Introduction
Housing affordability remains a persistent issue in Malaysia. In 2022, the median multiple affordability indicator was at 4.3, which indicates that our housing market is ‘seriously unaffordable’. Meanwhile, the supply of affordable housing falls short of meeting the demand, with newly launched units predominantly targeting higher price ranges. Amidst the affordability challenge, the prevalence of overhang and vacant units further exacerbate the issue.
The Annual Property Market Report 2022 published by National Property Information Centre (NAPIC) reveals concerning figures of over 27,000 overhang units recorded in 2022. Additionally, MyCensus 2020 reported 1.8 million vacant living quarters in 2020. The mismatch between housing demand and supply, coupled with the overrepresentation of high-priced units among unsold properties, raises concerns about whether the housing market can meet the needs of the local population.
It is crucial to understand the factors contributing to the overhang and vacancy situation, as well as recognising their potential impacts on resources and neighbourhood development. This article delves into the underlying factors and implications of overhang and vacancy, while exploring the potential benefits of implementing a vacancy tax as a solution to foster a more affordable and sustainable housing market in Malaysia.
The state of overhang in Malaysia
The Annual Property Market Report 2022 reported a total of 27,746 overhang units valued at RM18.41b in the year 2022. Notably, the majority of these unsold units fell into the higher price range, with units priced above RM300k constituted 76.5% of the total unsold units. Within this category, units priced between RM300–500k and above RM500k accounted for 43.2% and 33.6% respectively.
The previous year saw the highest number of transactions in the housing segment below the RM300k threshold, constituting more than half of the total transactions at 55.8%. Interestingly, houses within this price range also have a comparatively lower share of overhang units (23.5%) compared to higher-priced units.
However, a different picture emerges when we compared the number of unsold units to the total housing units within the same price bracket.
For units priced RM300k and below, overhang units comprised of only 4.6% of the total, a figure even smaller than the overall share of overhang units for that price bracket. Conversely, properties above RM1m that remained unsold make up 25% of the total units available in this bracket. These figures indicate a significant demand for affordable homes while higher-priced properties face greater challenges in finding buyers.
What contributes to overhang units?
There are several factors contributing to the presence of overhang units in the housing market. One of the primary reasons is the mismatch between housing supply and demand. Overhang occurs when there is an oversupply of houses that are not built based on demand, or a lack of demand for those units. The former happens when developers did not analyse the market and local demand adequately thus leading to the supply of houses that do not meet the specific preferences or requirements of prospective buyers in terms of size, design and available amenities. Whereas, the latter is due to a lack of affordability, or the housing attributes do not meet the aforementioned preferences of prospective buyers.
According to NAPIC, the majority of unsold units are expensive homes priced above RM300k (76.5%) and nearly two-thirds of the total residential overhang consists of condominium or apartment units (62%). These suggest that there is a lack of demand for expensive homes and high-rise units. However, newly launched units tend to be in the higher priced range, further worsening the issue of unsold homes.
Moreover, it is possible that houses in the affordable price category remain unsold due to their unfavourable locations and perhaps with limited access to key amenities. Properties located further away from the city centre, workplace or schools may deter potential buyers from making a purchase as it may not align with their optimal preferences and convenience.
Additionally, NAPIC’s data shows that the composition of newly launched housing units has shifted notably over the years, towards high-priced housing units. In 2009, affordable houses priced RM200k and below comprised 55% of new launches while in 2022, this category made up only 11% of the total. In contrast, in 2022, new launches priced RM300k and below formed 44% of the national total, followed by RM300k – RM500k (31%) and > RM500k (25%).
Given that new launches are mostly high-priced, and our household income is growing at a slower rate compared to median house price, which almost doubled in the last decade (from RM158k in 2010 to RM330k in 2022), there will be a growing demand for affordable units that cannot be met by the existing schemes. In other words, there is a shortage of affordable units.
While affordability and preferences of buyers do play a role, another factor contributing to the overhang situation is the Sell-then-Build (STB) housing delivery system. Under this system, developers are allowed to sell units upfront to secure profits and then have two or three years to complete the project and deliver the homes. To proceed with the development, they only need to secure a certain percentage of buyers during the initial launch. However, in some cases, developers may not be able to achieve the full sales target as the project nears completion and often house prices are usually slightly higher after project completion. If these prices are unaffordable for potential buyers, then the units remain unsold.
Vacant living quarters in Malaysia
Meanwhile, MyCensus 2020 found that out of 9.6 million living quarters in Malaysia, approximately 1.8 million units or 19.4% were found to be vacant. The primary reason for vacancies is due to units being either newly completed or awaiting rental or sale, followed by vacant units in holiday resorts or transit locations, and units undergoing repair or renovation.
Approximately 704,935 units remain unoccupied, either due to being newly completed or intended for rental or sale. This suggests that these units were possibly acquired for speculative or investment purposes, with the intention of generating quick profits or rental income. However, it is important to acknowledge that the data lacks a detailed breakdown between newly completed units and those intended for rental, making it difficult to ascertain whether the units are primarily for long term rental or purchased for speculative purposes.
Additionally, the increasing trend of vacancy rates since the 1970s also indicates the likelihood of speculation and investment activities taking place. In 1970, the recorded vacancy rate was 9.5% and it spiked to 19% in 2020, highlighting the prevalence of such activities.
While the vacancy rate experienced a modest reduction in 2010, it subsequently surged in the following decade. This also coincided with the introduction of various financing schemes aimed at addressing affordability during that period, coupled with speculative demand, these factors eventually contributed to a rapid escalation in house prices. Therefore, it is vital to address this issue in order to ensure proper utilization of housing resources and promote an efficient housing market.
The impact of vacant units on resources and neighbourhood development
Vacant and overhang units represent wasteful resources. These unoccupied units remain idle, generating no value or utility to anyone. An individual who hoards multiple or even a single unit with the intention to speculate is effectively depriving others of the opportunity to purchase or rent them.
Moreover, vacant units have adverse effects on resource utilization and neighbourhood development. The presence of vacant and overhang units leads to underutilization of public resources such as transport services (bus/LRT/MRT), public parks and public halls in townships or cities with high vacancy rates. These resources are not being utilized to their full potential as the targeted population for whom they were designed either have not moved into the area or the units remain unoccupied or unsold. Consequently, this situation places a strain on public resources. For example, some of these resources (e.g. bus/LRT) are not generating sufficient revenue that might be needed for their maintenance costs. As a result, they are not maintained in good condition, or the authorities have to allocate additional funds for maintenance.
Additionally, the presence of unoccupied units can also lead to disinvestment in townships by discouraging property developers and businesses from investing in the neighbourhoods. When there are fewer residents, businesses may be hesitant to invest as they may not generate the desired sales due to lack of potential customers. This lack of investment can have detrimental effects on the growth and development of those townships.
Sometimes, vacant units may also align with the “Broken-Window Theory”—If a window in a building is broken and is left unrepaired, all the rest of the windows will soon be broken— whereby neglected properties can attract unintended activities and further deteriorate the overall condition of the area.
Vacancy Tax: Curbing Empty Units and Speculation
Given the aforementioned implications of unsold or unoccupied units, it is suggested that the implementation of a vacancy tax will aid in curbing speculation, existence of dilapidated buildings, underutilization of public amenities as well as creating an affordable and sustainable housing and rental market.
A vacancy tax is generally imposed on units that remain unoccupied or unused for a certain time period. The tax amount is usually calculated as a percentage of the gross selling price of those vacant units. The higher the selling price of a unit, the greater the corresponding tax amount.
Vacancy tax aims to encourage developers to be more cautious in planning and developing housing projects. They would be prompted to undertake a comprehensive feasibility study to analyze the local market demand and provide housing that caters to the diverse needs of different population segments. This can prevent oversupplying products that can contribute to the property glut.
Additionally, the vacancy tax also aims to discourage speculative activities by individuals who hold units with the intention of making quick profits. Countries like Canada (Vancouver and British Columbia) and Australia (Melbourne) have implemented this tax to create an affordable housing market and curb speculation, particularly among local and foreign buyers.
To put this into context, the implementation of a vacancy tax will prompt both the developers and individuals to start selling or renting their overhang and vacant units, respectively to avoid paying the tax. Consequently, this will provide home buyers with access to affordable housing options as developers lower their price through ‘fire sales’ to clear the gluts.
Some argue that discounted prices benefit current buyers and disadvantage existing owners, leading to depreciation in house prices and affecting the market value of the secondary housing market, which accounted for about 80% of total residential transactions in 2022. However, it is important to note that house prices in Malaysia have escalated rapidly since 2010, with a compounded annual growth rate (CAGR) of 5.8% between 2010 - 2022. Innovative financial schemes and speculative demand are among the factors contributed to a stark increase in house prices, thus creating a housing bubble where prices do not reflect the true value.
Meanwhile, the expected healthy CAGR for Malaysia’s house prices should be between 3.1 - 4.0%, as demonstrated in the figure above. Thus, a vacancy tax could actually help the housing market achieve the predicted healthy CAGR.
On the other hand, investors and/or the speculators will release the units they have been hoarding into the rental market. This will increase the supply of rental properties and stimulate healthy competition among new and existing landlords to provide a decent, good-quality units at affordable rents for tenants. Some may argue that rental yields will decrease due to the sudden surge in supply. However, it is important to recognize that this correction in rental prices will actually bring down previously expensive rental rates to a more affordable range.
Thus, the arguments against implementing a vacancy tax, such as property value losses for existing homeowners and lower rental yields, are the consequences to be incurred if we wish to correct our housing and rental market to become more sustainable.
However, one significant challenge in implementing a vacancy tax is the governments’ capacity to efficiently monitor these vacant homes. Currently, there is no periodic survey in place to monitor vacant properties thus raising logistical and resource-related concerns regarding the implementation of such tax. While addressing this challenge is vital, it should not deter us from the need to rectify issues within our housing and rental market.
Conclusion
Understanding the causes and implications of overhang and vacancy issues is crucial for devising effective solutions. Factors such as inadequate market analysis, unmet preferences and requirements of buyers, high house prices and the Sell-then-Build system contribute to the presence of overhang units. Furthermore, the prevalence of speculation and investment activities is evident in the high number of vacant units, hindering proper resource utilization and neighbourhood development.
Thus, the implementation of a vacancy tax on both the property developers and individuals is suggested as a solution to address the issue of wasted resources such as vacant and unsold units in addition to discourage speculation among both citizens and foreign buyers. Recently, it was reported that 11,512 apartments priced above RM500,000 remain unsold in Iskandar Puteri. In an attempt to clear this oversupply, developers are opening the market for units priced above RM1m to foreign buyers especially from Singapore. However, this situation may contribute to speculation, particularly if these units are purchased for investment purposes. Therefore, implementing a vacancy tax would help prevent such occurrences.
Moreover, vacancy tax would encourage developers to be more cautious in planning housing projects that meet the local demand, and thus preventing the accumulation of overhang units, particularly in high-rise and high-priced categories. Creating an efficient housing market requires a concerted effort from both the government and property developers. Thus, it is also crucial for local authorities to thoroughly review these studies and cross-reference them with available data, such as population growth, household income and existing supply in the respective localities.
Hence, the introduction of a vacancy tax coupled with comprehensive market analysis (both demand and supply) can curb speculation, optimize resource utilization and thus alleviate the overhang and vacancy issues in Malaysia.
