MONDAY, 5 June 2023: Last week, Prime Minister Datuk Seri Anwar Ibrahim asked the Local Government Development Ministry to review conditions set for housing developers to ensure that they provide affordable housing for all mega projects developed. Anwar said this was necessary as the requirement for these projects to include at least 30% of affordable housing was not followed according to the schedule and scale set. Anwar stated that affordable housing is a real issue for the middle-income group, adding that about 200,000 units priced at RM300,000 and below are needed to meet the housing demand of civil servants throughout the country.
According to the Center for Market Education (CME), the suggestions from the Prime Minister do not differ from the approach followed by previous governments, an approach that does not take into account some general misunderstandings about affordability in terms of definition, measurement and policy proposals.
Commenting on the news, Dr Carmelo Ferlito, CME CEO, stated that «we keep on judging affordability by using the Price Income Ratio (PIR), which is a limited analytical tool; but there is more: we keep on calculating PIR for new launches, imagining that each household would buy brand new houses (an utopistic scenario), while 80% of the transactions happen in the secondary market. In a nutshell – added Dr Ferlito – we measure affordability of a certain housing market, while people buy and sell in a different market».
Elaborating more on the PIR, which compares the median price of a dwelling with the median household income, Dr Ferlito explained that, «while it is an index easy to calculate, it does not apply to rent, does not take into account location, and does not really say how much housing can be purchased for the median price. Moreover, a low PIR does not necessarily indicate a good level of welfare; it might be due to economic stress or absence of demand (in turn signalling something wrong about the city or the State under consideration). Therefore, while PIR might be useful for identifying an affordability problem, it is too simple to be the driving force for a policy solution».
Most studies on housing affordability in developing countries merely focus on the price and the composition of new housing, drawing the conclusions that these new units are unaffordable to the poor and the private sector has no interest in entering that market segment, and therefore the government should do something in the form of direct investment or by forcing private developers to intervene with imposed quotas of affordable housing. Under the social pressure to do something in order to provide acceptable housing standards at an affordable price for all, government policies make mistakes, starting with often ignoring housing location. By focusing only on income (ignoring floor area and location), government turns people facing issues in getting shelter into a mere statistical group, isolated from the rest of the community, a statistical problem to deal with. Moreover, most government action is based on wrong data, thus drawing wrong conclusions: not only data from the informal sector are disregarded, but it also ignores that the existing stock plays a crucial role in current transactions; there are indeed more transactions in the existing stock rather than in the new supply.
At the same time, governments often exacerbate the high cost of housing in a city by limiting the supply of housing through regulations and underinvesting in urban expansion. With reference to 45 cities in the United States, an inverse correlation between housing supply elasticity and development regulation has been found: an increase in regulation makes it more difficult for the supply to adjust to the demand pressure and this, in turn, keeps prices at high levels: fewer market constraints would facilitate a readjustment of prices toward lower levels.
CME intends to contribute to the debate with the development of a new affordability index, currently under study by Dr Ferlito and Prof Consilz Tan (a CME Fellow), based on a mix of financial affordability (PIR) and social affordability (location, connectivity, occasions for social mobility). Such a new index, which should be applied to the secondary market too, will have to be combined with the following pillars for a different policy action:
- Too-strict requirements for low-cost developments (i.e. minimum size) should be avoided in order to facilitate the interaction between supply and demand, taking into account the location and size factors, and therefore allowing lower income people to move toward the economic heart of the country, supporting thus not only their housing issues but also promoting their possibilities for a higher degree of social mobility.
- Disruptive entrepreneurship will play a key role in developing new technologies for making housing developments cheaper from the cost side. However, in order to emerge such kind of entrepreneurship requires freedom to react to market signals and cannot be centrally designed by the government.
- The rental market will play a growing role in the future: the government may play a different role in the low-end segment, with initiatives like the guaranteed-rent homes, where the central authority guarantees the loan for those developers investing in affordable projects, and partially covers the rent disbursement, in order to make the projects both affordable and economically viable.