Rent to Own – The solution to affordable housing?
Updated: May 22, 2018
The recent high prices of houses in Malaysia has created a new social issue of the new homeless, those who are priced out of the market due to unaffordability, weighted from an income relative to price ratio. This has hurt those in the B40 segment, i.e. households with monthly income of not more than RM4,360; as well as the young and first time buyers. Whilst this is not particularly a Malaysian issue, it has been a global phenomenon, with major cities and countries all experiencing a similar effect, including developed and so-called high income countries. In short, this reflects growing income inequalities, a result of the side effect of unfettered global capitalism and technology disruption. The highly skilled workers and top management are now earning many times the median income, whilst the unskilled, uneducated, and young adults are increasingly bearing the brunt and chucked at the wayside.
According to the Malaysian House Price Index (MHPI) published by NAPIC, the bull run in pricing started around 2011, which saw double-digit growth in the Index. Between 2010 and 2017, MHPI recorded a Compound Annual Growth Rate (CAGR) of 9.4%. In KL and Selangor, the increases were even higher at 10.2% and 9.7% respectively, an unprecedented figure in recent history. These increases are in part due to Quantity Easing (QE), big words that engulfed the panicky global financial system in a bid to save capitalism after the 2008 Global Financial Crisis. What this essentially means is that the world is flooded with plentiful and cheap money; as a result, there is price and asset inflation - basic Economic 101, demand exceeds supply.
Table 1: Annual change in House Price Index
According to Demographia, the key measurement on affordability is the ratio of house price to median annual household income of a country. Based on this, the levels of affordability are as shown in Table 2. A geographic area is considered to have affordable homes if the ratio is below 3.0.
Table 2: Demographia housing affordability categories
Source : Demographia
Based on the so-called “average” price of houses in KL of RM732,257, and a median monthly household income of RM9,073, KL is considered “Severely Unaffordable”, whilst Selangor is rated as “Seriously Unaffordable”. Amazingly across the country, no states are classified as having affordable houses, even in laid back places such as Perlis and Kelantan, and only three states, namely Perlis, Perak and Negeri Sembilan are considered “Moderately Unaffordable”.
Table 3: Comparison of housing affordability based on median annual household income and average house price, 2016
Source: NTL Research & Consulting
In buying a property, one of the key challenges is raising the initial sum; this can be between 10-30% of the price of the property, besides the ability to sustain the longer term mortgage repayment. This sum is usually sourced from savings, or in some cases from financial aids and assistance from parents. With a low starting income and relatively stagnant salary growth, coupled with high inflation, first-time buyers struggle with even raising this initial sum. In an attempt to overcome this barrier, various schemes and hybrids of rent-to-own schemes have been suggested; some of these are discussed in the following sections.
In 2016, Selangor Dredging Bhd. implemented a Reside and Purchase scheme, whereby completed units are sold on this package. Essentially, this is not a standard home purchase; although a sale is undertaken upfront. However, unlike the normal procedures of securing a home loan from a bank, the purchaser only needs to place a 5% down payment on the selling price of the property to move into the home immediately. Thereupon, the purchaser is given 36 months to settle the unfinanced portion in equal instalments, with the balance sum financed by the bank released at the expiry of the period. It was reportedly well-received, although affordability was not an issue here, given that these units were at the higher-priced range of the market.
Sunway Berhad also implemented a rent to own scheme as an experimental basis for some of its unsold bungalows, which offer the tenant the right to buy within two years. It is unclear if the rents paid in the last two years will be offset against the price.
Driving this issue will be government initiatives towards housing level affordability, where various housing projects have been initiated under various agencies; one of these being the federal government’s project Perumahan Rakyat 1 Malaysia (PR1MA).
Under PR1MA’s home ownership scheme – Rent To Own (RTO), once a person is eligible and approved to enter the scheme, (in the case where one could not secure a typical loan from a bank), he pays the monthly rental, plus an additional amount under a Buyer’s Saving Account that accumulates as a future down payment for the property, in the event that he or she chooses to purchase the property. Another variation of the scheme basically provides the same option to purchase, but without a saving plan for the future deposit. What is pertinent is that rental is benchmarked to mortgage instalment and not necessary market rent, and is reviewed every three years.
The latest entity to jump into this is Maybank, the largest financial institution in Malaysia via its subsidiary, Maybank Islamic. Named as #HouzKEY, this scheme is targeted at the younger buyer who does not have the initial funds to purchase, but wanted to enter the market with minimal financial obligation as a tenant, with the option to purchase the property with a lock-in price sometime in the future. Again, this scheme is a modified mortgage scheme whereby the bank purchases the property upfront (essentially financing 100% plus ancillary expenses) and the tenant pays the equivalent of a mortgage rate, with the option to buy at a scheduled range of lock-in prices that will reflect the duration of the rental term. In essence, the future purchase price reflects the reducing balance of the initial purchase price, after taking into account the rental (equivalent mortgage) paid over the years. However, it is to be noted that the property will be locked in at a fixed rental rate for five years, after which it starts escalating at 2% per annum.
In summary, the objectives of all these schemes are to provide flexibility and options for the market and prospective purchasers. In some cases, it is to overcome the challenges of raising the initial sum, especially in PR1MA homes for first time buyers, and in others, a marketing scheme to maximise returns on assets pending on a future sale. These latter schemes ultimately hope to move sales and loans, and are not necessarily driven by social objectives as its core. In a static or weakening market, most of these schemes do not necessarily offer a cheaper rent, or a secured tenancy with reasonably sustainable rental for those who need it and may have a longer horizon to purchase. At the end of the day, these schemes can be useful for first home buyers, but a combination of availability of more affordable priced homes and higher and more equitable distribution of household income are the ultimate solution to resolve the affordability issue.
Brian Koh - Executive Director, Nawawi Tie Leung Property Consultants Sdn Bhd
Edmund Cheun – Assistant Manager, Nawawi Tie Leung Property Consultants Sdn Bhd