Hornbill Unleashed

April 25, 2017

So, what is so bad about renting a house instead of owning one?

Filed under: Politics — Hornbill Unleashed @ 8:01 AM

A view of condominiums near Subang, near LDP. A condo costs RM500,000 on average in the Klang Valley. — Picture by Saw Siow FengWhen Second Finance Minister Datuk Seri Johari Abdul Ghani proposed long-term rental as one of the solutions to the country’s housing quandary, the idea drew so much flak from the public that the Umno federal lawmaker was forced to retract the suggestion.

After all, how can anyone even consider permanent rent as an option in a culture that deems home ownership the pinnacle of financial security; Malaysians generally believe owning property is a sign of maturity and success and rent is, more or less, stupid since money will go into paying for something that will not become yours at the end.

Yet policymakers, private institutions and even aspiring home owners around the world have warmed up to the idea of long-term rent as the global housing market becomes increasingly unaffordable for the average worker.

In the US, for example, households that rent jumped from 36.1 per cent in 2006 to over 42 per cent in 2014 while home ownership continues to decline, according to a report by Trulia, a real estate website that monitors the housing and rental market.

What is most notable is that the report found that the preference for rent increased especially among middle-class and more affluent Americans:

“Among the lowest income households, those making US$31,000 (RM136,725) or less, the share of renters grew by 3.7 percentage points, from 61.1 to 64.8 per cent. For lower middle-class Americans (households earning between US$31,000 and US$42,000), the share of renters increased by 4.9 percentage points, from 43.8 to 48.7 per cent,” the report noted.

In the UK, the Conservative government led by Theresa May is moving away from the Thatcher-era housing policy that favours home ownership to one that emphasises more on rent as a viable option to home ownership.

In a housing White Paper tabled in February, the Tories proposed measures ranging from rent control, to incentives for private developers to build more properties meant for long-term rental.

This “built-to-rent” (BTR) system ― where private players, with state financial support, either convert existing buildings or build new units for secured long term tenancy ― has been lauded by critics and observers as vital to solving Britain’s “broken” housing market, among the most unaffordable globally.

And BTR is big business today. According to leading UK-based real estate consultancy firm Knight Frank, the sector is expected to overtake the buy-to-let market with an estimated worth of £50 billion (RM300 billion) by 2020.

Germans led the way with a stable rental system

What this signifies is a shift in British attitudes about owning homes: where home ownership was once considered a must, now many Britons, put off by the absurdity of today’s house prices and the exorbitant commitment owning one entails, are beginning to have second thoughts.

The Independent recently reported that as many as 20 million Britons are renters and the number continues to grow, and the same report also noted that one fourth of them are uncertain if they ever want to own a home, which explains why subsidies to beef up the BTR sector have been increased to meet growing demand for corporate-owned rented homes.

It is worth noting that much of the May government’s shift towards a rent-friendly housing policy is based on Germany’s stable rental system; German house ownership is among the lowest in the European Union and 42 per cent of its population are long term rent-dwellers, thanks to strong regulation and tenancy laws.

Compare that to Malaysia, which has a 70 per cent home ownership rate.

In Germany, rents are regulated and prevented from being increased sharply despite the private ownership of most rental-houses. Tenants also enjoy tenure security; so as long as they pay the rent and observe the rules, eviction is unlikely.

What is more interesting is despite state support for stringent laws to curb inflation in the rental market, the German government is also responsible for making homes tough to buy for Germans; properties switching hands will be taxed as high as five per cent next to the Grundsteuer, annual land tax of close to two per cent of a single residential unit.

Considering all of the points above, Second Finance Minister Johari may have had a substantial basis for proposing long-term rent as a realistic option. If one cannot afford to buy property, then pragmatism requires one to step out of that traditional thinking where owning a house is a must.

Which brings us to this question: is the housing ecosystem in Malaysia conducive for a stable long-term tenancy market?

Academics and lawmakers have argued otherwise.

Dr Suraya Ismail, one of Khazanah Research Institute’s research directors specialising in housing, said it is important to note that adequate supply of genuinely affordable housing is a prerequisite for a secured long-term rental market.

Rent? Build more homes first

Pointing to May’s White Paper on housing, Suraya said a key feature of her proposal was to first ensure home stocks meet demand.

“She had four policies: the first was to increase ownership. She mentioned that why she wanted to emulate the German model was because renting should be an option… the thing about Theresa May’s policy is that one: you build more houses to increase the supply.

“Secondly, build faster; the construction industry must meet the demand,” Suraya told Malay Mail Online.

The logic is simple: even if Malaysians become more open to the idea of long-term renting, the lack of supply to meet demand could push rent up, which is already a visible problem in most of the major cities in Malaysia.

The German rent model works simply because the country also has one of the most liberal housing regulations that allows private developers to provide adequate supply of homes, which helps stabilise price and ultimately, rent.

Because of a highly liberal supply, German house prices have only increased at around two to three per cent for the last 20 years. Rent increase is capped at three per cent annually and pegged to inflation. And despite rent control, private owners and institutions are still making profits.

This is a stark contrast to Malaysia where the construction industry is virtually dominated by private developers with vested interests to ensure houses are built slowly so they can leverage on the lack of supply to jack prices up.

Last year Malay Mail Online published a special report to show how the compounded annual growth rate of house prices have jumped by 300 per cent in the last 10 years, making home ownership but a dream for most Malaysians today.

Under the 11th Malaysian Plan, the government projected that at least 130,000 affordable houses are needed yearly, yet only an average of 60,000 residential units were launched in the past five years; developers continue to prefer upscale launches for the simple reason that it brings much higher returns.

Malaysia also lacks the necessary legal safeguards to make long-term rent appealing. Unlike in Germany, or the UK which is reinstating rent caps after liberalising the rental sector saw rent in cities like London spiralling out of control, rent rates are decided almost freely by landlords, which could be subject to abuse.

Owning vs renting: A cultural gap

But even with rent regulation, loose enforcement remains a major problem. One such example is the rental rates in state-built flats (PPR) meant for the lower income.

Loopholes and lax enforcement have allowed rich politically-connected buyers to snap up the flats in big numbers, in some instances up to 10 units, and then each unit would be rented out for as much as RM600 a month, which is a lot of money for poorer households.

But not everything boils down to policy and market forces in determining on whether or not Malaysia is ready for a long term rent market.

PKR Member of Parliament for Kelana Jaya and a vocal supporter of public housing Wong Chen believes culture plays an important role as well.

For him, Malaysians are just not open enough to the idea of long-term rent, which often denotes class inferiority.

“Culturally, Malaysians don’t have the concept of renting. In Germany or Europe, there is no shame in renting. In fact, it is highly encouraged because in most of the European countries, the houses in the city centres are owned by the government,” he said in an interview with Malay Mail Online.

“In Malaysia we had rent control then but most of those buildings with rent control are gone. What we have is a pro-development country where we encourage ownership… so the culture of renting is considered the lower end.

“There is a social stigma… so we need to first overcome this problem,” he added.


Source :  SYED JAYMAL ZAHIID @ Malay Mail Online


 

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