Slow income growth compared to the cost of living is one of the main causes for loan rejections for properties below RM300K, which comprise almost 80% of overhang properties.
The overhang that we are facing today (32,810 units) stood at the highest point since 2008 (26,029 units). Further study on the nature of overhang and the take-up rate of new launches reveals that today’s overhang is not merely caused by a skewed market that is in favor of building high-end properties by profit-seeking developers; but is likely the result of the inbalance of the country’s housing supply-demand system.
This is due to:
(i) The oversupplying of housing stock that outpaced the market’s limit of absorption (the supply-side problem); and
(ii) The decreasing purchasing power among mass market buyers as a result of escalating living cost (the demand- side problem).
Oversupply is the number of housing units in excess of the number of existing households in a country. By comparing the existing housing stocks with the total number of households in a specific location, one can find that residential housing supply outgrows the housing needs in areas such as Kuala Lumpur, Johor, Penang, and Negeri Sembilan (Table 1). While in areas like Selangor and Melaka, housing supply is approaching to a point of saturation if the current housing growth rate is to be maintained.
NAPIC defines overhang as properties which have received Certificate of Completion and Compliance (CCC) but remained unsold for more than nine months after launch.
Unsurprisingly, all these areas are having substantial amount of overhang of condo/apartment and serviced apartment; except for Melaka and Negeri Sembilan, as mixed-use developments only account for 8.7% and 9.6%, respectively, of the total residential property stocks in these two states; as compared to 54.8% in Kuala Lumpur, 26.4% in Selangor, 17.5% in Penang, and 14.7% in Johor.
Excessive supply of serviced apartment is obviously the main factor that causes overhang in Johor and Kuala Lumpur; where as high as 56% and 44% of these overhang units are high-end products that are priced above RM500K (Figure 1). In the case of Penang and Selangor, property type like condo/apartment plays a dominant role in influencing the severity of overhang.
Being a state with relatively lower population density and physical & economic developments than other more urbanized states (i.e. Kuala Lumpur, Selangor, Penang), the overhang in Perak is mainly attributed to the mismatch of product – a direct consequence of overbuilding high-rise properties especially government affordable housing schemes which are not popular in the local market. This is apparent as 79% of the overhang comprise houses priced below RM300K; and within this category of products, as high as 2,352 units or 55% are condominiums and apartments.
Insight to be drawn from today’s overhang is that, developers need to slow down the pace and scale of their project launches, as well as to supply houses which comfortably meets the public’s affordability level, as this is totally a buyer’s market now. One can foresee that low-margin could be the new norm in the housing industry, as most of the developers are entering the affordable housing segment. However, this may also potentially cause saturation in the affordable housing market segment, leading to the market cannibalization between new supplies and the existing stocks. As such, the government needs to wisely monitor any implementation of new builds – such as the mega development in Bandar Malaysia – so as to avoid excess housing supply to the overall housing need in the country.
In addition, today’s overhang is also closely related to the increase of cost of living along with the changing lifestyle. This is well-reflected by studying the overhang in different price range of products. Houses priced below RM300K are the major contributor (35%) to overhang, followed by houses priced at RM300K – RM500K (27%), RM500K – RM1million (25%), and above RM1million (13%).
Most often, overhang for houses priced below RM300K is considered as products located in less-appealing locations that are not meeting the mass market demand. From a wider perspective, however, the increase of unsold units of affordable housing should be seen as an indication of decreasing purchasing power among mass market buyers as a consequence of escalating living cost. Coupled with weakening currency and trade tensions affecting the local economy, the property market becomes less and less active which then translates into a decline in demand despite rising supply of affordable housing in the market.
Number of households (demand) vs.
existing housing stocks (supply), 2019
(Source: NAPIC, DOSM) (Note: * Estimation based on the growth rate and number of households in 2014 and 2016)
Figure 1: Overhang of residential housing &
serviced apartment by state, 2Q2019
The worrying trend now in Malaysia is that, mass market buyers (mainly contributed by B40 and M40 groups) are battling financial woes as the cost of living continues to rise. They are barely making ends meet and are forced to make unrealistic compromises in other areas of their life; which tends to expose themselves to the phenomenon of “house poor” if they have taken advantage of low borrowing rates in order to increase the size of their mortgage.
House-poor also known as house rich, cash poor – is a term used to describe a person who spends a large proportion of his or her total income on homeownership, including mortgage payments, property taxes, maintenance, and utilities. Individuals in this situation are short of cash for discretionary items, due to the low take-home pay after deducting existing debt obligations and expenditure.
The fact that high loan application rejection rate (32%) for properties priced below RM300K – as shown by the Bank Negara Malaysia (BNM) – which are mainly targeted at low and middle income groups – should show that ‘house poor phenomenon’ is becoming more and more common among B40 and M40 income groups who live and work in the cities. Since the majority of these groups are wage earners in both the public and private sectors who do not have alternative revenue streams, they are heavily dependent on corporate performances which are significantly influenced by the overall economy. With income growths at a slower pace as compared to the cost of living, these groups remain more vulnerable to shocks. It is dangerous to push these seemingly financially unqualified buyers into the market through affordable housing schemes. It is likely that economic growth, in relation to the rising wages and the reduction of household debts will have to improve significantly, in order to revitalize the housing industry.