Addressing the rising home price conundrum

The rising cost of housing has become a phenomenon in many countries, causing enormous social concerns particularly for the lower and middle income groups.

Indeed, from the more than 4,000 suggestions and comments our Prime Minister received online in his preparation for Budget 2013, the price of housing was one of the two hottest topics raised. What can we do to alleviate this conundrum?

Increase supply of affordable houses

State and federal governments should remain the prime providers and managers of affordable housing. With the improved road infrastructure, suburban land owned by them are now more accessible and can be alienated for affordable housing schemes. Contractors with an excellent track record should be selected to build the houses at the lowest price so that houses can be sold to eligible buyers at affordable prices. The Government can also auction and sell land at the highest bid price and use the proceeds to fund the schemes.

Private developers which buy land at a high cost would invariably seek to optimise the usage of land by building high-end houses and commercial properties. The authorities have to set a stringent development quota for affordable housing. As government intervention should be kept to a minimum for the market forces to function, developers should be allowed to pay cash compensation should they decide not to build in accordance with the quota set. Such compensation may also be used for affordable housing schemes.

Curb speculation

Several countries have introduced tougher measures to curb speculation, a major factor to escalating home prices. Singapore, for instance, changed its stamp duty rules on Dec 8, 2011 and imposed a 10% duty on top of the normal rate on foreigners and non-individuals. Stamp duty chargeable on vendors of up to 3% was introduced on Aug 30, 2010 and revised to 16% on Jan 13, 2011.

The slew of stern measures have been fairly effective. From Jan 28, 2011, two major cities in China, Shanghai and Chongqing pioneered the collection of real estate taxes on certain categories of house purchases, including second homes and luxury properties at rates ranging from 0.4%-0.6% and 0.5%-1.2% respectively.

Malaysia can do likewise by reinstating the Real Property Gains Tax on gains from residential property disposed of within two years at 30%, replacing the current mild rate of 10%.

Concurrently, the stamp duty of up to 3% can be increased and be levied on both the buyer and seller in respect of any properties transacted by foreigners and high end properties purchased by the locals who already own one.

The recent Bank Negara rules introduced to restrict the borrowings on buyers who own more than two houses have dampened the sales of developers considerably. To keep the business going, many developers are undertaking promotional activities abroad to lure foreign investors, particularly those from China, Japan and Singapore who often find Malaysian properties unbelievably cheap.

Some investors, especially those who enlist in the My Malaysia Second Home (MM2H) programme, snap up property almost instantaneously without much consideration. It does not make economic sense to shut our doors to foreign investors completely but we can set a higher price threshold for foreigners and take advantage of the inflows to collect more tax revenue. The additional revenue collected can be gainfully used to help more people to own a house.

Provide fiscal assistance

The Government can extend the interest deduction scheme introduced in 2009 under which eligible individuals are given three years' tax deduction in respect of interest incurred of up to RM10,000 per year.

Hong Kong in its 2012/2013 budget extended the annual home loan interest deduction of up to HK$100,000 from 10 years to 15 years.

Our government has thus far been considerate by providing a 50% stamp duty exemption on purchases of residential property not exceeding RM350,000 from Jan 1, 2011 to Dec 31, 2012 and a 100% exemption for property priced up to RM300,000 purchased under the Skim Perumahan Rakyat 1 Malaysia (PR1MA) from 2012 to 2016.

In view of the high home prices, the Government should consider giving full stamp duty exemption on purchase of residential property not exceeding RM500,000 by first time house buyers.

In China, the real estate tax revenue collected is to be used to subsidise the construction of affordable houses and the Chinese government has targeted to build 10 million units of affordable houses in 2011. Singapore, on the other hand, offers Central Provident Fund (CPF) housing grants to various eligible groups. Applicants living near parents are given a princely grant of S$15,000 to S$40,000.

Presently, there is a housing loan scheme allowing a maximum loan of RM45,000 offered by our Housing and Local Government Ministry to the households which earn between RM750 to RM2,500 per month.

More funds can be channelled to this scheme to increase the qualifying household income to RM8,000 a month.

Developers can certainly play a part in boosting the home ownership by introducing flexi-schemes such as lease with an option to buy and allowing the conversion of lease rental paid to settlement of purchase consideration if the option is exercised.

Malaysian developers may consider adopting an interesting shared ownership scheme practiced in the United Kingdom where a buyer can co-own residential property ranging from 25% to 75% of the overall property value with another party which can be either the housing developer or housing association and pays a rent in respect of the share he does not own.

The buyer is allowed to increase his ownership as his disposable income increases over time.

The lower capital outlay assists the aspiring young own a house at the early phase of his career, encourages him to work harder and save more to eventually acquire absolute ownership of the property.

Strict financial discipline is imperative if one who starts from scratch harbours a hope of owning a house early.

Undoubtedly, the authorities, the developers and the people concerned collectively play pivotal roles in realising the home ownership dream of the lower and middle income groups.

Yee Wing Peng is the Country Tax Leader of Deloitte Malaysia. He considers himself fortunate as he was able to purchase, with a mortgage loan, a 20X70 link house costing RM220,000 after 6 years of work. He now has concerns for his three children.

By The Star