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Thursday, April 22, 2010

High-income economy: The impact on Malaysian properties spoke to Real Estate and Housing Developers’ Association (REHDA) chairman and Metro Kajang group managing director Datuk Eddy Chen about the New Economic Model (NEM) and addressing the housing affordability gap.

“I would suggest that the government raise the income of the government servants. They can lead the whole high-income movement,” says REHDA chairman Datuk Eddy Chen.

What are your thoughts on the recently unveiled New Economic Model (NEM)? Chen: I think that the NEM, if it is carried through is very good for the country. And it may be make market much more equitable. For example, let’s say if the Prime Minister said to take care of the bottom 40% of the people, irrespective of race, that would be good. Because then, you take care of Chinese, Indian and Malay as well. Then it is fair, because it is (on) needs-based.

The only grouse that we have is the pricing of low cost houses, which developers are subsidising RM15,000 to maybe RM20,000 per unit. We believe that there are not that many people who fall into that category now.

Out of the bottom 40%, how many percent of people will qualify for the low cost housing scheme?
Chen: It may well be 5% or maybe 10% of the 40% that falls into that category, which we believe the government is fully capable of taking care of these people via general taxation, without involving subsidies.

Because for subsidies, the costs are passed on to medium-cost house purchasers. They are footing the bill for this.

If the government takes care of low cost housing, would that mean that prices of houses would be lower?
Chen: Across the board, for developers, it is like this. We work on a margin. Say Metro Kajang, we look at land and we work backwards. I want a margin of say, 15%. Then (we) work backwards and price the house accordingly. So if take away low cost housing, certainly my margin will remain, but it may be at a lower absolute figure. Therefore, if you look at lower figure that means the price of houses is actually lower in absolute terms.

And of course, developers also do take into consideration the market demand of the house. If the market price is say RM500,000 per unit, the developer will price at RM500,000 per unit. (We) won’t overprice to RM600,000.

Or below, because if I invest in a property at RM500,000 and later if the subsidy of low cost housing is removed, my property’s value might remain or even drop.
Chen: Then you (will) find that following of buyers will reduce. So we try to price ourselves to the market but of course we work at a margin. So it is a dual thing – market and margin.

Because you see, in terms of affordability, the government can help in many aspects. You take away bumiputera quota. The 7% (bumiputera discount) subsidises the rich bumiputera as well as poor bumiputera. It is not (on a) needs basis. But if you do away with let’s say, anything above RM250,000, they will get a discount.

Some suggested instead of RM250,000, look at RM500,000. Any house above RM500,000, we do away with the bumiputera discount. That way, it will help affordability a lot more.

Bumiputera quota and low cost housing - if we take these away, developers will still work on a margin of some sort, and price to market. The absolute figure might actually come down.

That will help affordability and of course there are compliance costs like TNB (Tenaga Nasional Berhad), IWK (Indah Water Konsortium) and water capital contribution. All these are privatised entities. Developers come up with capital and they collect the long-term income. So perhaps look that they (utilities companies) fork out their own costs and price in their tariffs and take it back over the long term.

So at the end of the day, these are some of the things that can bring (property) prices down, make houses much more affordable and when we say affordable, we are talking about (property being) affordable to (the) middle class. Because they are the bulk of the population.

Yes, because they (the middle income group) don’t qualify for low cost housing and at the same time, can’t afford many of the properties built these days.
Chen: So, if we can take care of the middle class, which is probably the majority of Malaysians, I think the middle class may constitute 60% to 70% of Malaysians.

But even if the government does decide to do away with the bumiputera quota for properties above RM500,000, the middle income group is still stuck in the trap.
Chen: Everybody will get a lower price. The price will move to a new equilibrium if we can take away some of these structured costs. But over time, inflation will take over and will slowly push the cost up. So this is one way. Of course the other way is that NEM is talking about bringing Malaysia to a high-income economy. I think that is more critical, in the sense that, high-income must be linked with productivity and add value-add. Income must value-add and it must be more than the physical income.

Malaysia aims to make that quantum leap from the current USD7,000 per capita annual income to USD15,000 in 10 years. But in 10 years, property prices would’ve inflated quite a bit too!
Chen: (The) thing is that when we move up, the input into housing, the raw material, the service, the value-add will be more. Because of this value-add, price goes up. You may be looking at new technology of building houses. Better quality houses, more guarantees in terms of houses, guarantees in delivery system.

So if (we) transform the housing (industry), although it won’t be a revolutionised thing, but the incremental increase in quality, the specifications would certainly commensurate with (the) higher price. But then, of course you are earning higher income and salary. And (the) built environment will be much higher.

In 10 years’ time, we may not be building the same house. Quality is improving every day. (We) build greener homes, houses that save more water, save electricity, safer house. What is the point of having high-income if we stay in the same type of houses. So it must actually be meaningful. Everything must be better.

If you look at say Ringgit Malaysia, (it) will eventually go up. But be mindful that other countries such as Australia, Singapore might have gone up as well. So in relative term, we must move faster than Singapore or Australia. But the thing to us is that we have more room to grow than a matured economy.

You mentioned green homes. Fact is, it is not cheap to go green at the moment, be it for existing building or new buildings. Will this move be even more of a burden and enlarge the affordability gap?
Chen: Actually, (being) green will increase the price but we are looking at the incremental increase. Because the house cannot be totally green at the moment, so we could be looking at maybe increasing certain features over time.

Certainly we are hoping to incorporate green features that will help savings. For example, certain green features save electricity, use less light, use less water. And although the price will increase but over time you save. So we are working on is figuring out the feasible ROI (return-on-investment), and we are waiting for the feed-in tariff (FIT) to come from the government.

Do you have any idea of the percentage increase of income versus property prices?
Chen: Property prices tend to move faster than income, and many a time this is caused by little bit of speculation. For example, price of some houses I have sold in Kajang, prices have increased by maybe 200% over the last 20 years, but pay has not increased by 200%. In many instances, some (properties) have increased by 300% or 400%. But generally, pay has not increased much, especially for government servants.

Unfortunately for the poor people, there is a myth that the government is helping the low income people to own properties as an investment. But many low cost houses, when you look around, Kajang, Rawang, Kuala Langat, the low income people bought at RM42,000, and today they are selling only at RM20,000 to RM25,000. These poor people have become poorer! They are caught in the trap. We believe the government is wrong in that sense, to build low cost houses irrespective of location.

And low cost houses, the other problem is that there is lack of maintenance. People are not paying subscription, not painting the houses, no sinking fund. Some of these low cost houses, it is like a slum.

Somehow government must come to understanding that these poor people, maybe it is better for them to rent than to buy a house that is in a poor location with poor maintenance. So that is a myth that developers building low cost houses are helping them as an investment. As a home, yes of course, a roof over their head. But as investment, it is a losing proposition.

So, when household income increases, we will have a better quality of life. Apart from that, what are the other expected spin-offs when people have higher income?
Chen: Not just for housing (industry). I would suggest that the government raise the income of the government servants. They can lead the whole high-income movement. With more to spend, the Ringgit goes around to boost the economy. Imagine, they buy more things from hypermarkets. These hypermarkets now feature locally-produced items, which are purchased from SME (small and medium enterprises) in this country.

(When) the consumption increases, this has big multiplying effect. We need for studies to be done for this. That is the theory of it all. If you can move government servants’ salary (up), there is justification for everyone to move salary (up), to new income salary equilibrium. But it must all be done via productivity. For example, instead of taking six months to approve a plan, it takes three months instead. That is huge savings and that savings can be passed back to everyone else.

When (we) get everything (done) faster, on the global picture, Malaysia becomes that much more competitive. These are the things that income can help generate this kind of effect and government servants play (a) crucial role.

REHDA Property Forum 2010
The REHDA Property Leader Forum 2010 will take place on 22 – 23 April (Thursday and Friday). For inquiries or registration, call 03-7803 2978, email /, or visit

By The Star ( by Sherry Koh
Posted on 21 April 2010

1 comment:

Malaysian Email List said...

its time to increase income for governament servents...