Buying that first home

While many young potential house buyers welcome the new My First Home scheme, those living in big cities with soaring property prices say owning a house remains an elusive dream.

IF there is one regret that widow Noraini Abdullah has in her life, it is that at 60, she is still living in a rented house.

“We didn’t qualify for a low cost house and with five kids, my late husband who worked as a driver could not save enough to make a down payment for a house.”

Like many parents, Noraini is happy to hear about the My First Home scheme launched by the Prime Minister on Tuesday that will enable young working adults like her two youngest children to buy their own houses.

“It would definitely make me feel better to know that my children will not end up like me, worrying about not having a roof over my head if something goes wrong. I wish we had this scheme when I was younger,” says the retired typist.

First announced in the 2011 Malaysia Budget, My First Home scheme is aimed at assisting young people who have just joined the workforce and who are earning RM3,000 or less per month to own their first home. Under the scheme, they will be exempted from the standard 10% down payment for the property they are interested in purchasing and obtain 100% financing from financial institutions.

With housing a worry for many young working adults, especially newly married couples, many laud the move by the Government.

Civil servant Kalam Azad, 34, is one. “When you start work, you have a lot of responsibilities and other financial commitments, so many find it difficult to save for the standard house down payment. Like me, most of my friends have ageing parents to think about and younger siblings. Buying a house is not a priority even though we know it is a good investment. It is worse if you are married and starting a family,” he says.

Unfortunately, he quips, he does not qualify for the scheme as it is only open to those working in the private sector. (There are various housing schemes for government servants.)

Chin Mei, a 32-year-old teacher, also thinks it is heaven-sent for not only those who just joined the workforce but also her peers who have worked for more than five years.

“Most people my age have car loans and credit card bills to settle before they can even think of getting a house. Renting is an option but many would rather put money into something that would be theirs in the future than contribute to someone else’s pocket. That is why most of my friends are interested in buying their own place early,” says Chin Mei.

But saving enough for the down payment is their biggest barrier, she concedes.

»Even without the 10% down payment, buying a house and being able to afford to pay the monthly instalments are two different things«

“Many get their parents’ help or loan. For those whose parents cannot help, they have to wait many years, by which time their loan term will be shorter and they have to pay higher instalments or they will have to continue paying for their house after they retire,” she says.

Copywriter Crystal Chan, who shared the down payment for a house in Bandar Utama with her mother-in-law, wishes they had this option back then. “My husband and I took a long time to decide if we should accept his mother’s offer or wait until we had saved enough. It would have been good if we had this option (the My First Home scheme) then,” she says.

The National House Buyers Association (HBA) applauds the Government’s move to exempt first-time house buyers with household income less than RM3,000 from having to pay the standard 10% down payment.

Although the scheme is only available for properties costing RM220,000 and below, says HBA (honorary) secretary-general Chang Kim Loong, it will help this category of house buyers to realise their dream of owning a house.

“Since they have not worked long, they will be hard-pressed to come up with a down payment of RM22,000 (10% of the property price) and even their EPF may not have sufficient funds,” says Chang.

As the incentives will directly result in easier buying of houses that cost below RM220,000, it will encourage developers to build more houses that cost RM220,000 and below, Chang opines.

Wan Saiful: ‘I fear that this is a dangerous move from an economic perspective.’

A Real Estate and Housing Developers’ Association Malaysia (Rehda) survey showed that the average terrace house in Malaysia last year was RM179,590 and high-rise property price was RM165,530. However, news reports showed that the average prices of newly developed residential property this year is expected to grow by 13% compared to last year due to the escalating costs of raw building materials, while those in the Klang Valley might shoot up by 15%.

Hence, for those living in urban areas, the property price limit (RM220,000 and below) under the scheme may be a hindrance.

Outpriced

According to Rehda, there are not many properties priced below RM220,000 in the Kuala Lumpur and Selangor area where the highest number of young adults work.

Chin Mei who works in Petaling Jaya agrees. “What can you buy at RM220,000 in KL or PJ? There are not many decent properties going at that rate. Even if there are, they come with various issues. They may be in the outskirts of the city and be too far from the place of work. The other issues are safety and convenience: Are there facilities and shops available nearby, for example?”

Chan, whose Bandar Utama property costs about RM600,000 concurs.

“The average price of the houses in KL and PJ ranges from RM350,000 to RM600,000. Many who work here will not be able to take up the scheme unless the Government reviews the price limit,” she says.

Kalam supports the suggestion for the Government to review the price limit.

Although he does not qualify for the scheme, he says he has many friends who want to buy their own house but find it difficult to find properties priced below RM300,000 in KL/PJ.

There are not many choices available, even in the fringe areas of the Klang Valley like Puncak Alam, he says.

He believes that the Government should base the property price limit according to the area.

“Outside of KL, it might be possible to get a nice house for less than RM200,000. In KL, the minimum should be at least RM350,000,” he says.

Penangite Brian Lai, 28, agrees that the limit be differentiated according to area.

“I am appealing to the federal government to be more flexible with the scheme.

“My brother recently bought a four-bedroom double storey house in Johor Baru for RM150,000 but the three-bedroom apartment I’m considering here (in Penang) is pricier at RM250,000. The location of the apartment I’m hoping to get is not even in the city and it’s so expensive.

“The scheme must be more flexible, otherwise it would be difficult for those living in urban areas like Penang, Seremban and Kuala Lumpur to benefit,” he opines.

Public relations manager Queenie Ching, 33, says it may be “impossible” for her to benefit from the scheme if the property price limit is not varied in line with the cost of property in different locations.

“I am a single lady who works till late every day. I need to get a place that is safe and properly maintained. I’ve been hunting for an apartment for more than a year now but can’t afford any – at least not on Penang island,” she says.

This is supported by Rehda president Datuk Seri Michael K.C. Yam who also believes that the property price limit of the scheme should be a minimum of RM350,000, and be increased depending on the area.

In Penang, where land is scarce and prices of property have been soaring, the house price limit should be raised to RM500,000, suggests Rehda Penang branch chairman Datuk Jerry Chan.

While lauding the scheme for helping first home owners, he stresses that the criteria must reflect the “market reality”.

“On the island, it’s not realistic to get a decent place for RM220,000,” Chan points out.

It may be possible on the mainland, where land is cheaper, he notes, and the maximum amount allowed for the property can be set at RM350,000.

Copywriter H.K. Chia, 27, will be applying for the scheme but hopes for a higher ceiling price for the units.

“This is a timely announcement as I will be getting married this year and am looking for a place. I am very fortunate to have found a two-bedroom unit in Batu Ferringhi on the island that costs RM220,000.

“Ideally, I would have liked a three-bedroom place to raise a family but most places I looked at were about RM300,000. Unlike in other states, property in Penang is skyrocketing. For a decent three-bedroom apartment, you can’t expect to pay less than that,” he says.

Like many young people, Chia also hopes the federal government will also consider raising the income limit to RM4,000 for first home purchasers.

“Most young professionals are earning more than RM3,000 a month and will not be eligible for the scheme. And as property prices here are high, many of us can’t afford our first home and yet are not eligible for the scheme,” he says.

Rehda Penang proposes that the income ceiling for eligible applicants be raised to RM5,000 in the bigger cities throughout the country and RM3,500 for others.

Crucially, says Chan, the most important criterion is whether the applicant is purchasing his or her first home.

“For example, a young engineer buying his first property won’t qualify for this scheme because of his earnings, and those who do would want to live in a nice place.”

Ultimately, says HBA’s Chang, this is a good scheme to assist the lower and middle income household group – regardless of age – own their own home.

“(Because they cannot save enough for the down payment) this category of income earners ends up renting for many years. Some may end up being homeless when they grow old or retire,” he says.

Sales executive Fared Helmi, 34, only has a year left to take up the scheme and he is worried.

“I think the Government should review the age limit. With the rising costs of living, many people only reach some stability when they approach the age of 40. And with the trend now where you job-hop to move up the corporate ladder, many would refrain from buying a house until they find the most suitable position or company for them. And before you know it, you are over 35, so what about these people? They want to own their dream home too,” he says.

As Chang argues, house prices have soared to such exorbitant levels in major cities that even the middle class cannot afford to own a house or apartment, what more the lower income group.

He is calling for more measures by the Government to impose quotas for developers to build homes costing less than RM350K (between the range of RM150K and RM350K) so that the lower and middle income earners can be homeowners without stressing their lifestyle.

“On hindsight, the Government can be seen as only treating the symptoms and not the cause of the spiralling costs of owning a house with the scheme.”

Possible pitfalls

Chang is also calling for caution, saying that the scheme may give one the false impression that he or she can afford to maintain the house, when they actually can’t.

“Even without the 10% down payment, buying a house and being able to afford to pay the monthly instalments are two different things. A higher housing loan translates to a higher monthly repayment, which will put further strain on the house buyers’ monthly expenses,” he explains.

Generally, banks set a guideline where any single loan repayment should not exceed a third of the gross pay to avoid a situation where the borrower can no longer afford to pay his monthly loan obligations, he says.

Based on the current Basic Lending Rate (BLR) of 6.3% and the “market rate” of about BLR less 1.8%, the effective interest charged to the house buyer is about 4.5% per year. Hence, the repayment of the housing loan may exceed the advised amount (see chart).

“Borrowers would be considered high risk as they have no safety net and will default on their loan obligations in the event of any personal emergency.

“It would also be impossible for these house buyers to take up any additional loan such as to buy a car. This does not even factor things like child care or spouse expenses. The costs might drive the house buyer into a deficit position.”

Fortunately, says Chang, fresh graduates have a high potential for income increase over time and will be able to add on to their savings.

While describing the intention behind the scheme as noble, Institute for Democracy and Economic Affairs (Ideas) chief executive Wan Saiful Wan Jan is cautioning about possible long-term dangers.

“The intention behind this scheme is noble – in wanting to make housing more affordable to low income earners. Owning property is an important thing and helping the people with low income to own property is certainly well-intentioned. But I fear that this is a dangerous move from an economic perspective,” he says, drawing attention to the recent housing mortgage crisis in the United States, which intensified the economic crisis there and in the rest of the world.

“As we have seen this done before in America, the long-term result can be disastrous. In America, they have Fannie Mae and Freddie Mac. These are government-linked companies tasked with helping to make home ownership more affordable. What the Government has now introduced under the My First House Scheme is not exactly the same but the spirit behind it is similar.

“Fannie Mae was established in 1938 and Freddie Mac in 1970. Under the scheme run by the companies, people who are not earning enough to qualify for normal mortgages got their mortgages because of government policy. As a result, the sub-prime mortgage industry boomed but due to the global economic crisis, the home owners struggled to pay their loans, creating a vicious cycle that impacted the whole economy of America, and subsequently the rest of the world.

“Government intervention in the housing industry, especially in making mortgages available to those who otherwise wouldn’t qualify, can produce disastrous results.”

Wan Saiful feels that it would be better for the Government to focus on its Economic Tranformation Plan (ETP).

“The Government is already on the right track with the NEM (New Economic Model) and ETP. The emphasis in both agenda is to grow the economy and enlarge the economic cake. They should stay the course and focus on increasing the gross national income,” he says.

“At the same time, they must remove all market distortions like subsidies and handouts so that pricing, including pricing of properties, can be adjusted correctly by the market.

“That way, everyone, including young people, will have more money in their pockets and property prices will not be artificially inflated. Then the young will be able to afford homes through conventional means, without relying on government intervention like we have been doing for decades.”