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The Malaysian tripartite economics of affordable housing

Updated: Apr 19, 2023

16 December 2021 - Best view in desktop.

The pervasive problem of unaffordable affordable housing is measured as Price to Income Ratio (PIR) — (Median House Price / Median Annual Household Income) where Malaysia possesses a PIR of 4.1 in 2019, indicated it will take 4.1 years for median household, who earns RM5,873 per month, to own a house value at RM290,000.

The looming B50 in tandem with psychological distress

Housing is unaffordable to half of the population and the matter is worsen where Bottom 40% (B40) or lower income group has increased to Bottom 50% (B50) due loss of income and employment during the post COVID-19 pandemic. Further exacerbating the matter, Malaysian Mental Health Association (MMHA) reported that more than a two-fold increase in cases seeking counselling related to stress. Long-term psychological distress impact the body and health not only contributing to premature coronary artery disease but also to risk of heart attacks.

Twelve (12) pressing matters arising and economics of affordable housing

The following tripartite economics of Affordable Housing Supply, that has profound effect on the housing affordability are; firstly Malaysia whole of Government with more than 20 agencies at both federal level and state level; secondly is the Supply led by property developers and finally the Demand are both house purchasers and renters. Refer to exhibit - The tripartite economics and matters arising in Malaysia Affordable Housing.

The tripartite economics and matters arising in Malaysia Affordable Housing

The tripartite economics and matters arising in Malaysia Affordable Housing

The burning matters of supply and demand;

M1. House Price to Income Ratio (PIR) at 4.1 2019

M2. Mismatch of Supply & Demand such as 26% unsold units priced below RM 300,000 in 2021

The disadvantageous of lower income group namely B40 and looming to B50;

M3. 4.6 million household (57% of 8 million household) earns less than RM 5,336 per month in 2019

M4. Choice of rental market / rent to own based on economic condition and lack of landlord-tenant legal


M5. Bank loan approval rate at 72% for price below RM 300,000 in 2020

Government national housing policy and demand touchpoints;

M6. Need of community / neighbourhood development and capacity building

M7. Lack of building maintenance and consideration on housing whole lifecycle cost (WLCC)

Property developers predicament's role as supply in affordable housing;

M8. Construction cost 50%

M9. High land cost 20%

M10. Capital contribution and compliance cost 6.6% to 20%

The most important and major force is the exigence of Whole of Government approach (WGA)

M11 Lack of database both supply and demand information leading mismatch of affordable housing

M12 Fragmented and absence of coordination amongst 20 agencies to provision adequate and cost effective affordable housing


Whole of Government approach (WGA) to lead in economics affordable housing

Moving forward urgently is the need of a concerted and consolidated WGA with nuance to supply and demand needs. Aleevar puts forward a summary suggestion of 4 collaborations (C1 to C4) steps to be undertaken and broken down into 11 suggested action plans (AP1-AP11) reviewed from National Housing Policy housing or Dasar Perumahan Negara (DRN) 2018-2025 that has already identified 5 focus areas and not less than 50 action plans with suggested measure back in 2018, National Affordable Housing Policy or Dasar Rumah Mampu Milik (DRMM), Bank Negara Malaysia (BNM), Khazanah Research Institute (KRI) and Tsinghua University. Refer to exhibit The Whole of Government approach (WGA) collaboration and action plan.

The Whole of Government approach (WGA) collaboration and action plan

The Whole of Government approach (WGA) collaboration and action plan

The following suggested WGA collaborations (C) and action plans (AP) are;

C1. Government (and inter-agencies) coordination

The critical path to move forward are 3 main action plans entailing centralised housing authority, unified housing database and land preparation;

AP1. Centralise affordable housing authority

  • Malaysia Government encompasses 20 federal-level and state-level agencies are empowered and led by National Housing Department or Jabatan Perumahan Negara (JPN) and Housing Ministry (KPKT) guided by National Housing Policy housing Dasar Perumahan Negara (DRN) 2018-2025. The novel affordable housing intent was mooted back in 2012 to facilitate docile group up to Middle 40% (M40) having household income (HHI) between RM2,500 and RM7,500 per month to purchase house price between RM 100,000 and RM 300,000. However, provisioning of affordable housing are fragmented and uncoordinated has resulted in slow progress to achieving Government’s affordable housing target.

AP2. Create unified housing database

  • Klang Valley Affordable Housing (KVAH) has been much written on supply from home ownership of 3 programmes namely Residensi Wilayah (RW), Rumah Selangorku (RSKU), Residensi Prihatin (RP) and recently Rumah Idaman (RI). The main factors that will influence the success of affordable housing are affordability, availability in strategic location, financing and lower income group purchase financial capability. KVAH (excluding RI) can expect 72 affordable housing projects amounting 53,244 units by 2026 sourced from 3 official programmes website in 2021 based on Aleevar Research and the Spatial Distribution of KVAH.

  • However, a much needed is a unified housing database (i.e. matching demand and supply) in providing data encompassing demand data Economic Status of Households (e.g. monthly income, household income, place of work, employment status, etc), Household Composition (e.g. marital status, household size, etc.) and Household Preference (e.g. location, property size, design, transportation). The supply data includes Existing and Planned Supply (e.g. location, price, size, unsold units and type) . See example of demand study of Singapore Housing Development Board (HDB) Household Survey 2018.

AP3. Prepare affordable land

  • Dasar Rumah Mampu Milik (DRMM) encourages KPKT working with state governments to cooperate with the private sectors to propose suitable lands for affordable housing development

  • National Housing Department and Jabatan Wakaf, Zakat dan Haji (JAWHAR) to collaborate with the State Islamic Religious Councils to unlock potential waqf and Baitulmal land to tap on 26,000 hectares of underutilised wakaf land where out total 30,000 hectares of wakaf land throughout the nation, only 13% has been developed.

C2. Government (and Public) capacity building

This article jumps briefly into the Demand (i.e. house purchasers) perspective of a RM250,000 example unit cost breakdown located in a Klang Valley.

AP4 Improve financial literacy

  • For a start, for house purchaser to own a RM 250,000 unit is an investment will have to consider an upfront down payment (e.g. 10% cash) and acquiring a bank loan with loan to value (LTV) up to 90% and max tenure 35 years depending of credit worthiness of purchasers rated by financial institutions). Economic community development programmes are required to be implemented and measured such as to raise credit worthiness that encompasses employment opportunity, income generation and wealth creation to enable purchaser not only eligible for loan but to repay the loan instalment in long run.

  • An look inside of costing for every unit with the size of 900 square feet (sqft) sold at RM 250,000, there are 8 main house cost components. The 2 largest cost components which contributed half of the costs is the Construction (building including carpark) cost RM 117,000 per unit (46.8%) and followed by Land Value at RM 43,560 (19.2%) per unit. Both Infra and landscape cost, and Capital contribution & compliance cost at 7%. The property developer Pretax Profit Margin is at 15% at about RM 36,155. After deducting the tax at 4.2%, developer makes only RM25,750 about 10.3%. Refer to roving diagram of the RM 250,000 unit cost.

The RM 250,000 unit cost. (Please click arrow button above to explore)

AP5 Launch various affordable financing schemes

  • For first time buyer, owners may choose My First Home Scheme or Skim Rumah Pertama up to 110% from various commercial banks, where Cagamas SRP provides up to 20% guarantee, doing away down payment and Rent to own provides rent before deciding to own however the cons are they may not own the property during the lease or if the property price falls.

  • Review more social market options such as repayment affordability instead of income based through different agencies at federal and state levels or even private cooperatives. Additionally, explore third sector's social impact bonds (SIBs), or from an Islamic perspective, socially responsible investment sukuk (SRI Sukuk) and partial solution of 2-generation loan.

AP6. Ensure dwelling condition

  • Upon owning the unit of 900 sqft, the home owners is expected to pay monthly maintenance fee of RM247.50 with service charge (i.e. RM 0.25 per sqft – RM 225 per month) and sinking fund (i.e. 10% service charge – RM 22.5 per month) through out the loan tenure to maintain the value of the high rise building. However, the collection monthly maintenance may not suffice to cover the cost of major repair or refurbishment in the later years.

  • The concept of whole lifecycle cost (WLCC) of every affordable housing built to be considered to ensure maintenance fee and government assistance to fund the building operating cost ahead in the next 80 years.

Based on Singapore HDB's Home Improvement Programme (HIP), Aleevar made a Affordable Housing Whole Lifecycle cost model assumption (not based on Net Present Value - NPV for purpose to simplify explanation) where every 30 years, there will be 2 major upgrade and repair costs that could total up to RM 14 million in year 30 and year 60 from the sinking fund collection only at RM8 million, a deficit of RM6 million. However, this is subject to the capacity of Joint Management Board (JMB) in managing collection, expense and executing home improvement projects cost effectively. At the end of 80 year, the end of life could cost up to RM 62.7 million.

In short, the WLCC could be as much as RM 185 million excluding the initial cost of GDV at RM125 million. See table the Affordable Housing Whole Lifecycle Cost (WLCC) assumption.

  • Based on the guideline and standard from PLAN Malaysia or Jabatan Perancangan Bandar dan Desa, to implement both public space (i.e. community hall, sports, farming space, etc.) where fit in tandem with human capital development (i.e. early childhood education, tuition, health care assistance and elderly care, training) resulting a safe, cohesive, quality and self sustainable neighbourhood development.

The Affordable Housing Whole Lifecycle Cost (WLCC) assumption

The supply perspective: A RM 125 million project GDV and Cost Influence

An examination of a well-publicised MKH Berhad Cost Compliance case study of a 500-unit of 900 sqft in 5-acre land (at a density of 100 units per acre) with a Gross Development Value (GDV) at RM 125,000,000 shows the following breakdown and cost influence.

The viability of the KVAH are highly influenced by the 2 largest cost components. Firstly, the construction (building) at RM 58,500,000 (46.8%) based RM 130 per sqft of total number of house units (i.e. 500 units x 900 sqft equivalent to 450,000 sqft) which is subject to risk of between 5% and 10% higher cost of material due to poor RM currency performance.

Secondly, the land value (or cost) at RM 23,958,000 (19.2%) based on RM 110 per sqft that could be in the radius between 10 KM and 20 KM from KLCC with candidates such as Batu Caves, Seri Kembangan, Balakong and Puchong with exception for Subang Jaya and Petaling Jaya that could be above RM140 per sqft based on Aleevar's estimates on land price data from Dr. Foo Chee Hung.

The subsequent cost is Infra & landscape cost at RM 9,250,000 (7.4%) includes road, drainage, landscaping and upgrading cost for traffic disbursement.

Property developer’s Pretax profit margin (before 4.2% tax) accounts 14.5% at RM 18,077,528 but after tax, the Net Profit Margin remain only at 10.3% at RM 12,875,000. Industry average net profit margin has fallen to 14% in 2019 (after the peak at 21% in 2015).

In Malaysia, property developers are subject to cross subsidise at least 30% of houses as low cost units from the sale of higher cost units. However, imposing developers to build affordable homes without government cross-subsidies will lead to higher property prices in other housing categories.

C3. Private (Developers and banks) innovation

AP7. Reduce construction cost and embrace IBS

  • The property sectors need to lower cost in long run by embracing Industrialised Building System (IBS) quicker that would mean quality is improved, costs are reduced, and construction timelines are accelerated. But, they are costly in the short run due to high cost in manufacturing unless it is widely adopted resulting economies of scale, and lack of industry experience and skillset. Currently, about 35% of private developments in Malaysia are utilising IBS components namely 714-unit RSKU Jade Hills development in Kajang where construction time was cut to 2 years from 3 years.

C4. Government (and private sector / utility sector) collaboration

The subsequent path are 4 closely knitted action plans amongst the Governments (i.e. both federal and state), property developers of both private and public sector and utility company (i.e. power, water, sewerage, telecommunication, etc.)

AP8. Reduce compliance cost and AP9. Removal of utility capital contribution

  • Capital contribution (are building utility facilities and surrendering them to power, water, sewerage and telecommunication companies) & compliance cost at total of RM 8,231,200 (6.6%) where the unit price are influenced by a combination of as % of land value, % of GDV, per units, per 1,000 sqft.

For compliance cost example namely land conversion from agriculture to residential is 15% of land value and development charges at 1.5% of GDV value RM 1,875,000 are not show in the table. Both compliance cost reduced by authority and capital contribution could removed by having utility companies to invest own capital to be recovered via tariff based and government funding respectively.

AP10. Strengthen development control and AP11. Control affordable housing price

  • State Governments (subject to the State Government Council) are empowered with the 6 key guidelines of the DRMM prescribed such as housing type (i.e. high rise, landed), density (i.e. max density of affordable housing per acre), unit size (i.e. min unit size), price (i.e. max sales price), public amenities (i.e. public space, community hall, place of worship) and utility (i.e parking). See an example of Selangor's Rumah Idaman requirement with unit size of 1,000 sqft, 2 car parks, partly furnished kitchen cabinet, fans, lighting, grill for door and windows, free Sales and Purchase and 2 year free maintenance fee. However, State Government Council is responsible for making comprehensive reviews on property market, conducting demand and supply studies, and to provide strong justifications.

In summary, Malaysia has no shortages of policies in place specifically National Housing Policy housing or Dasar Perumahan Negara (DRN) 2018-2025 that has already identified 5 focus areas and not less than 50 action plans with suggested measures, and National Affordable Housing Policy or Dasar Rumah Mampu Milik (DRMM).

Homeownership and housing (including renting) are necessity and nation equity for Malaysia and it should be considered as merit good. In addition to the COVID-19 endemic and the laissez-faire affordable housing as property play are market failure that required urgent and immediate Malaysian government to lead a coordinated intervention, with various stakeholders amongst the federal government, state governments, developers, banks, manufacturers, utility companies and real estate intermediaries in provisioning subsidised and/or incentivised affordable housing projects based on merit for public consumption.

Malaysia's affordability of affordable housing is in dire straits, the Whole of Government approach is required urgently to implement the proposed 50 action plans and measure the performance.

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