HOUSING as PROFITABLE VENTURE and AN INCOME

GENERATOR

• Perspective on housing as an income generator• To substantiate that housing is

a highly profitable venture.

LECTURE OBJECTIVES

Why Housing is an important income generator?

Looking at different facets such as:

• The general public i.e. individual person like you and me

• The governments; the federal, the state and local authorities

• Private entrepreneurs and industries

HOUSING AS AN INCOME CONTRIBUTOR

• Gov emphasis in DEVELOPMENT OF HOUSING SECTOR (federal government)– Being measured in terms gross domestic product– Being measured in terms employment– Being measured in terms of impacts economically or socially especially taxes in terms of

cooperate or individual taxes.• State Gov interest in housing sector

– Catalyst to other development which lead to more taxes, levies etc– Mass housing development would also drastically improved taxes on land– Some states government e.g. SELANGOR and JOHOR esp. involve directly in housing

development.• Local authority

– Main incomes are quit rents and parking

• THE PRIVATE SECTOR WILLINGNESS TO PARTICIPATE IN HOUSING SECTOR• HOUSING IS THE MOST PROFITABLE SECTOR

Housing as the MAIN ASSET

• EXPLAIN WHY THE GENERAL PUBLIC IS MOSTLY AFFECTED IN TWIST OF AN ECONOMIC CYCEL NEGATIVE OF POSITIVE– Based on the magnitude of investment in housing– Based on the amount of saving on housing– Based on the magnitude of mortgage involved– Based on the financial expenditure link to housing

From an individual perspective

• Shelter and its vast interpretations

• Main Asset• Safe but high return investment• A good form of saving• A highly acceptable form of

collateral

From the Federal government perspective

Federal government• An important income generator refer to GDP

and KLSE company listing http//biz.thestar.com.my/marketwatch/

• Corporate tax• Personal income tax

From the State government perspective

Encourage housing development especially in a large scale. Why?

• Increase federal contribution to the state i.e. per head contribution

• Increase in land tax e.g. the conversion of agriculture to housing.

• Profitable venture and directly involve in its development such as Selangor and Johor

• Other taxes associated to development.

Perspective of private entrepreneurs

Extremely profitable venture take example shah alam.

• Almost 65% of company listed in KLSE related to housing directly or indirectly to housing sector.

• Especially properties, construction, banking and insurance, industries and especially plantation

• Most ‘unrelated companies’ have interest in housing industries.

How important is housing sector as an economic contributor to the Malaysian economy?

THE BUST-BOOM CYCLES

Impacts on HOUSING

Terminology-GDP

• GROSS DOMESTIC PRODUCT• Gross domestic product (GDP) refers to the

market value of all goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living

Deflation versus inflation

• In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the annual inflation rate falls below 0% (a negative inflation rate).

• inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[

• inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy

• Inflation's effects on an economy are various and can be simultaneously positive and negative

• Negative effects of inflation include a decrease in the real value of money and may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions)

Recesssion

• A recession is a business cycle contraction, a general slowdown in economic activity.[

• Recessions generally occur when there is a widespread drop in spending often following an adverse supply shock or the bursting of an economic bubble.

• Governments usually respond to recessions by adopting expansionary such as increasing money supply, increasing government spending and decreasing taxation.

BUST OR BOOM AFFECT

LIQUIDITY IN THE ECONOMIC SYSTEM

IMPACTS OF ECONOMIC CYCLES

To HOUSING SECTOR

An economic boom

• Boom-bust cycles come hand in hand with periods of thriving stock markets and rapid growth in real state development.

• The boom phase of the cycle is often associated with a rapid increase of gross domestic product (GDP), consumption and specially investment.

• Eg. Malaysia in 1987

Scenario during the economic boom

• Investment (both invisible and FDI)• Employment • Income • Production and export• Composite Index • Lending policy liberalized• Economic policy – expansionary• Full employment• Inflation manageable (encourage lending)• Public spending and consumption

2,3252,209

2,0511,8771,7421,6391,4701,3331,171

3,8173,7103,5903,497

3,3253,2403,1542,976

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

1989 1990 1991 1992 1993 1994 1995 1996 1997

The number of service employment in ‘000

102.0131.0

151.0 144.0

268.0

181.0139.0

3,043

1,934

1,3381,2811,4291,259

923

0

50

100

150

200

250

300

1998 1990 1991 1992 1993 1994 19950

500

1000

1500

2000

2500

3000

3500

Quantity ('000)Value (RM'000)

The Car Import (CKD).

Housing Loans (RM‘000).

12,99514,479

16,63918,055

21,72121,00919,85319,469

16,64016,74114,04114,508

12,20311,588

9,5898,143 7,5707,3226,4676,039

4,9634,2893,3652,671

0

5,000

10,000

15,000

20,000

25,000

1989 1990 1991 1992 1993 1994 1995 1996

GovernmentCommercial BanksFinance Companies

0

100,000,000

200,000,000

300,000,000

400,000,00019

84

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Volume ('000)Value (RM'000)

KLSE TURNOVER In Terms of Volume and Value

Chart 13: Net Profit and Earning Per Share of the Malayan Banking Bhd.

1075.0

38.0 80.0172.0 210.0

864.0

644.0

391.0261.0

94

76

56

3435323126

12

0

200

400

600

800

1000

1200

1988 1889 1990 1991 1992 1993 1994 1995 19960

10

20

30

40

50

60

70

80

90

100

Net ProfitsEPS

EPS in cents

Net Profits in(RM millions)

Source:The Maybank Annual Report 1989 - 1997

Commercial Banks Loans to Construction Sector (RM’000)

9,30910,377

13,995

8,602

6,7305,5054,763

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

1989 1990 1991 1992 1993 1994 1995

An economic Bust characteristics

• The bust cycle follows with a downswing in which consumption and investment fall sharply, leading to a period of depressed economic activity.

• E.g. Malaysia 1997

Continuation…• extreme form of recession, a depression is characterized by its

length, by abnormally large increases in unemployment, falls in the availability of credit— often due to some kind of banking/financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.

Triggering factors

• Greed and imprudent spending.• Can be uneconomically

unrelated factors

Scenario during the economic bust

• the reverse to the economic boom

Consequences to housing

• NPL• Bankruptcies• Abandoned projects…• Pending projects resubmitted• Drastic drop in housing prices and rental.• Can lead to failure in banking system e.g.

USA, Rep of Ireland, Greece• Limited availability of housing loans

How the banks react during the economic cycles?

• Bank reacts differently and contradicting during the economic cycles.

• Obliging during boom• Suppressive during bust• Intermediate situation – depending on the

bank negara reads the situation e.g. currently.

Housing Policy in Malaysia

An Historical Perspective

OBJECTIVES

• Dynamic of housing problems• Emphasis of ‘housing policy’ in

Malaysia• Capitalism in Malaysia

Independent day 31st of August 1957

• Gaining independent with conditions – citizenship for the immigrants – the birth of a multiracial country. With distinct characteristics – Distinction of race in terms of types employment– Distinction of race in terms of place of stay

• A perfect brew of racial/economic inequality and national instability as shown in 13th of May 1969

New Economic Policy

• Objectives – restructuring society in terms of place of stay and employment.

• Modus operandi – creating a new ‘economic cake’ and urbanizing the Malay (creating Malay urban population)

• NEP turns housing into ‘political animal’. Housing issue is ‘placed’ under the Min of Internal Affair in the 70’s.

Creating urban Malay urban population

• Only mentioned publicly in the 1990’s by the premier but implemented with the establishment of the New Economic Policy

• The creation of predominantly Malay population especially the generic new towns at the poorest predominantly Malay regions.

• In line with ‘mushrooming’ of squatters areas in major towns in Malaysia

Continuation….

• Government agencies such as UDA, SEDCs, DARA, KETENGAH etcs. Some projects are financed by borrowing from the foreign sources.

• State government directly involved in the development of low cost houses. Getting soft loans from the federal gov. and surrendering lands for the purpose

• Introduction of government end financing loan for the government servants

In 1980’s

• A complete philosophical turn-around with coming of Dr. Mahathir as the premier.

• In the 1970’s (Tun Abdul Razak) the housing policy concentrate of helping the new economic policy and the development of low income housing to help the Malay population set foot on urban areas.

• In the 1980’s the housing inspiration of the nation do not change but the implementation attempts of this policy are contradictory. A good example is the ‘30% policy’.

Continuation…• A philosophical change..in relation to the low income. Job

creation is more important than providing houses to low income groups.

• Bankers are given full autonomy in giving loan as result the low cost housing quota was abolished in 1989

• Integrated development concept is introduced in the 1980’s led to the development of ‘town within a town’. Argued that a way to provided town facilities can be provided efficiently and adequately inclusively housing for the poor can be provided line with the 30% low cost housing rule.

“the fact about all Malaysians owning a house and so-called house-owning democracy is sheer nonsense.........The wages of low income families had increased by two-fold if compared to the wages 20 years ago. (Mahathir, 1996) Page 1 & 2

“If the banks think that they will not get back their money, they will not lend” (Mahathir, 1989)

Housing problem?

• Characteristics – dynamic• Types – ever-changing• Causes – numerous- but the main ones are

politicians and the nature of the problem seem simplified and uncomplicated … therefore there is high tendency to be underestimated and misinterpreted.

Conclusion: Housing Policy in Malaysia?

• Policy between 1971 to 1980 and 1981 onwards a distinct contradiction

• No formal policy• Monitoring on housing based on 5 year plan

copied from socialist Russia• Ironically, the same tone for every plan – bias

towards low income housing.• Highly contradicting between plan intention and

actions.

Capitalism in housing provision

• Definition• Complete change of course after 1981• Responsibility of low cost housing

construction is given to profit motivated entities without any monitoring tools

• Led to the failure of low cost housing program

“If the banks think that they will not get back their money, they will not lend” (Mahathir, 1999)

“the fact about all Malaysians owning a house and so-called house-owning democracy is sheer nonsense.........The wages of low income families had increased by two-fold if compared to the wages 20 years ago. (Mahathir, 1996) Page 1 & 2

‘The research has shown that the low cost housing policy did not have the cutting edge to ensure the banking system and the construction sector tow the line in accordance to the requirement of the policy. Ironically, under the current political and administration setting, the governments both at the national and state levels, intentionally or unintentionally had acted against the spirit of the low cost housing policy.’

Injustice in HOUSING PROVISION – the housing

MISMATCH

• Looking into the priorities of housing machinery in Malaysia• Analyzing housing problem in

Malaysia in particular “housing the poor”

LECTURE OBJECTIVES

Explanation to the current housing problem

What is the current housing problem?Housing mismatch. The market bias towards the demand of

higher income section of the population. Not only negatively affected lower income of the population of the population but families of household income of rm4000 are also affected. A good case study is the Klang Valley and Shah Alam is included.

• Why this is happening? Maximization of profit. It is more profitable to build higher cost houses and it is easier to get housing loan for them.

• Who is to blamed for this?

Inappropriate banking system

• Geared for maximum profitability and the upmost security of investment

• Tendency toward lowering management cost• Tendency for high value of housing loans• Tendency to shy away from low income groups

– ‘unreliable groups’ or unsafe group to do bussiness’

Government change of stance• Responsibility of low cost housing scheme ‘given’ to private

developer i.e. 30% rule since 1980• Bank low cost housing loan quota abolished in 1989.• State refuse to surrender land for low cost houses led to

development of SPNB• State government become housing developer and shy away

from constructing low cost and affordable houses• State government ‘accept’ the notion that high price of land

in main town areas are ‘unsuitable’ for low cost and affordable house construction which led to mismatch problem

Private entrepreneur stance

• Very clear – low cost housing scheme is unacceptable – cross-subsidizing of profit is a myth

• Various tactics used to shy away from the ‘social responsibility’ and they are very successful

conclusions

• Housing demand for affordable and low cost houses are unattended.

• Even housing demand for household with monthly income of rm4,000 in main urban areas are also unattended.