AP771 Urban Development and Management - Urban Housing Project

UDM715: Urban Housing Urban Housing Problems

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UDM 715

URBAN HOUSING

ASSIGNMENT

25 JUN 2013

PREPARED BY:

ANWAR BIN SURAN

2012977513

CHECKED BY:

ASSOC. PROFESSOR. DR. MAT ZAIN MAT HASSAN

UDM 771: MSC URBAN DEVELOPMENT AND MANAGEMENT

UNIVERSITI TEKNOLOGI MARA


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House prices in major towns of Malaysia have surpassed beyond the affordability of

the population masses (approximately 95%). Despite the attempts made by the Bank

Negara in the last three years, the house prices are still spiralling. All of these

situations have their own dynamic reason and depending on the country itself.

Keywords: Urban Housing, Property

Abstract


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Preface

We would like to start with a word of thanks for the people who have made it possible to write

this assignment. Firstly we would like to thank Assoc. Prof.Dr Mat Zain Mat Hassan for getting

me in touch with useful contacts and giving me suggestions and advices during the writing-

process. Im also would like to say thanks to my entire friend that have teach me during writing

this assignment.

Anwar Bin Suran


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Table of Contents Page

Abstract 1

Preface 2

Question 1 - Modus Operandi Bank Negara 5

a. Based Lending Rate (BLR) 5

b. Real Property Gain Tax 7

c. Loan to Value (LTV) Ratio 8

d. Housing Interest Rate 9

e. Use Disposal Income 11

Question 2 - Problems of Urban Housing Spiralling 13

a. Housing Bubble and Burst 13

b. Generate Homeless Generation 14

c. Increasing Household Debt 15

d. Increasing Number of Squatter House/Slump 17

e. Oppression Rich People to Poor People 18

Question 3 Reason of Urban Housing are still Raising 20

a. Status People via the type of House 20

b. A lot of Unemployment and Low Income People 21

d. Inflation Effect 22

e. Development in Construction Technology 23

List of References 24

Appendix 25


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Question 1:

What is modus operandi established by the Bank Negara to curb the problem of housing price

spiralling?

Answer:

In Malaysia, the house price is exceeded further than the affordability of the citizens. With the

aim to overcome these problems, Bank Negara took some scheme to control that issue. There

are several modus operandi that was established by Bank Negara to curb the housing price

spiralling problems which are:

a. Base Lending Rate (BLR)

According to iproperty online 2013, define that Base Lending Rate (BLR) is a minimum

interest rate calculated by financial institutions based on a certain formula. This formula

takes into account the institutions cost of funds and other administrative costs. The BLR

is adjusted by banks, but the rate actually is determined by Bank Negara Malaysia

(BNM) during Monetary Policy Meeting.

When people are seeking for home loans in Malaysia, it is common to see banks BLR

offering followed by the percentage (example: BLR-2.4%). Though it looks like some

kind of complicated formula, it simply indicates the interest rate that they are offering to

people based on the BLR as defined by Bank Negara.

BLR in Malaysia now is 6.60%, but every bank in Malaysia might offer different package.

For examples:

Example:

BLR as defined by Bank Negara : 6.6%

BLR offered by the Bank : BLR-2.4%

Actual Interest for your Home Loan : 6.6% 2.4% = 4.2%

Example 1:

Bank Rakyat offers a package of BLR-1.8% for 30 years. (BLR = 6.6%)

Means 6.6 % 1.8 % = 4.8 %.

If buyers borrow RM 300,000

Buyer will be paying about RM 1,574 per month


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For home buyers, it is always beneficial to have their BLR as low as possible. As an

example: for a home loan of RM500,000 over a period of 30 years, the difference in

interest between a BLR of 4.2% and 4.15% (i.e. a mere 0.05%) could be well over

RM5000. Additionally, BLR is constantly undergoing adjustments depending on the

economy. Generally, it rises when the money market is on an uptrend and correlates

downward when the opposite happens. In Malaysia, the highest BLR recorded is 12.27%

in 1998, while the lowest is 5.55% in 2009.

Consequence, when Bank Negara Malaysia (BNM) increase the base lending rate this

will usually cause commercial bank to increase their interest. The higher interest rate in

economy will:

i. Surge the incentive to save. Higher interest rates cause the people concern to

saving rather than borrowing. This also encourages consumer to hold the money

rather than spending it.

Example 2

Bank Islam offers a package of BLR- 2.0% for 30 years. (BLR = 6.6%)

Means 6.6 % 2.0 % = 4.6 %.

If buyers borrow RM 300,000, buyer will be paying about RM 1,537 per

month.


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ii. Higher borrowing cost. Higher interest rates make the cost of borrowing higher.

This will encourage consumers and firms to more concern avoiding take loan.

iii. Higher mortgage interest payments. When interest payment increase

consequence affect the monthly cost of mortgage repayment. This cause less

consumer tends to borrow loan from bank.

iv. The asset price drop. Higher interest rate makes it less attractive to buy asset

such as housing. This will cause drop in house prices and therefore lees people

tend to have property or encourage people to have a house as shelter not as

asset.

b. Real Property Gain Tax

Azizi Ali, 2012 define that the Real Property Gains Tax (RPGT) is the tax we pay after

selling our properties for a profit (In the unlikely case that people do not make money,

there is no tax due). By the way, it is paid by the seller. The tax will be charged upon him

at 30% for the first year and 25% for the second year. This method will reduce the

number of transaction as they will charge for the tax when selling their house.

According to Malaysia Budget 2012, effective from 1 January 2012 gains from the

disposal of residential and commercial properties are taxed between 0% and 10%

depending on the holding period of real properties as follows:

Holding Period

RPGT Rates

Companies Individual (Citizen & PR)

Individual (Non-Citizen)

Up to 2 years 10% 10% 10%

Exceeding 2 until 5 years 5% 5% 5%

Exceeding 5 years 0% 0% 0%

Table: Holding Period and RPGT Rates. Sources: Malaysia Investment Development Authority

Example:

Bought Unit 1 year ago with RM500, 000.00 and sell within 2 years with selling Price RM600, 000.00

Since it fall within 2 years period so the RPGT will be 15%

Gross Earning: RM600K RM500K = RM100000

RPGT = 15% x RM100K = RM15000


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The RPGT rates will not burden genuine property owners as they are given exemption

and the payment of RPGT is based on net gains as follows:

i. RPGT exemption on net gains from the disposal of one unit residential property

once in a lifetime by an individual who is a citizen or a permanent resident of

Malaysia;

ii. RPGT exemption on gains from disposal of property between parents and

children, husband and wife, grandparents and grandchildren;

iii. RPGT is charged only on net gains after deducting all related costs such as

purchase price, renovation costs and incidental cost example legal fees

iv. Exemption up to RM10000 or 10% of the net gains, whichever is higher, is given

to an individual.

c. Loan to Value (LTV) Ratio

According to Investopedia online, 2013 the loan-to-value (LTV) ratio is a financial term

used by lenders to express the ratio of a loan to the value of an asset purchased. Loan

to value is one of the key risk factors that lenders assess when qualifying borrowers for a

mortgage.

Formula:

The risk of default is always at the forefront of lending decisions, and the likelihood of a

lender absorbing a loss increases as the amount of equity decreases. Therefore, as the

LTV ratio of a loan increases, the qualification guidelines for certain mortgage programs

become much stricter. Lenders can require borrowers of high LTV loans to buy

mortgage insurance to protect the lender from the buyer default, which increases the

costs of the mortgage.

According to Bank Negara Website 2013, with immediate effect from 3 November 2010,

Bank Negara Malaysia announced the implementation of a maximum loan-to-value

(LTV) ratio of 70%, which will be applicable to the third house financing facility taken out

by a borrower.


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Example

Example LTV Percentage

Genuine buyer of 1st house 90%

2nd buyer 80%

3rd buyer 70%

4th buyer 60%

5th buyer and above 50%

Financing facilities for purchase of the first and second homes are not affected and

borrowers will continue to be able to obtain financing for these purchases at the present

prevailing LTV level applied by individual banks based on their internal credit policies.

The measure aims to support a stable and sustainable property market, and promote the

continued affordability of homes for the general public.

At the national level, residential property prices have increased steadily in tandem with

economic development and the rise in income levels. This aggregate growth trend

remains largely manageable and has not deviated from the long term trend in residential

property prices. In the more recent period, however, specific locations, particularly in

and around urban centers, have experienced faster growth, both in the number of

transactions and in house prices. This is further supported by an increase in financing

provided for multiple unit purchases by a single borrower, suggesting increasing

investment activity that is of a speculative nature.

d. Housing Interest Rate

According to iproperty online (2013), Interest is a fee charged by banks for lending

people money. Besides, home loan is a loan used to purchase property (Investopedia

Online, 2013). Essentially, interest is like rent on money. In Malaysia, housing loan

interest rates are usually quoted as a percentage above or below the Base Lending Rate

(BLR). For example, if the current BLR is 6.6%, the interest rate on a BLR 2.1% loan

would be 4.5%.

Table: Example of LTV Percentage for Buyers


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There are different types of Housing Interest Rate which are Fixed and Variable Interest

Rate. A housing loan with variable (or floating) interest rate is a type of loan where the

interest rate could change at some point in the future. In contrast, a housing loan with

fixed interest rate will not experience any changes to its interest rate throughout the

entire loan period.

Most housing loans in Malaysia today have variable interest rates (all banks that quote

their housing loan interest rates as BLR XX% are variable interest rate loans). Banks

charge interest on the unpaid loan amount of people home loan (also known as the loan

principal or outstanding loan balance). Typically, home loan interest rates are calculated

and charged on a monthly basis.

Depending on the loan agreement, interest may be calculated either on a daily rest or

monthly rest basis. The diagram at the next page provides an illustration of the

difference between daily rest and monthly rest interest calculation.

Example,

Lets assume people borrow a RM500000 home loan from a bank

Bank interest rate of BLR 2.1%. Lets further assume that the BLR is 6.6%.

In the first month:

The total amount of interest charged by the bank is:

RM500000 x (6.6% 2.1%) / 12 = RM1875.

The interest charges may be less in subsequent months.

Assuming the monthly repayment is RM3000.

In your second month:

Previous months interest charges = RM1875 (see above)

Amount allocated to reducing outstanding loan:

RM3000 (previous months repayment) RM1875 (first months interest) = RM1125

Outstanding Balance in Month 2:

RM500000 (initial loan amount) RM1125 (amount used to reduce outstanding loan in month 1)

= RM498875

The total amount of interest charged by the bank in Month 2:

RM498875 x (6.6% 2.1%) / 12 = RM1871.


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A home loan with daily rest calculation is almost always better than one with monthly rest

calculation. The obvious advantage is that people can save some interest charges if

people make a large repayment towards their home loan mid-way through the month

(before their loan repayment is due).

e. Use Disposal Income

According to Azizi Ali, 2012, disposable income person (DIP) is the amount of money

that household available for spending and saving after income taxes have been

accounted for. Disposable income is determine by (Gross income deduct outgoing) will

be use when determine the amount of loan of each person should take.

Formula:

This is because the Bank Negara wants to endorse tighter lending condition towards the

lender. At the same time Bank Negara avoid use gross income as they want to select

the person who has the ability to pay or in other way has fixed and flexible income also

without any hesitation of paying in future. This method will ensure the lenders are in

stable economic condition and have no issues when paying the loan in return.

Flow Chart: Difference between daily rest and monthly rest interest calculation


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According to Bank Negaras Annual Report 2010, Malaysias household debt at end of

2010 was RM 581 billion or 76 per cent of GDP (Gross Domestic Product). The Bank

claimed that the household debt is still manageable because of income growth, high

levels of savings and favourable employment opportunities.

BNM maintains that Malaysian household debt is still at a manageable level due to a

corresponding expansion in household financial assets, of which high proportions are

liquid assets such as cash savings. However, the ratio of household financial assets to

household debt has declined from 274.3% in 2008 to 229.6% in 2012, while the liquid

financial assets to household debt ratio declined from 175.3% to 148% over the

corresponding period. BNMs stance is also supported by the decrease in household

NPL ratio from just 4.1% in 2008 to 1.5% in 2012.

Example:

Salary RM3, 000

Monthly car payment: RM600

The first house monthly payments: $ 400

Monthly fee for loan-be made (2nd home): RM1200

So, (600 + 400 + 1200) / 3000 = 73%

Figure of Household Debts by Composition (2011), Source CIMB Research


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Question 2:

What are the possible dangers if the problem spiralling housing price is unchecked?

Answer:

When the housing spiralling problem in Malaysia is unchecked, it will produce a lot of possible

dangers in term of physical, economic and social. There are several effects when housing

spiralling is unimpeded which are:

a. Housing Bubble and Burst

According to Business Dictionary Online, 2013 defined that, housing bubble and burst is

a temporary condition caused by unjustified speculation in the housing market that leads

to a rapid increase in real estate prices. As with most economic bubbles, it eventually

bursts, resulting in a quick decline in prices. The end of a housing bubble is hard to

predict given the fact that economic conditions can change without warning. If a housing

bubble swells to an extremely high level, the aftermath of a burst may set the housing

market back years.

Based on the article by Tan Sri Jeffry Cheah in News Strait Times 2012, stated that

Property prices in Malaysia are still affordable compared with some of our neighboring

cities in the region. But when we look at housing bubble burst in Asia perspective, the

result has been an explosion in heavily leveraged consumption as well as in residential

real estate activity, even in economies where wage incomes have not increased that

much, such as the Republic of Korea. And the impact has been most strongly felt in the

housing market. From early 2009, as Charts 1 and 2 shows, residential prices in several

Asian economies soared dramatically for at least two years.


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This has been most evident in Hong Kong, where house prices have more than doubled

since early 2009. In 2012, when global residential real estate prices increased by around

4 per cent, prices in Hong Kong rose by 24 per cent. It is now the most expensive place

on earth, with property prices significantly higher than in New York, London or Shanghai.

In some other countries in East Asia, house prices have tapered off or even started

declining, independent of any policy nudging, but simply because the bubble has finally

burst. This is clearly evident for Taipei China and Malaysia (Chart 2), but even in South

Korea and Indonesia, the rate of increase has come down significantly.

b. Generate Homeless Generation

According to the National Property Information Centre (NAPIC), average prices of

residential property in Malaysia rose by about 12 percent in 2010 to about RM 220000

compared with the year before for example housing cost in the Klang Valley as well

RM100000 more than in 2009.

International consultant company Robert Walters found that on top of stagnant wages,

bonuses in 2010 were also lower than in 2009. In 2009, professionals with less than five

years of working experience could expect to earn under RM5000 a month on average,

depending on the industry.

g

And so was born the sandwich class - a generation of Malaysians who, despite

receiving better education, training and opportunities than their predecessors - are taking

home salaries insufficient to open them to the property market.

Tables of Average House Price, Source: National Property Information

Centre (NAPIC)


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While the property price hike in 2010 represented a big jump, NAPIC data show that

prices have been on a steady rise since 2000, when average house prices were about

40 percent lower nationwide.

According to National House Buyers' Association (NHBA) 2010, the hike in residential

property prices has been due to speculative buying. When the government waived the

real property gains tax (RPGT) following the economic crisis, it sparked speculative

activities that increased house prices higher and higher.

c. Increasing Household Debt

Household debt is defined as the amount of money that all adults in the household owe

financial institutions. It includes consumer debt and mortgage loans (iproperty online,

2013). Household debt of Malaysians has become an increasing concern for Bank

Negara Malaysia (BNM). Malaysia's equally risky to be struggling in the credit crisis in

the economy where it arising rapidly developing Asian countries, according to several

reports today. This remains the case even though the Bank Negara Malaysia (BNM) is

working hard to maintain the country's household debt at a manageable level, after a

ratio of gross domestic product (GDP) increased by 80 per cent last year.

Graph of House Prices in Malaysia, Source: Valuation & Property

Services Department of Malaysia


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The household debt ratios in 2010 are 47.8%, almost half of their income. This means

that their household income goes to paying debt such as housing. Then, the other half is

used for the expenses such as cloth, education, foods and other. When this happens,

the spending to the medicine will be kept beside because there are many needed needs

to fulfill. As the result, most of these people will not care about their health because more

focusing on other things.

House Prices and Household in Malaysia, Source: The Star News, 2012

Graph of Household compared with other Countries. Source: Edges, 2013


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d. Increasing Number of Squatter Houses/Slump

A slum, as defined by the United Nations agency UN-HABITAT, is informal settlements

within cities that have inadequate housing and squalid, miserable living conditions. They

are often overcrowded, with many people crammed into very small living spaces.

According to Ron Keith, 2013 the population growth or Urbanization in Malaysia

constantly increases over the year as shown in graph below:

Malaysia today has a population of 29.2M making it the 43rd most populous country in

the world and the 30th largest economy. With a relatively high degree of urbanization

relative to its peers in Southeast Asia (72% of the people live in the cities vs. just 30%

for Vietnam), Malaysia currently runs a very low unemployment rate with the official

number reported at 3.2%.

Graph of Urbanization with Annual Rate of Malaysia with other Countries. Source: Ron Keith, 2013

The image of Shanty Town due to the increase in housing prices. Source: Google Images, 2013


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When the housing spiraling problem in Malaysia is unchecked, it will produce a lot of

possible of urbanized people to build squatter house in urban area such under the

flyover, interstitial building, railway reserve, riverfront and also graveyard. Once the total

numbers of squatter house is increase it will create the shanty town that give bad impact

to the city in term of image and traffic problems. To eliminate the squatter house is really

complicated because the local authority should be replacing them to the new house.

e. Oppression of High Class People to Low Class People

In Malaysia, the population of high income peoples was 10% and low income people

were 90% (Jabatan Perangkaan Malaysia, 2013). In the current day, capitalist system

causing to high class peoples will become more richness and low class peoples will

become poverty (Kiyosaki R.T, 2012). There more low cost rental house was billed by

government for settling up the numbers of resident with low income but sadly, that

houses was purchased first by high class people and rented to low class people in

strongly affordable prices rate (Utusan Online, 2013).

Most of the high-income group in Malaysia is dominated by Chinese race. They were

buy a variety of properties in the urban area and rented to low income peoples especially

for Chinese. They will differentiate out the house prices according to the type of race for

Graph percentage of household follow by area. Source: Jabatan Perangkaan Negara, 2002


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example, they will sell or rent at a low rate house price for Chinese and in contrast,

Malays are to be sold at a higher price. This will cause the Malay race once oppressed

and 'driven out' of that urban living. If this situation is continues to happen, then the

Malay population in the urban area will steadily diminished.

Based on Sinar Harian Online (2013), the richest people in Malaysia controlling most of

the Malaysia economy. The data showed that 38.4% of the income economy dominated

by the high income people 10%. While the Low income people 10% accounted for only

1.7% of economic income. This will cause the income gap between the rich and the poor

people thus disturbing the socio-economic growth.

Graph of rate of income in Malaysia with race. Source: Jabatan Perangkaan Negara, 2007


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Question 3:

Why the housing prices are still raising despite the level is already beyond the affordability of

95% of the urban population such as in Shah Alam?

Answer:

In Malaysia, every day we see more and more expensive the price of homes, land, houses and

factory stores, especially in urban and suburban areas. This is because

a. Status People via Type of House

In Malaysia, via the type of house will be able to determine the status of the person

whether they as high income, medium income or low income people especially in urban

areas such as in Shah Alam, Kuantan, Putrajaya etc. According to Rohaizan (2012),

stated that, most of the high income people might stayed in house like bungalow,

condominium, or semi detached house. Besides, medium income people was stayed in

medium cost terrace house and high or medium cost apartment and lastly, the low

income people was live in low cost apartment and low cost terrace house.

From that situation, the developers will take possibility to build a lot of high cost

residential in order to take more profit from the high income buyers such in Bukit

Jelutong in Shah Alam. Sime Darby Property was develop Bukit Jelutong as high cost

residential zone. According to Malaysia Kini Online (2013), the prices of Bukit Jelutong

house are really expensive compared with the actual cost. Because of that zone is high

residential cost category, the buyers willing to buy that house in order to show their

status and positions. Therefore, because of that reason, the land property always rises.

Photo: Bungalow House

Source: Google Images

Photo: Terrace House


Photo: Apartment



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b. A lot of Unemployed and Low Income Peoples

Demand for housing is dependent upon income. With higher economic growth and rising

incomes people will be able to spend more on houses; this will increase demand and

push up prices. In fact, demand for housing is often noted to be income elastic (luxury

good); rising incomes leading to a bigger % of income being spent on houses. Similarly

in a recession, falling incomes will mean people cant afford to buy and those who lose

their job may fall behind in their mortgage payments and end up with their home

repossess.

Refer to the graph above; there are many unemployment people in Malaysia especially

from 2001 until 2008. According to Jabatan Perangkaan Malaysia 2012, the total of low

income people in Malaysia is range 80% and its quite high. Related to economic growth

is unemployment. Clearly when unemployment is rising, less people will be able to afford

a house. But, even the fear of unemployment may discourage people from entering the

property market.

Graph of Total unemployment in Malaysia from 1988 to 2008. Source: Jabatan Perangkaan Negara, 2008


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c. Inflation Effects

Next, inflation also has an impact on property values in Malaysia. At its most basic level,

inflation is simply a rise in prices and a fall in the purchasing value of money. The

example such as again using Penang where there is latest news announced that "the

selling price of properties in Penang will soon surge by 5%-10% following the recent

move by Lafarge Malayan Cement to raise cement prices by about 6%", according to the

Penang house developers.

A hike in cement price simply means the price of concrete roof tiles, cement sand bricks

and all the other cement-related products will rise. On average, 50% of building

materials used in property development comprises cement and cement related products.

Therefore, such inflation will leads to an increase in construction costs and the buyers

are the one who ultimately bears the cost. Besides, the inflation also has been caused

by the transportation and labor costs that are increased nationwide. The rise in cost of

labor is particularly due to the labor shortage as many Indonesian have gone back to

Indonesia and are facing with stricter laws and standards when they wish to come back

to Malaysia.

Graph of Malaysia Inflation Rate from year 2000 until 2011. Source: Universiti Malaya, 2008


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d. Development in Construction Technology

Nowadays, the construction technology is highly developed in much country including

Malaysia. House prices are also much influenced by the methods used in its

construction. This situation caused developers to choose the appropriate type of system

construction to begin construction of the house. A more systematic method should be

used to create more number of houses in line with the increase in population is

happening at present. It was already stated by Ahmad (2001) and they also say that the

conventional construction systems are not suitable for affordable housing development

by the population.

Besides, this situation is due to the construction of the system requiring a long time. This

situation has also been described by Wales, et.al. (1997) in and say that in this

conventional system, an employee can only complete home within a year. In addition to

the long term, the use of this system will also require the developer to produce high

expenditure for the construction materials. In addition to the cost of labor will rise to be

one of the influences on house prices.

The developed construction technology that influenced the construction cost in Malaysia. Source: Google Images 2012

Documents

AP771 Urban Development and Management - Urban Housing Project