Easy and less costly credit makes houses more expensive

By Medecci Lineil

Commenting on its latest research report “Making Housing Affordable” which was launched on Aug 24, Managing Director of Khazanah Research Institute (KRI) Charon Mokhzani said:

“The policy should therefore be geared to improving the elasticity of housing supply and make it more responsive to the needs of all sections of the population”

The research report, which can be downloaded at http://www.krinstitute.org/kris_publication_Making_Housing_Affordable.aspx, says housing supply is inelastic in the short term.

This means that when demand goes up, prices will rise rapidly.

If we had a more elastic supply, prices would not rise as high.

If housing supply is inelastic, then government interventions, such as improving affordability by leveraging on demand either by allowing consumers to borrow more or by subsiding the costs of houses or by direct provision of affordable homes that cost billions of ringgit, aimed at enabling buyers to be able to afford homes, are simply wasted!

In Chapter 4, page 41, KRI concurs: “These types of policies are not sustainable in the long run. Allowing consumers to borrow more does not reduce the cost of housing but instead increases household debt, and a government subsidy to developers is a needless drain on government finances.”

In addition to that, KRI correctly pointed out that having credit does not make a home cheaper even if government policy and interventions can make the monthly payments lower.

According to them if credit is more available and less costly, this would mean more people being able to buy houses at any price which will make housing even more expensive!

However KRI did not report the root cause of cheap credit.

In my view, what makes credit so cheap (ie. cost of borrowing) these days is an artificial low interest rate.

If low interest rates cause rising house prices, will house prices be cheaper if interest rates are set higher?

Another reason for rising house prices is mainly contributed by a large stock of existing houses as mentioned in Chapter 5 page 42.

KRI reports “As of 2010, there were about 4.4 million houses in the formal sector. Every year 100,000 new houses are built and 200,000 houses out of the existing stock are sold. Since far more existing houses are being sold than new houses, it is the price of existing houses that determines the prices that new house are being sold at”

What surprises me is why there is so much stock of existing houses being sold rather than new houses in the first place?

Does that mean we can’t even sell homes that we already built?

If so why build them?

Why build new houses when we can’t sell the old ones?

Why can’t we let house prices fall by embracing non-interventionist policies?

That would also create a dynamic and self-funding housing industry and save the government housing subsidies as Khazanah Nasional Berhad Deputy Chairman Nor Mohamed Yakcop said in his speech.

I hope people read this research report.

As for myself, I might build my own house on my kampung land which will be much better and much cheaper than a RM350,000 double-storey terrace house in Kota Samarahan, Sarawak.

First published in The Ant Daily on September 10, 2015.

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