|WHAT DOES THE ECONOMIST SAY?
*The views expressed are of an academic expert who is attached with the central bank.
(Q1) To say that there is an economic apocalypse on the horizon is very dramatic. What we are currently experiencing is a cyclical slowdown in the aftermath of some shocks faced by the economy – attributed to both domestic and external factors. In fact, our performance is respectable given the global circumstances – in part due to the reforms undertaken over the years. Income has quadrupled, since the launch of Vision 2020. But of course we aspire more – many of our economic wants and needs now are far varied, and we demand more. For instance, higher modern living standards which include holidays, a higher standard of amenities etc.
There is nothing wrong with this, but if these wants are beyond our affordability, then we will have to adjust accordingly – instead of complaining or attributing it to our incomes being too low. Conversely, these same items will be affordable if our income is higher, and income can only go up if our labour productivity is higher.
(Q2) Unemployment will affect national income if it becomes too high. Loss of jobs would, of course, affect livelihood, and may if goes unresolved, will result in foreclosures. Nevertheless, are there massive layoffs? The answer is NO. It is very sector specific, and typically, affected workers will be re-absorbed into employment in other areas of the economy.
(Q3) On income playing catch up to property prices – buyers will have to adjust their aspirations and go with what they can afford. It is true that prices are still rising, albeit at a slower pace. Incomes will not accelerate anytime soon – a sustainable solution is to create an environment so that the supply of homes in the more affordable range can be increased.
There is plenty of demand for affordable housing – it is a need, and economically, households have the income to own a property. It is unrealistic, however, to be saddled with ever higher debt to own property that we cannot afford. Times are tough; but no, it is not apocalypse – most Gen-Ys are too young to remember what a real crisis is like.
Latest figures from the Statistics Department show that the number of unemployed Malaysians is at 510,700, an increase of 8.3% or 40,856 people as compared to the year before. So what does this mean for our housing market?
Unemployment in Malaysia is rising in record numbers – More than 31,000 people were laid off in the first 3 quarters of 2016 itself. Datuk Shamsuddin Bardan, President of the Malaysian Employers Federation, said the unemployment rate could rise as high as 3.7% this year, from its current 3.4% – a dim prospect indeed for fresh graduates and those on the verge of joining this group.
It is not just fresh graduates who should be worried. Our income growth is pretty dismal when compared to the rising costs of living. In a recent newspaper interview, Balqais Yusoff, Employee Provident Fund’s Head of Strategy Management Department said that the low salary structure in the country was a major contributor to the affordability conundrum – 89% of the working population earn less than RM5,000.
Of course, this figure is the sum of earned incomes throughout Malaysia and paychecks greatly differ across industries and localities. Nevertheless, there is no denying that more and more people are struggling to remain above water.
Honey, who shrunk the Ringgit?
Almost all of the Uber drivers I speak to reinstate the affordability sentiment and parrot the “I need the secondary income” reason. One of them, a 30-year old insurance agent says,” With the economic slowdown, most people and businesses are cutting back on spending. I am struggling to pay off my monthly obligations and I am one among MANY forced to take on a side gig – if not for ride sharing services like UBER and GRAB, I would have racked up thousands in credit card debt already.”
It is not just working professionals who should be worried. Unemployment is rising in record numbers – More than 31,000 people have been laid off in the first 3 quarters of 2016 itself. Datuk Shamsuddin Bardan, President of the Malaysian Employers Federation, said the unemployment rate could rise as high as 3.7% this year – a dim prospect indeed for fresh graduates and thousands on the verge of completing their tertiary education.
While the situation in Malaysia may not be as dire, the rising unemployment and cost of living beg the question, “How many of our Gen-Ys, especially those residing in cities would be able to afford homes in the coming years?”
We also have to wonder, should developers be worried over the rapidly decreasing pool of eligible homebuyers? I have asked a few developers this question and their reply – rising unemployment is not our problem, we will continue building homes as per market demand. The question is where will this future demand come from – investor clubs/IHCs? Foreign investors?
We can only predict how bad or good things are going to be for local millennials looking to buy a home – hence, to help paint a clearer picture of what is on the cards for Malaysian youths, I got the help of a few industry experts:
(Q1) What are your comments on rising unemployment figures and cost of living as well as poor income growth? Are we going through a rough patch or are we headed for an economic apocalypse?
Samuel Tan, Executive Director, KGV International Property Consultants says,
“Like other emerging markets, Malaysia’s economy is going through a difficult phase. The higher cost of living is caused by a combination of inflationary and local economic factors. I believe this scenario will have to be played out for the next few quarters until the economy improves.
In the meantime, the government and other stakeholders will have to find a workable solution to transit through this period. To minimise the affordability woe, all parties must look into ways to increase productivity, reduce living costs and provide a safety net for those who are less able to fend themselves.”
Chang Kim Loong, Secretary-General, National House Buyers Association (HBA) comments,
“The current economic slowdown is not only affecting Malaysia but also other major economies, such as the USA, China and Europe. As a result, demand for Malaysian goods, especially commodities has fallen and with it, the value of our local currency. Thus, it is only natural that the prices of many goods have increased and consequently, cost of living goes up too.
Comparatively, during the Asian Financial Crisis in 1997- 2000, only the Asian region was affected whilst the economies’ of other major regions such as the US and Europe were not badly affected. This resulted in the demand for Malaysian goods, especially commodities remaining strong, which helped speed up the economic recovery.
Many economists have predicted that the current global slowdown might persist until 2020 and how well countries cope will depend on their own economic management and fundamentals. We can only hope that our leaders will focus on the important task of strengthening our economy and that Malaysia can ride out this economic slowdown and emerge stronger and more united.”
What is the state of the housing market?
Even with various controls in place by Bank Negara Malaysia (BNM), and a substantial decline in residential transactions in the past year, the Malaysian House Price Index increased by 5.3% to 241.5 in Q3 2016 in relative to Q3 2015.
(Q2) Will increasing unemployment result in more mortgage foreclosures and are we at risk of a housing bubble?
Samuel shares that mortgage foreclosures are already on the rise. If the economy slows down further, even higher unemployment figures will lead to more foreclosures; which happens after a 6-month lapse in instalment payments. Besides that, the fear of under-employment will cause prospective purchasers to be more cautious.
However, he feels that there will not be a housing bubble burst. Instead, there will be ‘market corrections’; with the highly oversupplied sub-sectors seeing a dive in activity and price growth.
Warrick Singh, Director, Asian Land Realty Sdn Bhd (below) agrees that foreclosures are on the rise. Being an auctioneer, he notes that there has been a rise in distressed properties in the Selangor and Kuala Lumpur auction market.
More homebuyers are struggling to cope and are defaulting on their mortgages, leading to banks’ repossessing homes. The rise in defaults, i.e. non-performing loans is worrisome considering that the total exposure of Malaysian financial institutions to the local property market (as of end-2015) amounted to RM733.4 billion – which is 25.7% of total financial system assets. Figures are as stated in the Bank Negara Malaysia’s 2015 Financial Stability and Payment System Report.
As for a property bubble, Chang does not foresee it happening unless the prolonged slowdown in the economy results in massive layoffs across economic sectors. When this happens, many will not be able to service their mortgages, resulting in banks having to repossess their units and auctioning it off at potentially below market value or even below original development costs.
When there are too many of such auctions occurring, it can lead to a collapse of the property market across the board. However, he hopes that this will not happen and that Malaysia can ride out the current economic slowdown and emerge stronger than before.
How long will we have to wait and see?
(Q3) (For how long) Will the real estate market see a stagnation while aspiring homebuyers wait for their pay to catch up? SHOULD developers be worried over the rapidly decreasing pool of eligible homebuyers?
Warrick feels that the jobless phenomenon amongst Malaysian graduates is a worrisome trend and a further uptick in unemployment is inevitable. Most industry players opine that the mismatch between demand and supply of talent is the key reason why many graduates remain unemployed.
Further driving the nail into the unemployment coffin – the recent government’s reduction in allocations to public institutions of higher learning is bound to have dire consequences on the quality of graduates produced. This is because a lack of funds will affect the entire chain, i.e. quality lecturers, research and all related matters in pursuit of global educational excellence.
Until there is no marked improvement in quality and productivity, the typical Malaysian graduate cannot expect any improvement in terms of income growth. Given so, the ability to afford the monthly instalments for a home will remain elusive for many Malaysia Gen-Ys in the coming years.
Agreeing to this outlook, Chang who says that the threat of a “homeless generation” is already at our doorsteps – the 2015 report, “Making Housing Affordable” by Khazanah Research Institute showed that average house prices in Malaysia are more than four times the median income, which makes such properties to be considered as “seriously unaffordable”.
There is still a very strong genuine demand for properties as Malaysia is still a relatively young country and there is still strong urban migration, as the younger generation moves from rural areas in search of greener pastures. However, it is almost impossible for the vast majority of the current younger generation to buy their own property without assistance from their parents; either in form of their parents’ EPF monies or selling of a current property that is already fully paid.
Most private housing developers will never reduce prices but will merely reduce the supply of new properties to balance the weaker demand. What we need is for the Government to take steps to increase the supply of more affordable properties so that the vast majority of the rakyat can afford to climb the property ladder.
Samuel, on the other hand, believes that the demand for homes in the immediate 2 years will be from owner-occupier locals. What has to be fulfilled, however, is ensuring that the supply meets the market’ needs. In the primary market, several scenarios will play out. Niche products, especially those with distinct and attractive concepts in choice locations will still do well. Many developers are already switching their focus towards properties worth RM500,000 and below. More homes will also be built in suburban areas and beyond, where land is relatively cheaper.
Here’s how you can work towards your property dream
Was saving up for your own property one of your 2017’s resolutions? Mine was. The million-dollar question is, how long will it take to realise this goal? The golden rule of saving is to set aside 10-15% of your net income each month and to use the rest for your needs and wants – food, rent, car instalments, entertainment, etc. Let’s say you earn RM4,000 per month, you are left with RM3509 after the EPF, SOCSO and tax deductions.
The minimum 10% savings translates to RM350 per month and RM4,200 in a year – taking into account a year-on-year salary increment of 5%, saving for the down payment on an affordably priced RM400,000 home will take you……8 years. This is assuming that the property price remains unchanged over the years, which is likely only in a perfect world!
What is a girl (or boy) to do, you ask? Here are four strategies for keeping your property dreams afloat:
1. Old-school frugal living – Buckle down and save 50% of your pay each month to get that RM40,000 down payment within 2 years. Is it possible to survive in the city with just half your pay? Yes, you can – almost all of the property owners/investors that I know scrimped and ‘Scrooged’ their way towards achieving their downpayment goals.
Once you commit to a long-term goal, you won’t mind doing what it takes to make it come true – cook your own food, take public transport and forgo drinks costing RM30 a pop, among others.
2. Track your Expenses with an App – Many of us do not realise what our money is being spent for – the odd expense here and there and the ‘once in while’ spurlges all adds up. Utilising a FREE savings app such as Expense Manager or Pocket Expense will help you get a sense of your monthly expenses and enable you to identify and cut back on unnecessary luxuries.
If you are an emotional spender, use Mint instead which helps you create budgets with numerous spending categories and provide warnings with brightly coloured graphics when you are nearing the expense limit/cut-off.
3. Make it a team effort – Club together with friends or siblings to get onto the property ladder. This course of action is perfect for those who want to save on rent AND don’t mind living together OR have a sound investment plan in place, i.e – renting out the property for a number of years before selling it off for a profit.
You can also make saving strategically a team effort – connect with like-minded buddies who are all working towards a similar goal; not only will you keep each other motivated, it is much easier to plan for budget-friendly activities, meals, etc.
4. Earn extra income – With the weak Ringgit, cutting back is not enough. Take it a step further by working on side-jobs during the weekend. You could earn cash by filling up surveys; sign up as a mystery shopper or freelance for odd jobs including typing work, data entry and transcribing documents through platforms such as Jobless and Partimepost.
If all fails, there is always ride-sharing services such as GRAB and MyCar. Leverage on the recently-announced RM4,000 rebate for Proton Iriz cars used for ride-sharing purposes and squeeze in a daily ride or two before and after work.
There are dozens of other ways to both make your savings work for you and to make more money – Do not sign up for a credit card, put your money in a Fixed Deposit Account or a mutual fund, or invest in your education/professional skills.
The key is to start NOW – with its compounding effects, time is the most valuable commodity in the financial/investing world. Also, property prices in Malaysia can only go up, it is time we come to grips with how ‘tough’ things are and adjust accordingly – it is either that or striking the 4D lottery jackpot!