty discounts to clear out old stock. Thus, forgoing 20% of the initial value which will be received 5 years down the road is a small price to pay. There seems to be little incentive to help property value increase. Besides, the way that developers have usually tried to increase existing property value is by building more of the same property around the area, at higher prices. This does nothing if there are way too many properties unsold to begin with.
The state of household finances
In 2017, Bank Negara’s Deputy Governor painted a bleak picture of Malaysia’s household finances. Citing the Financial Capability and Inclusion Survey conducted in 2015, he notes that 3 out of 4 Malaysians find it difficult to raise even RM1,000 of immediate cash for emergencies and that 32% of Malaysians can only cover a week’s worth of expenses in the event of loss of income. Malaysian household’s savings are low, at 1.4% of their adjusted disposable income, and their indebtedness are high, with a 89.1% in ratio to GDP. It is worth noting that residential loans make up 48.6%, or the bulk of their total indebtedness.
Since the scheme’s launching, it has received ample criticism on its affordability, particularly on the ability of Malaysians to come up with the first 20% in order to participate. Within a short span, Datuk Tong of The Edge U-turned from saying that the scheme leaves no one out of the ecosystem, to now stating that the scheme is only meant for a very specific segment of the M40 group: young Malaysians who earn between RM 4,000-5,000 per month and are only just starting out in their careers. Because when you are young and only at the start of your career, you’d surely have close to RM100,000 at hand to pay for your first home, right?
Just when we thought we were done, Tong apparently managed to convince Housing and Local Government Minister Zuraida Kamaruddin that the scheme is indeed open for all, and was not targeted at any specific group. The minister went on to say that those who will benefit from the FundMyHome scheme would include those without a regular income stream, as well as those without bank accounts – both of which affects the individual’s ability to obtain a mortgage.
Traditionally, financial institutions have ways of approving mortgage applications for people without a regular income stream, such as those who work commission-based jobs. If applicants can prove that they have sufficient funds to maintain their living expenses and service loan repayments, on top of having a good credit history, they would most likely qualify for a mortgage.
Saluran Betul is also confident that LHDN will have some questions if someone who has no bank account can produce the 20% required to buy a property.
To sum it up, the narrative around FundMyHome has gone from a scheme that is meant to help all, to one that is meant to help some, then back to a scheme meant for everyone.
There seems to be a lack of clarity in who the scheme actually helps.
But actually, there isn’t.
The scheme is designed to help developers, who again receive 80% of the selling price at the beginning and get to transfer ownership to buyers and investors. What happens after five years? Well, that’s something the buyer and the investor will need to work out.
Addressing the wrong issue
There are no issues with the supply of property. NAPIC’s statistics on property overhang for the second quarter of 2018, indicates that properties priced at RM150,000 and below only made up 14% of total property launches, and constitutes only 12% of the overhang. In contrast, properties priced above RM250,000 was 70% of the number of unsold properties. In the second half of 2018, states where the property market has began softening are also the ones with the highest incoming and planned supplies.
Access to financing is also not the issue. Mortgages remain available for eligible borrowers. 71% of mortgages consist of first-time owners who purchase properties priced at RM500,000 and below. According to Bank Negara, the overall mortgage application approval rate remains above 70% (72% approval rate for financing below RM250,000). Mortgages for purchases of houses priced less than RM250,000 is 25% of all financing approved. This makes sense, given that houses priced within this range make up 27% of total launches in the first half of 2018.
The real problem is affordability.
Earlier this year, The Edge reported that the Malaysian House Price Index (MHPI) grew at a compounded annual growth rate (CAGR) of 7.56% from 2013 to 2017, outpacing median monthly wages and salaries, which grew at a CAGR of 6.17%.
A 2015 study published by Khazanah Research Institute highlighted that property prices are just too expensive for many Malaysians. The study found that in general, prices of properties in most areas are beyond the reach of most households:
Based on everything that has been outlined, it isn’t access to financing or supply that is the issue. The issue is that the houses that are being built in major cities only, and exceed people’s ability to afford them. In other words, homes are being built, but most of them are at the wrong price.
Taking the state of household finances into account, and how Malaysians, according to Tong, are denied access to financing from the banks (who only require 10% down payment) due to excessive commitments – it is hard to imagine how Malaysians can suddenly cough up 20% of the total house value under the FundMyHome scheme.
Again, the question that needs to be asked is, who exactly is FundMyHome helping?
There is no doubt that present and past governments have tried to work on addressing the specific problems faced by first-time home buyers. It probably should be clear by now that making loans cheaper or subsidising transaction costs do nothing if home prices continue to be out of reach for most Malaysians.
Whatever it is that FundMyHome aims to be, it certainly doesn’t address the issue of affordability.
If people were already facing difficulty with traditional mortgages that required a 10% contribution of the property price, it would seem a stretch to suddenly expect that they can now afford a 20% deposit.
For now, it just seems that the scheme is intended to shift the risk of ownership of excess property from developers to buyers and investors.
Tong says that all criticism towards the scheme are wrong and is simply expected of something so innovative and disruptive.
Saluran Betul hopes, for both the buyer’s and investor’s sake, that Tong is right.