Budget 2021 – Critical insights to avoid collapse

Dr Foo Chee Hung is the principal researcher of MKH Berhad, a property developer based in Kajang, Selangor.

Economic sense dictates that should the SMEs fail, the entire economy risks a collapse.

Budget 2021 is among the most crucial budgets in recent years, given that the COVID-19 pandemic has caused a severe setback to the country’s economy. Despite the concerns of revenue shortfall and rising fiscal deficit levels, the budget is expansionary in nature, with greater government expenditure aimed for spurring the economy. At RM322.5 billion, Budget 2021 is the largest budget in the Malaysian history with no new taxes being proposed or any existing taxes being increased.
Nevertheless, there are mixed views – some said it is fit for the purpose, as it truly addresses the current state of the people’s economic level – especially the B40 income group. By  providing financial relief to those with cash flow problems so that they not only can sustain normal economic activities, but can have more cash to spend which is deemed to stimulate consumption, and hence, the overall market.
Meanwhile, others opine that such a move is nothing more than just putting money in the pocket of everyone, with a lack of direction in taking the country into the future; not to mention the lack of revival measures that can help strengthen the country’s competitiveness once the country reopens its borders.

Little Cheer

Similarly, not much goodies are found in the property sector. The Budget continues to focus on providing adequate and affordable housing units to the low-income group under the effort of PPM, PPAM, and SPNB; as well as encouraging homeownership among first-time home buyers through the introduction of rent-to-own (RTO) financing scheme that involves 5,000 PR1MA houses, and offering the full stamp duty exemption for transfer and loan agreements for property priced up to RM500K.
While all these property incentives, together with those that intended to increase people’s disposable income – tax reliefs, targeted loan moratorium, reduction of income tax rate and EPF contributions, etc – may help to stimulate the buying interest, one should realize that the fear of unemployment and income loss are hindering buyers from making any big-ticket items.
Despite low interest rates and the pent-up demand for homeownership among youths, people generally remain cautious in making property purchases. This is because income growth in the country has been far exceeded by the growth of house prices.

Decreasing Purchasing Power

Throughout the history of house prices development, particularly in the period between 2007 – 2014, Malaysia has experienced the most drastic house price escalation, with a CAGR of 11.4%, against the growth rate of income, at a CAGR of 6.4%.
House prices skyrocketed in this period not only due to the introduction of Developer Interest Bearing Scheme (DIBS) that helped drum up the buying sentiment; but also attributed to the favourable lending policy as well as the built-up speculative herd instinct among buyers and investors. Most importantly, by engaging in the expansionary monetary policy through expanding the money supply for the country, house prices were badly inflated, leading to the further deviation of house price from its fundamentals.
However, household income was not increasing as quickly as the overall cost of living, causing a decline in people’s purchasing power nationwide, and along with it, their ability to afford a house. This, then, translates into a decrease in housing demand and a less active housing market.
In fact, today’s overhang is a reflection of the decreasing purchasing power among mass market buyers. Figures are already pointing to this impending danger as the residential overhang has risen in the first half of 2020, with units priced at RM200k – RM300k – often referred to as a segment of affordable housing – accounting for the largest portion of the overhang units (Figure 1)
One should realize that the level of housing affordability is not only determined by house prices, but also based on household income. By comparing the growth of house prices against the growth of income in Malaysia and different selected Asian countries (Figure 2), one can clearly observe how the slowing income growth has severely affected the Malaysian housing affordability. House prices growth in all these countries are either trending downwards or moderating throughout the period of 1990 – 2019; except for Malaysia and Hong Kong, where house prices in these two countries are generally in a rising trend, with a significant growth trend especially between 2010 – 2019.
Meanwhile, all countries possessed a higher growth in income than house prices; except for Malaysia and Hong Kong, where income growth in these two countries is found lower than the house prices growth especially between 2010 – 2015. Particularly in China, income growth is as high as 12.14% in conjunction with a decline in house prices
throughout 2010 – 2015, with a CAGR of -1.25%. While Japan, too, shows a negative income growth in 2010 – 2015 (CAGR at -4.95%), the gap is much smaller than the one in Malaysia and Hong Kong, owing to its moderating house prices (CAGR at 0.96%). This explained why houses in Malaysia are perceived as “expensive” by locals, but are rather “cheap” in the eyes of foreign investors. Slow income growth has badly impaired peoples’ housing affordability!
Even though Malaysian house prices have grown at a slower pace since 2017, many young B40 and M40 income groups still find home ownership beyond their reach, due to the country’s weak economic performance that has affected overall income growth. Following the outbreak of COVID-19 in 2020, the gap between house prices and income in the country is expected to be further widening, and housing affordability will still remain a challenging issue in the coming years.

Productivity Issue

The government should realize that, when there is a drop in property demand across the board, especially in the affordable housing segment that is mainly targeted for B40 and partially M40 income earners, it is, in fact, a sign to indicate that the current housing affordability problem in the country is no longer a mismatch of housing supply and demand, but an economic issue that is deeply related to the productivity of the country.
In this sense, Budget 2021 as well as the future tabling budgets, should move away from merely giving financial support to the low income group or first-time home buyers, but should emphasize more on job creation and income growth, which are the key drivers to spur the country’s economy as well as the property market.
Moreover, COVID-19 is not a short-term impact and is likely to last for another one or two years. As such, from a macroeconomic perspective, the government should place more emphasis on helping industries and businesses to survive, to grow, and to transform.
According to the Companies Commission of Malaysia (SSM), a total of 32,469 small and medium
enterprises (SMEs) have folded since the first implementation of the movement control order (MCO) in March. In particular, there are as high as 17,800 corporate closures in August 2020 alone.
What is even more worrying is that, following the implementation of the conditional movement control order (CMCO), coupled with the end of the targeted repayment assistance offered to the SMEs, more corporate closures are expected in the near future, unless a structural change is made to the country’s economy.
Given that SMEs are the backbone of the country’s economy that account for the majority of employment and job creation, the collapse of SMEs is sure to push up the unemployment rate while lowering down the overall consumption power. The shrinking consumption power will then intensify the market recession and further damage the already sluggish economy. Eventually, no sector, including the property sector, can escape from the domino effect of this disaster!

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