Lower and middle income earners should not commit to purchasing a house until and unless they are financially stable, economic experts have said.
Following a news report by Malay Mail Online that showed how three middle class families struggle to set aside some savings for rainy days despite owning a house, car, and having enough money set aside for basic necessities, experts say that buying a property, especially a home, would require one to be financially stable in order to be able to commit to the long repayment period.
“Committing to a house requires a huge sacrifice in reducing other spending items,” Dr Yeah Kim Leng, professor of Economics at Sunway University Business School said.
“If we observe the limit (of bank loans allowed to finance a home), not more than 50 per cent of a person’s net income goes to servicing the mortgage, hence, the borrower will have to live with slightly more than the remaining half of his or her disposable income each month for other expenses,” he added.
While acknowledging that a owning a home is a basic necessity, Yeah, however, encouraged buyers to delay their purchase of a house if they were not able to commit to the huge monthly installment.
“Committing to a home or even a car when you are not ready will make it harder to set aside a small amount for long term retirement savings,” he added.
Khazanah Research Institute (KRI), in its The State of the Households II report, said households’ biggest expenditure in 2014 averagely went to housing and utilities, transportation and food.
In the highest income bracket (income of between RM9,000 and above), it pointed that 28.4 per cent of this group spend on housing and utilities, while households in the lower income class (income of about RM6,000 and lesser) spend 30.4 per cent on food and non-alcoholic beverages.
Like Yeah, Socio-Economic Research Centre executive director Lee Heng Guie also advised against buying a property that would require almost half of one’s household income.
Lee said although the drop in prices for some properties may seem enticing, people should not rush to make purchases just because it is now cheaper.
“Don’t force yourself to buy a property at RM900,000 just because it was earlier valued at RM1 million. There will be an opportunity to upgrade your first-house later,” he told Malay Mail Online.
When contacted, VKA Wealth Planners Sdn Bhd financial planner Kevin Neoh said pumping more down-payment for a property, whether it was a house or vehicle, will help ease in the monthly expenses.
However, he too noted the importance of making such big purchases only when one was “really comfortable”.
“When we do that (putting low down-payment for car or house) we are putting a lot of extra burden on ourselves. But it is quite sensitive because (these are) quite necessary in Malaysia.
“I suggest if you are going to buy a car, save up to pay a 20 per cent down-payment instead of (the recommended) 10 per cent,” he said.
The KRI report also showed an increase in vehicle ownership, with the percentage of Malaysian households owning cars jumping from 77.8 per cent to 83.9 per cent between 2012 and 2014.
In 2011, Malaysia was ranked as one of the highest motorisation rates in the world with the ratio of 341 passenger cars to 1,000 people.
In that year, the country was ranked slightly behind Germany but very much ahead of other bigger nations like Thailand and Indonesia.
Commenting on this, both Yea and Lee advised similarly against purchasing a vehicle.
Yeah said that although owning a car is convenient, he added that such purchases can be delayed to ensure money is allocated for the more important categories such as food and housing.
On cutting expenditures to cope with the rising living costs, Lee listed out several measures such as cutting down on overseas holidays and eating out at fine-dining restaurants.
Both economists and the financial planner agreed that each household should set aside between 10 to 20 per cent or one third of a household’s income for savings.
“If you have a health insurance or other form of insurance, then it is okay to have lesser savings but it is good to aim for between 10 and 20 per cent monthly,” Yeah said.
Lee said while the Employees Provident Fund (EPF) results in some saving, he added that putting aside the said amount each month would ensure a better cushion should a household experience any form of a financial shock.
The Malaysian Human Development Report 2013 stated that 53 per cent of households showed no financial assets in 2009.
Its analysis from a 2009 Household Income Survey (HIS) showed that about 88 per cent of households reported zero earnings from savings.
This analysis, however, excluded savings in the EPF.
Meanwhile, the KRI report also indicated that more than 50 per cent of the country’s urban households did not have any savings.
It also cited that 20 per cent of these households would only go on for not more than three month if their incomes were cut off.
In 2013, the nation’s household savings stood at 1.4 per cent of the adjusted disposable income, which compared significantly lower than the already low US’ savings rate at 5.0 per cent.
A. RUBAN AND AIZYL AZLEE@The Malay Mail Online