Penang house prices becoming more unaffordable

The median house price to median household income ratio (a common indicator of housing affordability) for Penang Island has risen to 8.1, high by any standards, from 6.8 five years ago.

The current average housing price on the island is RM429440 while the median household income on the island is RM52844. House prices on the island have risen by 50 per cent over the last five years. (Even on the mainland, prices have risen by 25-30 per in the same period.)

For Penang state as a whole, the ratio is 5 (RM265010/RM52844) – up from 4 in 2006. House prices in the state have soared by 90 per cent over the last seven years.

In comparison, the house price-to-income ratio for the USA was 3 until 2000, and then it rose to 5.8 by 2006, before the housing boom ended in an almighty bust. In the UK the ratio reached 11 in 2008, just before the credit crunch set in.

All the more reason for us to tread cautiously. The above figures are from an October 2011 research paper on ‘Supply and Demand in the Penang housing market: Assessing Affordability‘ published by Penang Institute.

Written by Stuart MacDonald, it makes for sobering reading and notes that house prices are becoming more and more unaffordable for more and more people.

Stuart has also come up with several recommendation on what can be done, including noteworthy recommendations to rebalance planning powers in favour of the state.

These are among the recommendations in another research paper of his, ‘Drivers of house price inflation in Penang, Malaysia – planning a more sustainable future’:

Recommendation 3 – Reform planning powers to rebalance in favour of the state.

• Policies can be easily developed to rebalance power in favour of the state, for example by requiring developers to fund the cost of independent consultants hired by local authorities, rather than directly funding them themselves, would remove the potential for conflicts of interest, promote truly “independent” studies, benefit the most professional consultancy firms and force the local authorities to develop the capacity to understand and scrutinise the studies presented, allowing a more strategic and holistic view to be taken.
• A policy to regulate the process of “soft” launches can prevent developers selling properties to favoured purchasers, prior to general release, which forces up the price of property. The state can request the details of intended unit prices early in the development process and compare these with sales prices post launch to highlight developers that are restricting public access to units through their practices.
• The state should publicly develop clear policies on issues such as land reclamation and hill cutting, with the public benefits of such policies clearly articulated. The state should also halt the process of converting leasehold land into freehold land (emphasis mine) (with exceptions where it may harm investment or economic development), until a clear policy has been developed which considers the long term benefits and risks to the state.
• The amendment of regulations that prevent mixed commercial and residential development need urgent attention, as this is resulting in developments classifying its residential property as serviced apartments, which is also exempt of a requirement to provide a low-cost housing quota.
• Greater clarity over the location of state land and assets (along with local authority owned land and assets) and communal lands is also required so that these may be managed for the benefit of the state with a longer term view.

Recommendation 4 – Review existing mechanisms for promoting affordable housing.

The state government, having developed the housing board, should initiate a review of all existing mechanisms for affecting the housing market in a way which would either raise revenue or reduce home ownership costs for those in middle to lower income groups or encourage developers and land owners to build housing appropriate to the needs of the people. Existing mechanisms, from density controls, to assessment rates should be reviewed, measured and evaluated in their total sum, understanding how one impacts upon another and assessing how progressive they are as forms of control or taxation, how feasible it may be to revise these mechanisms, taking into account the local context, cultural or historical and the political sensitivity of such reforms.

Touching on low-cost housing, Stuart notes in his paper:

Low cost housing must be provided in the same district as any developments led by the private sector, which should help to sustain property mix at the district level, but to what degree this is enforced in unclear. The low cost housing market is argued to have operated inefficiently, with developers being able to transfer and sell quotas, and the state allocation process also argued to be inefficient. Low cost housing developments are over represented in abandoned projects. Outsourcing the role of “social‟ housing provider to the private sector without sufficient controls from the public sector has resulted in an inefficient condition on private sector development. Conflicts of interest arise and private developers are driven to minimise their costs on low cost housing to protect their bottom line. The low cost housing market needs detailed examination.