Wednesday, June 27, 2012

Problems of Location and Cost

Problem of Location
Where should the developer place the low cost housing? Low cost housing not only, lose money, they also depress the value of properties adjacent to them, so developers chose the worst portion of their land for them - bits of land that might need more piles and more expensive infrastructure, or low lying land right next to the oxidation pond that need extensive earthworks. These extra costs become a burden on the budget for the construction of the actual homes.
The low cost areas are also often isolated from other types of housing. So they generally end up being a distance from social amenities - schools, nursery, kindergarten and shops. Isolated, the low cost housing area offers few employment opportunities. Placed in a far corner of a housing project, they also lack access to cheap transportation. And transport can eat up a substantial part of the poor man's income.
However, perhaps the worst aspect of low-cost housing projects is the very idea of low cost housing areas: that poor people are concentration in one location - financially and socially stressed - in one location, does not make sense. The higher the concentration of people in these low cost housing areas, the more unmanageable the social problems become. Healthy communities comprise a mix of the rich, the poor and the in-between. Indeed traditional communities like kampongs are not made up exclusively of rich or poor people.

Problems of Cost
Low cost houses are subject to a ceiling price much lower than their construction cost.
Developers pay for this shortfall by putting higher prices on the other houses that they sell, that private developers are unable to cope with rising cost of land and construction. Although some State Governments have increased the ceiling price of low-cost houses, it is still capped at a maximum of RM42,000 per unit, which means developers end up subsidising costs of between RM18,000 and RM28,000 per unit.
You would expect demand for these low cost houses to be high. Yet, there are many completed low cost houses which have yet to find buyers.
Compound effect - Overhang in the supply of low cost houses
“Overhang” refers to completed properties issued with Certificate of Fitness for Occupation and unsold for more than nine months. There has been a persistent overhang in the supply of low cost houses since at least the 1997 recession. Developers lose money on Low cost housing even when they are fully sold. When they can’t be sold, the effect on the developers cash flow and bottom line can be catastrophic.

Table 2: Overhang in Supply, The Sun “Hung up on residential property”, 28-Apr-2006, citing The Property Market Status Report recently released by the National Property Information Centre (Napic) of the Valuation & Property Services Department.

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