Tessellar Blog

Friday, June 29, 2012

The problems of low resale value; the unintended consequences of cross subidy

Low resale value
Buyers of Low cost houses have also suffered. Especially many of those that have encountered financial hardships and have had their mortgages foreclosed. A cursory study of Auction Notices over the past year has revealed that the Reserve Prices of low-cost flats in locations like Bukit Sentosa, Bukit Beruntung in the north of Kuala Lumpur is around RM9,000, a small fraction of the original selling price; perhaps even lower than the cost of demolishing it!

Figure 10: Declining values: this reserve price of RM9000 is not exceptionally low. There are 11 other apartments similarly priced

Bad for poor house buyers, bad for developers
For many unfortunate people, their low-cost houses are not appreciating assets that can help lift them out of poverty. In these sad situations, the "ownership" of a low cost house has turned into a financial nightmare.

The situation now is absurd! Developers make a loss from building low-cost houses even when they are able to sell all of them - when they remain unsold, their cashflow and profitability can become seriously compromised. But still, they are being forced to build low-cost house that they don't want to build, that the low-income people don't want to buy. Whilst the middle class buy houses that appreciate in value, the buyers of many low-cost flats, especially those out of town, have seen the value of their homes dwindle. Developers being generally smart, shift their focus to the high-end products which can more easily subsidize the 30% or 20% low-cost quota, which they build in less valuable outlying areas; or if they can help it, through delaying tactics and pleas for waiver, not build at all!

Problem of cross subsidization
The burden of a dysfunctional Low cost housing policy is not only on developers and unfortunate buyers. The general house buying public is also affected.

The responsibility of providing Low cost houses by private developers is often described as the developer carrying out his social responsibility. But it is a mistake to say that developers subsidize low cost houses out of his profit. Actually low cost houses are cross-subsidized by taxing other types of houses.

Where the requirement is that 30% of houses have to be low cost, developers find it easier to cross-subsidize by building higher cost units. It is easier to raise the money to subsidize 3 units of low cost houses (say RM 25,000 per unit) from ten units of RM250,000 superlink houses than from ten units of terrace houses priced at RM150,000.

Looked at this way, the 30% low cost requirement is a regressive tax.
The net effect is that, with the 30% requirement in place, developers are discouraged from delivering housing in the price categories just above that of the low cost houses.

A significant segment of the population is thus deprived of homes that they can afford.

Some of the State governments have recognized this problem. One response has been to designate a wider range of lower cost housing. For instance Johor and Selangor have not only requirements low –cost houses but also for low-medium cost houses (RM60,000) and medium cost houses (up to RM100,00). With the recent initiative on “Affordable Housing” – here the range is even wider, going up to RM300,000 in city centres), it appears that the Federal Government too is realizing that the cross subsidy model is too much of a burden on the medium cost housing.

Table 4

Still, the distorting effect on the supply of housing priced just higher than the regulated price segments still remains.

The very term "Low Cost Housing" assumes that the challenge is to find innovative ways to reduce the cost of building houses and in doing so, making it affordable to every family to own, regardless of their income level.

From my early work with low cost housing, I learned valuable lessons - the most important ones being that the low cost housing design involved more than the technical and cost problems of construction. For Malaysia at least, I can surmise that the problems of the quality of construction and the space standard of the housing has been adequately addressed. On the issue of quality, the problem was that of community and neighbourhood and how the lack of it could create instant slums. On the issue of cost, it is how to overcome the problems of cost and cross subsidy. All these issues would require further work on the drawing board to find a conceptual solution to this.

1 comment:

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