Kuala Lumpur, 26 February 2018 – The lack of supply of affordable houses has often been mentioned as one of the burning problems that Malaysians experience today. According to Bank Negara Malaysia (BNM), from January 2016 to March 2017, only 21% of new launches houses were priced below RM 250,000. The presence of 20 federal and state agencies for housing development is not helping, and as per IDEAS, this may be hampering actually.

Commenting on this issue, IDEAS Senior Fellow Dr Carmelo Ferlito said, “The core problem why Malaysia does not have enough affordable housing essentially comes as a consequence of government effort on directly supplying affordable houses or strongly directing policies oriented in such direction.”

Even if it might sound ironic, Dr Carmelo explained the reason why private developers are not investing in affordable housing, namely the unfair competition created in the market by the government. BNM recognises the problem of having 20 national and federal agencies providing affordable housing. However, while central bank’s solution is to concentrate the planning and action power into one institution, Dr Carmelo argues that a central authority cannot succeed where the other 20 have failed.

Dr Carmelo added that “It is normal for private developers to move away from what is perceived as unfair competition. The reasoning is simple and easy – as a private developer, it is impossible to compete on affordable projects with government planning. That is why we are facing a limited supply of affordable housing in the country.”

“If the problem is a mismatch between limited supply and ample demand, we should wonder why there are still 17% of unsold residential units below RM 250,000. The problem might not be as simple as it sounds. The market is a complex network of players, whose knowledge is continuously evolving, re-shaping their actions and decisions; central planning cannot be successful in coordinating such a network of dispersed knowledge.”

“The solution for allowing private developers to move back into affordable projects is not central planning, but rather re-opening the way to the free-market coordination role. It is clear for developers that luxury projects are remaining unsold in high percentage and that therefore there might be higher profit opportunities into the lower-end housing sector which will motivate private developers to invest in the affordable housing. However, if we want to bring back developers into that specific market, we have to avoid cutting out their incentives to do so with direct government intervention that created unfair competition in the market,” concluded Dr Carmelo, emphasising the crowding out effect typical of direct economic government intervention.

BNM has reported that median house prices in Malaysia are five times higher than annual median household income in 2016, which indicate that houses in Malaysia are considered as “seriously unaffordable” in 2016 by international standards. Thus, BNM come out with five strategies to overcome this problem; 1) Centralisation of affordable housing initiatives, 2) Establishing an integrated housing database and efficiently managed applicant registry for the planning and allocation of affordable housing, 3) Reducing the cost barrier to affordable housing, 4) Rehabilitating household balance sheets by enhancing financial literacy, and 5) Improving the rental market by strengthening the legal framework.