Introduction
Housing affordability has been a persistent issue in Malaysia. The government has implemented various initiatives including building more PPR housing programmes for lower-income households, state-led projects like Residensi and RumahWIP housing schemes for middle-income households and annual budget allocations for financing schemes like Skim Jaminan Kredit Perumahan (SJKP) guarantees and stamp duty exemptions to enhance access to homeownership, particularly among first-time home buyers. While these initiatives aim to improve affordability through financing, they often overlook the need for structural reforms to address the root cause of housing unaffordability.
This article examines whether financing alone is a sustainable solution to the housing affordability crisis. By analysing the current state of household debt and housing affordability, it highlights the risks of overreliance on innovative financial mechanisms to make expensive homes appear affordable. It also underscores the importance of adopting long-term measures to ensure genuinely affordable housing for all Malaysians.
Household debt remains high
Household debt in Malaysia has increased significantly over the past two decades. As shown in Figure 1, the household debt-to-GDP ratio increased from 67.2% in 2002 to 84.2% in 2023. This increase is largely driven by greater access to financial products, which enables individuals and households to borrow more, thereby contributing substantially to the country’s GDP.
This trend is also evident in the proportion of household sector loans over total loans, as illustrated in Figure 2. Total household sector loans in the banking system increased from RM332.7b in 2006 to RM1,265.3b in 2023. In terms of the share, household loans constituted 56% of total loans in 2006, increasing to 59% in 2023.
Housing dominates high household debt
Homeownership is a significant contributor to household debt. Urbanisation and the aspiration for an upward social mobility ladder have driven strong demand for housing. As shown in Figure 3, about two-thirds of household debt is allocated to residential properties, with its share increasing from 36% in 1997 to 60.5% in 2023. This is followed by loans for motor vehicles and personal financing. Residential property loans grew fourfold from RM202b in 2006 to RM928.1b in 2023.
This continuous increase in residential loans, particularly in recent years, indicates growing demand among homebuyers, facilitated by government measures to promote homeownership. Policies such as stamp duty exemptions for first-time homebuyers and government guarantees via SJKP have played a critical role. Moreover, this trend also underscores the role of financialization in facilitating homeownership, where easier access to credit enables certain segments of society to afford homes despite rising house prices.
Are Malaysian houses affordable?
The median multiple affordability indicator classifies Malaysia’s housing market as “seriously unaffordable”, with scores consistently exceeding the affordability threshold of 3.0. This indicates that homes are beyond the reach of many Malaysians. Expensive housing also explains the rising share of residential loans in household debt.
The proliferation of unaffordable homes in Malaysian cities is not primarily a wage stagnation problem. This is because no amount of wage increment, even with the minimum wage intervention can realistically keep pace with Malaysia’s rapid house price escalation. House prices have been growing much faster than household incomes, further widening the affordability gap.
Between 2012 and 2014, the median house price grew at a compound annual growth rate (CAGR) of 23% from RM170,000 to RM270,000. In comparison, median household incomes grew significantly slower at a CAGR of 11.7%, less than half the rate of increase in house prices. Hence, it is not reasonable to expect wages to increase at a CAGR of 23% to match house price growth. This disparity underscores a structural mismatch between the labour market and the housing market, where jobs are created, but homes remain unaffordable.
This imbalance underscores the need for structural reforms in housing policy to address affordability challenges. Without intervention, the gap between household incomes and house prices will continue to grow, exacerbating inequality and limiting access to homeownership for many Malaysians. But, is financing the easy way to address housing affordability?
Expensive homes appear affordable through easy financing
The phenomenon of making expensive homes appear more ‘affordable’ through macroprudential measures is not new. The growing gap between household income and housing prices is closely linked to developments in the financial industry. While demand for housing remains high, modest income growth is insufficient to close the affordability gap, which has been further widened by the increased reliance on mortgages.
Since 2009/10, house prices have grown at a CAGR of 7.2%. Despite this rapid growth, innovative financing measures such as longer loan tenure and higher loan-to-value (LTV) ratios have made these expensive homes more accessible and ‘affordable’. While these measures create the illusion of affordability, they also come with significant risks. Rapid price escalations driven by these financial schemes can lead to housing bubbles. When property prices do not reflect their true value, and households struggle with mortgage repayments, the market corrects itself. In such scenarios, banks may auction off properties at lower valuations, which can trigger widespread loan insolvency and financial instability.
The impact of longer tenures
House price increases in real terms can be partly attributed to longer mortgage tenure periods rather than current house valuations. A report by the OECD provides a classification of countries in which “houses appear overvalued, but prices are rising”, warning that such a phenomenon could also emerge in Malaysia if current practices remain unchecked.
Bank Negara Malaysia (BNM) has emphasized that a maximum housing loan tenure of 35 years is more than sufficient for borrowers to fully repay their loans before retirement. Extending loan tenures beyond this limit not only increases the total cost of financing but also has a minimal impact on borrower’s debt service ratio.
This demonstrates that longer tenures result in disproportionately higher financing costs without providing meaningful financial relief to house buyers. Similar challenges arise with intergenerational loans, a concept previously proposed to tackle housing affordability crisis. While intergenerational loans may offer lower monthly payments compared to conventional loans, they ultimately pass the debt burden to the next generation, who will end up paying much more interest payments over time.
Recognising these risks, KRI, in its recent report titled “The Financialization of our Lives: Values and Trade-Offs” suggested discontinuing housing mortgages with longer time periods and intergenerational loans. Reducing mortgage periods could help curb house price inflation caused by excessive financing. Shorter loan tenures would encourage more affordable house prices and foster moderate, sustainable price growth in the housing market, avoiding the rapid price escalations seen under current financing structures.
Conclusion
Given the high levels of household debt and the significant role housing loans play in it, addressing housing affordability requires more than just innovative financing mechanisms. Homes should not appear affordable merely because credit is easily available, and longer tenures reduce monthly mortgage payments.
Instead, genuine affordability must be achieved through structural reforms. This includes considering measures such as reducing loan tenure limits, transitioning to a Build-Then-Sell (BTS) system, adopting prefabricated construction technologies to lower costs and ensuring house prices align with the median multiple affordability in the localities.
By shifting the focus away from over-reliance on extended loan tenures and moving towards structural reforms, policymakers can promote a more sustainable housing market. Such an approach ensures property values reflect real market conditions and remain within the financial reach of households and promote sustainable homeownership.
