Affordable housing as key to sustained fiscal consolidation

A stable housing market in the form of affordable housing – facilitated and enabled by land price stability – implies less debt leverage.

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Published by Business Today, The Star & Astro Awani, image from Business Today.

At first glance, housing doesn’t seem to be related to fiscal consolidation – but stability of land price and, by extension, a stable housing market is a key to continuous and sustained economic growth and development that’s driven by the private sector and household spending. 

This is because a stable housing market in the form of affordable housing – facilitated and enabled by land price stability – implies less debt leverage than is otherwise the case which in turn implies more purchasing power and more savings to be set aside for future propensity to spend. 

In other words, ringgit for ringgit, affordable housing on a mass scale would, among others (inter alia), enable the private sector and household to be on a higher deficit and on a sustained basis relative to the State which can then afford to fiscally consolidate, i.e., reduce its deficit levels. 

Not to mention too is that the State also benefits since it doesn’t need to pay at higher prices – for procurement in the form of the gross development value (GDV) such as the raw materials. Actually, the fact is the State is in the position to set or influence the prevailing market prices in its capacity across the spectrum as buyer of last resort (BLR), employer of last resort (ELR), lender of last resort (LLR) and in this case as owner or compulsory purchaser. The State should, therefore, leverage and harness on its powers to do so.  

All in the context of a consumer-driven, i.e., private-debt-driven economic growth aligned with our traditional export-oriented industrialisation alongside the current account surplus as the policy goal. 

If fiscal consolidation is to take place, then the government must put into place and ensure that an affordable housing sector is at the centrepiece of its economic reconfiguration and adjustment post-Covid-19.

A housing market where price outpaces income wage by a multiplier of 5 and above times is unsustainable, including if fiscal consolidation is to take place in the medium term. According to the median multiple methodology developed by Demographia International and recommended by the World Bank and UN, affordability relates to not more than three times of annual household income. Back in 2016, data from the Valuation and Property Services Department (JPPH), Ministry of Finance (MOF) indicated a ratio of 6.17 times which puts it as “severely unaffordable”. 

We already have one of the highest household debts in Asia and the highest in the region. Malaysia has consistently ranked as having the second highest household debt-to-gross domestic product (GDP) ratio in Asia. Our debt-to-GDP ratio is expected to rise and stay at the 88 percent to 90 percent range by year end (i.e., of 2020).

The ratio denotes total household borrowings as a proportion to the size of the economy measured by the GDP.

Despite the slower overall growth in personal debt (housing and automotive) as according to Bank Negara’s Financial Stability Review for First Half of 2020, the household debt-to-GDP ratio rose to 87.5 percent as of June 2020 from its previous peak of 86.9 percent in 2015, which was mainly due to the sharp contraction in nominal GDP in the second quarter due to the Covid-19 outbreak.

The remaining elevated household debt at a time of continuing economic uncertainty, notwithstanding optimistic forecasts, alongside expectations and against the backdrop of increased unemployment levels can only increase the risk and chance of loan defaults. 

When we look at the Singapore model, we see fiscal soundness is combined with policy pragmatism whereby the Central Provident Fund (CPF) was unlocked to provide the funds for the construction of the Housing Development Board (HDB) flats. 

As a lesson for us in Malaysia, we see that public housing in the form of HDB flats was, of course, executed on a massive scale such that today between 80 percent to 85 percent of the population are housed therein. 

And affordable housing – with implications on price and financial stability and by further extension fiscal consolidation – was a major and primary driver of economic growth and development in Singapore. This was because urban (re)developments and townships revolved around the HDB neighbourhoods. And it can and should also be the case, albeit on a lesser scale in Malaysia if done correctly or, to be more precise, in the respective states. 

Another way the Singapore government inter-locked the CPF and HDB together was through the possibility of withdrawing contributions – up to a certain limit – for HDB purchases (down payment, instalments). As it is, the Singaporean was essentially borrowing from himself/herself on the basis accrued contributions and savings. This ensured financial stability whilst allowing the Singaporean to reap the fruits of economic growth through the unlocking of the CPF account to purchase a HDB flat or apartment.

And again, price stability is undergirded by State ownership of nearly all the land in the island republic. Whilst it’s not the situation here in Malaysia, an analogous scenario could be envisaged whereby mass affordable housing driven by the State (both federal and state in parallel synchronisation or coordination) performs the same function as lynchpin and anchor of price and financial stability.

Furthermore, if ever at all, to protect against what is known as the Minsky moment – named after economist Hyman Minsky – or otherwise known as the Financial Instability Hypothesis, Bank Negara must continue to strictly and rigorously supervise and monitor bank lending practices and enforce the required criteria. In other means, the solution to wider home ownership is not loosening credit worthiness by banks but the provision of more affordable homes.

As for capital outflows and financial market volatility, these could continue to be left to market forces to “dictate”. In other words, as far as our capital account is concerned, the non-internationalisation of our ringgit should ensure that volatility doesn’t degenerate into a downward spiral of speculative attacks. It’ll also cement the maintenance of our position as one of Asia’s leading bond markets. 

Financial stability that’s based on land price stability leads to conditions for sustained economic growth and increasing chances for the country to avert a downturn that will make fiscal consolidation more unlikely to be achieved. 

The anchoring of price and financial stability on State-driven affordable housing as a pathway towards fiscal consolidation can also be analogous, albeit indirectly, to the situation in Weimar Germany in the 1920s when hyperinflation was finally tamed with the artificial and indirect pegging of the newly introduced Rentenmark to an exchange rate equivalent to the defunct Goldmark (which was the pre-World War 1 German currency that was in turn pegged to the gold).

Now the Rentenmark was in reality and actuality backed by land and real estate mortgage (for agricultural and industrial uses) whereby the value in turn was translated into bonds payable to those mortgage holders whose land had been appropriated for that monetary purpose. 

Whilst this isn’t a call for the return of the gold standard exchange which is completely unrealistic, nonetheless there are other ways by which price and financial stability underpinned by currency stability or soundness can be secured as best as possible under the circumstances such as land price stability geared for the purpose of affordable housing and providing the conditions of a stable housing market. 

By extension, land value tax (LVT) could perform the role of both a major source of revenue for the government (particularly the state) as well as helping to stabilise the value of the undeveloped land by pre-empting hoarding for example. 

In conclusion, the time has come for the State to play a more proactive role in macro-managing, i.e., at the strategic policy (in contrast to purely administrative, i.e., at the micro) level so as to ensure price and, by extension, financial stability of which affordable housing is the hub or nodal point that will make fiscal consolidation much easier to achieve. 

Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focused on strategic policy recommendations based on rigorous research.

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