NB: This article was originally published in my column on The Malaysian Insider.

As far as Penang is concerned, housing has become a hot button issue. Critics are aplenty and everyone, from the locals at the kopitiams to the expatriates at the cocktail bars, seems to have an opinion on it. However, before lamenting about the housing situation in Penang, one first needs to understand it.

The general grouse is twofold. Firstly, it is said that housing prices are exponentially increasing with no signs of a slowdown. Secondly, complaints are heard that there is not enough housing to cater for the lower income groups. The fear is then raised that the shortage of low-cost housing coupled with ever-increasing property prices will eventually drive people out of the state, especially from the island.

Now, the first contention is admittedly true. There is no denying the fact that property prices are on the rise, having averagely increased by 50 per cent over the past five years. However, the causes of this phenomenon are often misunderstood. On the second count, to say that there is an undersupply of low-cost housing is inaccurate. In fact, it is a statistical fallacy. Both require further explanation.

It is not unusual for property prices to be competitive in urban city-states, especially on islands where scarcity of land results in stiff competition for any available inch of space. Consequently, high land prices will motivate developers to maximise their gains by building for the high-end housing market.

At the same time, one cannot discount the major role of fiscal, monetary and development policies in driving house prices up. Of late, there has been a national drive to encourage home ownership through low interest rates and easy credit – all ingredients for a speculative property market.

Compounding this is the sell-then-build model of real estate development and the “house-flipping” ploy by developers. For example, walk into a property fair today and the salespeople do not even try to sell you houses to live in. The usual sales pitch will attempt to convince you to put in a down payment (creative financing now typically allows a mere five per cent), before whispering in your ear that since no interest payment is required for the duration of the construction period (usually around three years), you would be able to make a killing by “flipping” it to the market before construction ends and your payments begin. After all, they would assure you, property prices will only go up.

This has created an oversupply of high-end condominiums as developers rush to fulfil the speculative demand. As a result, typical high-end condos in Penang would not be very well lit up at night, owing to its average 15 to 30 per cent occupancy rate, though they never fail to be oversold.

Finally, notwithstanding the increasing cost of construction materials, property prices are also affected by confidence. This is a self-inflicted situation, in which the more successful Penang becomes, the more FDI is received, the more international attention is gained and the better the local economic situation becomes, it naturally follows that there will be more interest in Penang, leading to more investment and, consequently, higher property prices.

So yes, houses are expensive and constantly trending upwards. Yet as we have seen, it is not so simple to pinpoint a specific cause. There are many factors at play, most of which are beyond the state’s control, like the national fiscal, monetary, development and home ownership policies that encourage speculative gains through capital appreciation. Similarly, solutions to this problem require a collaborative commitment from all stakeholders, including both state and federal policymakers.

We now move on to the second common complaint. The general perception is that there is a dearth of low-cost housing, especially on the island. This is an issue that is often played up by various quarters, often for political reasons. However, the facts may be surprising.

Matching the latest census with data on housing stock in Penang actually reveals that there is a significant housing stock surplus of about 21 per cent. Delving deeper into the data, one would find that the oversupply actually occurs in both the high- and low-end markets.

For example, there are 152,048 families or 40 per cent of households in Penang that earn up to RM2,700 in household income per month. Based on a 30-year mortgage at BLR 6.6 per cent with a five per cent down payment, this will qualify them for property costing under RM150,000, of which there are 306,896 units. This equates to an oversupply of about two to one.

This trend is similar even if we go lower – to the bottom 20 per cent of families earning less than RM1,800 household income per month. There are 76,024 families in this income range, while available units for which they qualify number 120,448. In other words, there is more than enough supply to serve demand. Data also indicates that this is the case for housing stock for the highest-income group.

So what is all the fuss about? Now, the real problem only reveals itself when we consider the middle-income groups. Families earning between RM2,700 to RM6,200 in household income per month would be able to afford property ranging from RM150,000 to RM350,000. However, while there are 152,048 families in this income range, there are only 81,966 units that fit their price range.

This deficit of around 70,000 units is significant, and means that middle-income families seeking to purchase houses are left with three options: consider smaller and cheaper houses which may not match their standard of living, continue to live in their family homes or, in the worst case, begin to look for options outside the state. And as the middle class continues to grow, so too will this problem. This is the real hot potato that the state has to contend with.

That said, it is clear that the problems of housing price inflation and housing stock mismatch are not as simple as they are made out to be. At the same time, state policies alone will not be able to solve these problems as a holistic approach is required that includes federal-level intervention through a revision of regulations such as house loan interest rates, mortgage repayment tenure and down payment ratio. Real property gains tax should also be reappraised, as the current 10 per cent for properties sold within two years and five per cent for properties sold within five years is not enough to deter speculative investment.

Further understanding of these gaps is required. In part two of this article series, I will examine and elucidate the state’s role in housing policy and, specifically, what the state government of Penang has done and should do in the future to address this important question of housing.