Middle-income trap makes owning homes near impossible

GEORGE TOWN, Jan 29 — The poor have government-controlled low-cost housing, the rich can have their pick of whichever property they fancy but the middle-income wage earners are left to rent or make do with a remote location when it comes to getting a home of their own.

The latest Property Market Report 2012 has revealed property prices in major cities such as Kuala Lumpur, Penang, Johor Baru and Kota Kinabalu to be well above the affordability of any middle-income wage earner with a take-home pay of less than RM4,000, prompting the federal government to come up with several affordable housing schemes.

In Kuala Lumpur, a single-storey terrace house in Taman Tun Dr Ismail or Lucky Garden is priced above RM730,000 while a similar type of house in the nearby Petaling district is priced above RM378,000.

The solution, according to real estate agent and International Real Estate Federation (Fiabci) committee member Michael Geh, is for potential home buyers to look further away to the outskirts.

“What we have now is a middle-income trap for the average wage earner where they can’t qualify for low-cost housing and yet they can’t afford a comfortable home within city limits,” he said.

Property prices have been strong in recent years with many urban areas experiencing property price increases while newly launched homes are priced above the RM500,000 mark, according to the Property Market Report statistics.

If a house buyer wants to get a home that’s within his means, he will have to either look at locations further from the city centre or get a “partner” as only a combined income will allow for easier approvals of housing loans, said Geh.

“So, either you grab a spouse to apply for a loan based on a joint income or you look further out of the city for cheaper housing and commute to work everyday,” he said.

Geh said there was also a new trend where friends partnered up to jointly purchase properties.

“Many singles prefer to partner up with a friend to jointly buy a house where they stay together as housemates instead of renting,” he said.

But many singles also prefer to rent and live like nomads where they frequently move from one place to another especially when they change jobs, he added.

“This is especially true for fresh graduates who may not have enough income to sustain a housing loan,” he said.

Property auctioneer M. Shanmughananthan echoed Geh’s opinions that it was now very difficult for the middle-income earner to purchase properties, especially newly launched projects in the city.

“There is now a growing phenomenon of investors clubs and they are snapping up these new projects even before they are launched so genuine home buyers will not have a chance to get these properties at the launch price,” he said.

In recent years, the bullish property sector in the country has turned this industry into a commodity worth investing in, spurring the growth of investors clubs.

Property researcher and property book author Ho Chin Soon had said there are now many investors clubs, each with a few hundred members, that advise members on project launches and property investments.

Property prices, while on the increase in urban areas, still remain at an affordable range in the outskirts such as on the mainland side in Penang where property prices in the state are known to be phenomenally high.

A single-storey terrace house on the island may cost upwards of RM500,000 but over on the mainland, in Seberang Perai, it could cost as low as RM90,000.

“House buyers will need to move away from high demand urban areas and look towards the more rural areas such as Juru or other parts of the mainland where property prices are not as high yet,” said Shanmughananthan.

Geh agreed and pointed out that there are still double-storey terrace houses in Johor Baru that are priced below RM250,000. However, this is not so practical for house buyers who prefer to live near where they work.

For lecturer Sandra Chia, all she wanted was to get a place near where she works for easier commuting and convenience, such as apartments in

Tanjung Bungah, Penang, but prices there are above RM400,000 a unit.

Chia earns around RM4,000 but does not have much savings, leaving her unable to buy properties in that area. “I am still staying with my family now but it would be nice to get a place of my own,” she said.

The high prices of properties in Penang have left Chia worried if she will ever be able to afford one and finally move out of the family home.

“It doesn’t look like I’ll be leaving home soon due to the current inflated property prices,” she said.

File photo of condominiums in Bangsar, Kuala Lumpur, most of which are beyond the means of middle-income wage earners.

Another potential house buyer, insurance agent Fakhrul Hizan, could not even get a bank loan for a RM150,000 medium-cost flat in Section 7, Shah Alam, Selangor.

The 27-year-old earns RM5,000 monthly but his loan application was rejected as the bank had calculated his nett income by taking 60 per cent of his salary and subtracting it with his monthly financial commitments of RM1,500.

He said the monthly loan instalments of RM650 would have been manageable, so he was “quite disappointed” that his loan application was rejected.

The loan rejection was probably due to strict guidelines on housing loan applications put in place by Bank Negara since 2012.

While there was no shortage in housing loan packages by banks, bank officer Jordan Chong said the problem was for applicants to qualify for the loans.

Under the Bank Negara ruling, housing loan applicants need to borrow based on their nett income, not on their gross income.

For example, Chong explained, a house buyer may have a salary of RM4,000 but the amount of housing loan he is able to apply for will not be based on that figure.

“We will look at the take home pay, after EPF and tax deductions, and from there, look at his other financial commitments such as car loans, study loans, credit cards and other debts,” he said.

So, in short, a person with RM4,000 gross income could end up with only RM3,000 nett income after deducting his other financial commitments.

“Based on this, he is only allowed to borrow a sum where the debt ratio is up to 70 per cent of the nett income,” Chong said, pointing out that a house buyer with a nett income of RM3,000 can only borrow up to RM270,000 to buy a RM300,000 house and he will need to service the loan at RM1,300 per month for 30 years.

But Chong  said house buyers may now apply for longer loan tenure that stretches up to 35 years, not only limited to 20 or 30 years.

“So, a 35-year-old house buyer is able to take up a loan that he will need to service until he is 70 years old,” he said.

As for whether it was true that it was now tougher for house buyers to get loans, he said this was because of the nett income ruling.

“Some may have a lot of financial commitments so after deducting the other loans they are servicing each month, they may not have much nett income left to borrow against,” he said.

All new house buyers with no existing housing loans under their names are eligible to apply for 90 per cent loans for a new house while those with existing housing loans can only apply for 70 per cent loans.

Due to this, newlyweds, fresh graduates and middle-income wage earners may not only have a hard time looking for properties within their affordability range but they will also have a hard time getting loans to buy their homes.

As Geh puts it, middle-income wage earners are stuck in a trap and perhaps the only way to get a place to stay now was to rent one or try their luck with the recently introduced 1 Malaysia Housing Programme (PR1MA).

Both Geh and Shanmughananthan lauded the federal government’s move in introducing the PR1MA affordable housing for the middle-income group and the My First Home Scheme for young adults to get 100 per cent loan financing.

All individuals or couples with an income of between RM2,500 and RM7,500 can apply for a PR1MA house, which is priced below RM400,000 each unit.

Prime Minister Datuk Seri Najib Razak had announced late last year that 123,000 PR1MA houses will be built throughout the nation including in Seremban, Shah Alam, Kuantan, Johor and Penang.

As for the My First Home Scheme, as at October 2012 only 436 applicants were successful in obtaining financing under the scheme which was introduced in 2011. - The Star