If you are torn between buying a home in 2020 or to continue renting before getting onto the property ladder, then this article is for you.
You have heard this a million times before – buying your own house or residential property is one of your biggest life milestones. The idea of investing a huge sum into such an asset seems daunting however, as the economy is not so rosy at the moment. The Covid-19 pandemic gives you more reason to put your property buying plans on the backburner.
Not to mention the costs involved when buying a house is not for the faint-hearted – on top of your mortgage payments, you have stamp duty, legal fees, valuation fees, mortgage insurance (MRTA) and real estate agent fees to think about!
But then again, just like most Malaysian millennials out there, you are probably tired of having a sizeable chunk of your salary go towards monthly rental payments. And wouldn’t it be nice to own the roof over your head, which could give you good capital appreciation down the road?
However, the answer to the buy or rent debate isn’t so cut and dried. It ultimately depends on an individual’s circumstances and future plans. Here we answer 8 questions you might have and by the end of this guide, you should have a clearer picture of which route to take.
What are the median prices of homes across Malaysia?
Your buying decision obviously depends on the price of the property and whether you have enough money to buy a home in your preferred location. Before we dive into the critical aspects of home ownership, let’s take a look at the latest median prices for residential properties across Malaysia.
According to the National Property Information Centre (NAPIC), the 2019 median price of a house in Malaysia was RM289,646. However, this price varies between states, with Kuala Lumpur topping the list as the most expensive location to own a home at RM480,000. Comparatively, a home in Pahang costs less than half that price at RM218,000.
Bear in mind that median prices depend on actual transactions and are not based on advertised selling prices. Transactions here refer to the transfer of both primary and sub-sale homes within the review period at all stages of construction – completed, under construction and planned.
The overall median price in Malaysia saw a drop in 2019 by 2.5%, with some states recording a double-digit drop for residential properties transacted in the market.
Why did median housing prices drop in 2019?
This drop in transacted house prices could be a “price adjustment” in the market – for years, the Malaysian housing market has been plagued with a demand-supply mismatch, where houses are priced out of the market of many aspiring home owners. Property prices have been growing at a much faster rate compared to the growth in wages or household income. According to Bank Negara Malaysia (BNM), the ratio of house price to household annual income rose to 4.8 times in 2016 from 3.9 times in 2012.
The lower median price in 2019 could be attributed to a multitude of factors namely home buyers took advantage of the more affordable property options being offered by some developers and that buyers in the sub-sale market either managed to negotiate a better deal (with it being a buyer’s market) or were willing to settle for older but cheaper homes.
But why did actual property prices continue to climb?
Historical data has shown that regardless of economic slowdowns, political turbulence and changes in government policies, housing prices have been on an upward trend since 2010. The 2019 Malaysian House Price Index (MHPI) stood at 197.5 points, up by 1.9% against the 2018 MHPI of 193.3 points. 2017’s figure was 187.6, a 3.3% increase from the 2016 MHPI of 176.1… Well, you get the idea.
As pointed out by Dr Foo Chee Hung, a real estate market researcher, the country’s housing market is quite resistant to price drops. Often, fast market recovery is observed after a crisis due to favourable lending policies, optimism over future capital appreciation from property investment, as well as the drumming-up of market sentiment from developers via special rebates and discounts.
You must be wondering why did the MHPI continue to climb despite the negative median house price in 2019? Well, this is because overall property prices are appreciating (albeit at a slower pace) but more purchasers are opting for more affordable options available in the market, thus bringing down the median transacted house price.
It is interesting to note that there was an increase in residential property purchasing activity in 2019! The housing market recorded 209,295 transactions worth RM72.41 billion – an increase of 6.0% in volume and 5.3% in value as compared with 2018.
Admittedly the YoY growth in housing prices has tapered off quite a bit, thanks to preventative measures by Bank Negara Malaysia (BNM) circa 2014 to mitigate property speculation. You might be thinking, it could be worth waiting another year or so. After all the MHPI growth has been steadily decreasing over the years. Not to mention, the Covid-19 pandemic has severely impacted various industries, causing an apparent increase in Malaysia’s unemployment rate and a fall in the Growth Domestic Product (GDP).
Will Covid-19 cause property prices to decline?
Many would argue that property prices should reduce in tandem with the steep drop in purchasing power post-Covid-19, but it is too soon to determine the extent of damage caused by Covid-19 on the property market and on housing prices.
Moreover, the Malaysian government is consciously making an effort to support households and businesses, including the real estate industry. In June, our Prime Minister announced that several property incentives will be introduced to act as buffers to the Covid-19 pandemic including a six-month loan moratorium for borrowers, the reintroduction of the Home Ownership Campaign (HOC) and Real Property Gains Tax (RPGT) exemption. We dive into these below.
Bear in mind that any drop in house prices does not help to make owning a house more realistic, especially for first-time home buyers. As mentioned above, many aspiring buyers have not been able to afford a house for years now. So any drop in transacted property prices is really just the market supply adjusting to the demand side of the housing market spectrum.
So really, what aspiring home buyers should be looking at is their own home purchasing capability. Those who are financially capable would do well to consider the perks home buyers can enjoy this year and early 2021, which would then make waiting redundant.
Before we help you determine if you are financially capable to purchase a house, let’s take a look at which option makes more financial sense – buying or renting?
Is renting cheaper than buying a house?
To provide a rough illustration of cost comparison between buying and renting, we will be using a Buy vs Rent calculator.
Let’s say you have decided to buy a RM460,000 condominium in Puchong. To commit, you will have to pay:
- A 10% down payment up front
- A 4% closing costs (legal fees, stamp duty and valuation fees)
- A 3% home insurance cost
- Monthly instalments of RM1,859. This is calculated based on the following terms: a 30-year loan tenure at 3.5% interest and a 10% down payment. *Note: The interest rates of current mortgage products vary between 3-4%, hence we will be taking the average which is 3.5%.
- A RM250/month for maintenance costs
Meanwhile, if you rent the same unit, it will cost you RM1,500 per month. To commit, you will have to fork out:
- A deposit of RM3,750 (equivalent to 2.5 monthly rent)
This Buy Vs Rent Calculator assumes the following:
- Property prices appreciate at 3% YoY
- Rental prices for similar properties appreciate at 2% YoY.
- A 3.5% investment rate (the percentage of annual earnings from any money you save from purchasing by investing them in FD, stocks, bonds, etc)
After 5 years, and using the variables mentioned above, your total cost of home ownership for a RM460,000 home would be RM628,006. Renting leaves you with RM524,096 in “savings” (including the money you didn’t spend on a down payment).
Property gain: if you buy, after 5 years your home will have RM161,920 in equity (available to you when you sell). However, if you instead rent and invest your down payment and the other money you save, at a 3.5% return rate, it will earn you around RM11,551 in 5 years.
Looking at your gross costs, equity and investment potential, it is better for you to buy than rent if you plan to live in your home for more than 5 years.
Do note that this is just one example. Property selling and rental prices could differ greatly by housing types, property age and across different locations. You should play around with the Buy vs Rent calculator to gauge if it makes sense to purchase your own piece of real estate now.
How to determine if you can afford to buy a house or not?
The best way to gauge your readiness to purchase is to calculate your Debt Service Ratio (DSR), the ratio of a person’s total debt to their monthly income. It determines whether you will be able to secure a mortgage in the first place.
Debt-to-service ratio Formula = Debt/Net Income X 100
A good DSR proves to the banks that you can afford to pay the monthly instalments throughout the loan tenure. Generally, banks will not accept a DSR which exceeds 70%.
Do take note that banks will refer to your Central Credit Reference Information System (CCRIS) report too when reviewing your home loan application. Your CCRIS, which is available online displays all of your total credits, interest charges and other outstanding charges for all loans that you have taken out with any banks in Malaysia – these include personal loans, credit card loans and hire purchase loans.
Delay in repaying any of your debt obligations will show up in your report, where it is labelled as “1”. Lending guidelines differ across banks, but most will require mainly zeroes as it shows that you are a good paymaster.
Do you have enough cash for the closing costs?
Buying a house requires making a number of payments at different phases. First, you have to fork out 10% of your purchase price as a deposit to lock in the property. Then, you have to pay the monthly loan instalments for the next 30 or 35 years.
Apart from that, there are also a number of fees you need to cover known as the closing costs. These amount to 3-5% of your real estate value and comprise expenses such as legal fees, agent fees, MRTA, valuation fees and stamp duties. Check out the latest stamp duty charges & 6 other costs to consider before buying a house in 2020.
Besides that, first-time home buyers who are keen on capital growth will have to keep property tax in mind. Since their first purchase is usually a starter home and they will have plans of upgrading after 5 years or so, these purchasers will want to secure a tidy profit when selling off their homes. Property sellers are now required to pay a minimum of 5% Real Property Gains Tax (RPGT) when selling off their homes.
If you determine that your DSR is within a healthy range and you have enough savings for a 10% down payment and the closing costs, you can then proceed to the next step. However, if you are already struggling with your financial obligations, it is best to put your home ownership dreams on hold and continue renting. In the meantime, you can work on improving your finances first using the 50-20-30 rule, a simple budgeting guide that is suitable for all income brackets.
Are there any financial incentives if you buy a home now?
1. Lower mortgage interest rates in 2020 due to recent OPR cut
If you’ve been adopting a wait-and-see attitude this past year or so, now is the perfect time to buy a home since BNM has lowered the Overnight Policy Rate (OPR) from 2.0% to 1.75% effective 7 July 2020. This reduction is actually the fourth OPR cut in 2020 and is the lowest OPR since 2009.
2. What happens when the OPR decreases?
OPR is the rate a borrower bank has to pay to the lending bank for the funds borrowed. A lower OPR has a declining impact on Base Lending Rate (BLR), Base Rate (BR) and the effective lending rate (ELR) of your mortgage. This means home buyers now have a better chance of getting a loan at a lower interest rate. A home loan which previously had an interest rate of 4.5% is now going for 4.0%!
Do take note that a lower BR offered by one bank does not necessarily mean it has the lowest ELR. Find out how BR and BLR affect your home loan.
What are the new housing market initiatives / deals in 2020?
As mentioned above, aspiring home buyers could leverage on several new government measures to secure their own property at a discounted price:
1. Home Ownership Campaign (HOC)
During the short-term economic recovery plan (PENJANA) briefing in June, the government announced it will be reintroducing the nationwide Home Ownership Campaign (HOC) which features significant stamp duty exemptions on the instruments of transfer and loan agreement. The HOC revival serves as an effort to stimulate the property market and provide financial relief to home buyers following the Covid-19 outbreak.
Malaysian home buyers who purchase a new launch property(ies) from 1 June 2020 to 31 May 2021 will enjoy a full stamp duty exemption for homes priced between RM300,000 and RM1 million. One could obtain over RM11,000 in stamp duty savings alone when purchasing a RM500,000 residential property under the HOC banner.
Meanwhile, for properties priced between RM1 million and RM2.5 million, a 3% stamp duty will be charged (instead of 4%) on the MOT & SPA for the portion which exceeds RM1 million. Purchasers will also enjoy a full stamp duty exemption on the Instrument on Loan Agreement.
2. Recent Real Property Gains Tax exemption could mean more subsale property opportunities
During the same PENJANA briefing, it was announced that Malaysians will be exempted from paying the 5% (or higher) RPGT for the disposal of properties from 1 June 2020 and 31 December 2021 (up to three units of residential homes per individual). This would encourage the listing of more sub-sale homes in the market – property owners who were previously holding off selling their property will be more willing to settle for lower selling prices as they would enjoy significant savings from the RPGT exemption (between 5-30% of profits earned). If you have been eyeing a sub-sale home, now is the perfect time to revisit the plan as you will be able to negotiate a better deal with the owner!
What are the ongoing housing schemes for first time home buyers?
1. Youth Housing Scheme
This scheme was the result of a collaboration between 3 parties – Bank Simpanan Nasional (BSN), the Employees Provident Fund (EPF) and the National Mortgage Corporation of Malaysia (CAGAMAS). If you are single or newly married, you can use this scheme to take a 100% loan on your first home at prices ranging between RM100,000 to RM500,000. Under Budget 2020, it was announced that the Youth Housing Scheme will be extended until December 2021. Also, there will be a RM200 monthly instalment assistance for the first two years limited to 10,000 home units only.
2. Residensi Wilayah (RUMAWIP)
The RUMAWIP scheme is specially designed for first-time buyers who fall under the low-to-middle income groups. This program offers a variety of properties in the Federal Territories of Kuala Lumpur, Putrajaya and Labuan at affordable prices.
3. Bank Negara Malaysia’s Housing Fund
BNM has set up a RM1 billion fund with low financing rate of 3.5% to help first-time buyers acquire homes up to RM300,000 in price. You are eligible for this loan if your monthly income is RM4,360 or below. The fund is available for two years from January 2019 or until it is fully utilised. Besides that, BNM recently launched MyKNP (Khidmat Nasihat Pembiayaan) to provide free-of-charge advisory service to applicants who failed to secure a home loan.
What are your next steps?
Buying a home involves a lot of research and personal assessments from your end, but this step-by-step guide could help you navigate the process smoothly from the get-go. Also, make sure to utilise our home loan eligibility tool, LoanCare to find out if you will be able to secure a mortgage from up to 17 banks across Malaysia for that property you have been eyeing.
It won’t hurt to talk to a trusted real estate agent to help you think through the decision of purchasing a home now instead of later. Should you think renting is a better option for you then check out 10 things you should know before you rent a house in Malaysia.