Property ‘oversupply’ in Penang – but not for middle-income group

Despite soaring prices in the state, Penang, especially the northeast district of Penang Island, appears to have a large property supply overhang. So why are the middle-income group on the Island finding it so hard to locate affordable housing?

Those findings were contained in an October 2011 research paper ‘Supply and demand in the Penang housing market: Assessing affordability’ by Stuart MacDonald of Penang Institute. Stuart observed: “Ten years later (Population and Housing Census 2010) the census showed that the number of households in Penang had increased to 385,658 (a 35.3% increase since 2000) while the number of housing units increased to 468,278 (a 21.4% increase), which still leaves an excess of 82,620 housing units; or 21.4% more housing units than there are households.”

It is important to analyse the overhang, he adds. “Understanding this oversupply is essential, the number of unsold properties does not explain such a significant oversupply, and this needs to be unpicked to establish the reliability of the Housing and Population Census data which raises a number of questions about an ‘oversupply’, are these properties vacant e.g. unsold or on the open market or are these properties owned by people not recorded by the Census e.g. absent landlords, foreign owners or institutions, those renting to students or medical tourists.

Let’s look at the overhang by district. Here you will see that the largest overhang is, not surprisingly, in the Northeast District (Timur Laut) of Penang Island.

Now let’s look at the housing supply distribution by affordability:

Writes Stuart:

From this analysis we can see that lower income groups have few housing options and even middle income groups have few options on the island. Only the 4th income quintile (upper middle income) can afford a condominium on the island, while family sized property remains out of reach for even this group. Each income quintile however has significantly more housing options on the mainland, however larger family sized properties, such as 2 or 3 storey terraced property only become affordable for those in the 3rd and 4th income quintiles. Figure 24 (the graph above) further demonstrates the distribution of housing units by district and by quintile affordability, and it is clear that the 3rd and 4th income quintiles have far fewer housing options.

And if nothing is done, the situation will get even more grim. I suppose this is what happens when you allow developers to have a field day building high-end homes as they please for God-knows-who:

By 2014 based on current growth rates in house prices and income, the lowest income quintile will no longer be able to afford a flat in Seberang Perai Utara or a low cost house in Barat Daya. The 2nd quintile income group will no longer be able to afford a flat in Timur Laut or a low cost house in Barat Daya. While for the 3rd quintile (RM2,700 – RM3,800), a single storey semi detached property in Seberang Perai Utara becomes unaffordable by 2014 based on current growth rates. The upper middle income quintile (4th) will no longer have the option of a condominium or single storey terraced property in Barat Daya by 2014 as these will have increased out of affordable range. In Seberang Perai Utara, the only district where a detached house is affordable for this income quintile, this also will no longer be affordable by 2014 on current trends.

Summary

If house price inflation continues on the past five years‟ historical rates and wage rate inflation remains as it has done over the past few years, especially for middle income groups, the issue of house price affordability will become more acute. People‟s housing options across the first 4 income quintiles are reducing and will continue to reduce if house price inflation continues. The overall impact of this is to push lower and increasingly middle income groups off the island towards the mainland. Those with families have even fewer options. The concern should be what impact this will have, not only on the lower and aspiring middle classes (socially), but also the economy of Penang and its environment, as the workers essential in transforming Penang into a high income and knowledge economy are forced into long commutes and increasing congestion, making Penang a less desirable place to live.

In developing more affordable housing, housing policies should extend beyond providing basic living accommodation, and should also be about ensuring that people have access to jobs, have a high quality of life and can minimise their negative environmental impacts and recue their cost of living. „Affordable‟ housing requires a definition which is sustainable moving forward, so that property is not simply developed which is smaller and smaller but fits within the median house price to median income ratio. „Affordable‟ housing should be defined by its suitability for families, access to amenities, sites of employment and connections to public transportation networks. It should be as „green‟ as possible, helping to make property affordable into the future, as cost of living continues to rise, as resources continue to become more scarce.

Conclusions

The extent to which the housing supply and demand factors are well understood in Penang is unclear. There is argued to be a mismatch of housing stock with demand, with significant oversupply. Condominiums are argued to be in oversupply on the island, while low cost housing is argued to be sufficient in three of the five districts, yet money is being invested in low cost housing in these areas7. Oversupply suppresses rental prices (which assessment rates are calculated on), depresses the prices of unsold property and will have a larger negative impact on property prices should there be a housing market deflation. The prices of prime properties in Dubai for example have fallen by 50% or more since the debt crisis of 2009 where there was a significant oversupply, and so caution should be taken.

Housing data needs to be collated and examined in much greater detail, and at a lower spatial level, and house price rises and affordability need to be much better understood. Future policies and development approvals need to be evidence-based as Penang is in danger of affecting future economic development if issues of housing supply and demand are not rapidly linked to wider development strategies. Penang state government should initially invest in developing its knowledge and understanding of the state housing market, so that it may further develop a robust housing demand model informed by a wider range of demand factors.

By using population forecasts, household income data, and stock volumes within „affordable‟ price ranges (data collected for this paper) we can see a huge mismatch in the supply and demand for property on the basis of income groups. Significant caution needs to be taken with this rough calculation, as many factors are not considered or controlled for8, however it does start to identify the potential scale of the issue. Each income quintile has 76,024 households (20%), therefore:

 The low income group, the 1st and 2nd quintiles (which has a household income of less than RM2,700 per month) is made up of 152,048 households who can afford property costing under RM150,000. According to NAPIC stock and transaction data, there are 306,896 properties with an average price which is under RM150,000, which is double the number of households for which this stock is within the affordability range. If stock volume remains as it is today, using the PSP population forecast for 2020, there will still be an oversupply of 116,420 units for this income group.

 The middle income group, the 3rd and 4th quintiles (which has a household income of between RM2,700 and RM6,200) is also made up of 152,048 households (40%) who and can afford property between RM150,000 and RM350,000, of which, according to NAPIC there are 81,966 units, half the required units for this income group, and by 2020 this undersupply will grow to 108,510 units if current stock remains the same.

This crude analysis starts to display the problems in supply and demand, with middle income groups likely forced into sub optimal housing choices by a lack of supply in the market, which then drives up the price of available housing, and explains why a low cost house in Timur Laut is an average of RM355,000.

Housing demand models should consider the needs of all groups within society, and the affordability gap for middle income groups in the 3rd and 4th quintile may well act as an inhibitor of future economic development, as these groups seek employment opportunities in locations where property is more desirable/affordable.

Stuart makes three important recommendations:

• develop a housing research function;
• develop a robust housing demand model; and
• drawing on best practice, develop a robust set of affordability indicators, including economic, social and environmental indicators.

Let’s hope his recommendations are heeded.

Stuart’s full paper can be found on the Penang Institute website.