housing is money
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HOUSING as PROFITABLE VENTURE and AN INCOME
GENERATOR
• Perspective on housing as an income generator• To substantiate that housing is
a highly profitable venture.
LECTURE OBJECTIVES
Why Housing is an important income generator?
Looking at different facets such as:
• The general public i.e. individual person like you and me
• The governments; the federal, the state and local authorities
• Private entrepreneurs and industries
HOUSING AS AN INCOME CONTRIBUTOR
• Gov emphasis in DEVELOPMENT OF HOUSING SECTOR (federal government)– Being measured in terms gross domestic product– Being measured in terms employment– Being measured in terms of impacts economically or socially especially taxes in terms of
cooperate or individual taxes.• State Gov interest in housing sector
– Catalyst to other development which lead to more taxes, levies etc– Mass housing development would also drastically improved taxes on land– Some states government e.g. SELANGOR and JOHOR esp. involve directly in housing
development.• Local authority
– Main incomes are quit rents and parking
• THE PRIVATE SECTOR WILLINGNESS TO PARTICIPATE IN HOUSING SECTOR• HOUSING IS THE MOST PROFITABLE SECTOR
Housing as the MAIN ASSET
• EXPLAIN WHY THE GENERAL PUBLIC IS MOSTLY AFFECTED IN TWIST OF AN ECONOMIC CYCEL NEGATIVE OF POSITIVE– Based on the magnitude of investment in housing– Based on the amount of saving on housing– Based on the magnitude of mortgage involved– Based on the financial expenditure link to housing
From an individual perspective
• Shelter and its vast interpretations
• Main Asset• Safe but high return investment• A good form of saving• A highly acceptable form of
collateral
From the Federal government perspective
Federal government• An important income generator refer to GDP
and KLSE company listing http//biz.thestar.com.my/marketwatch/
• Corporate tax• Personal income tax
From the State government perspective
Encourage housing development especially in a large scale. Why?
• Increase federal contribution to the state i.e. per head contribution
• Increase in land tax e.g. the conversion of agriculture to housing.
• Profitable venture and directly involve in its development such as Selangor and Johor
• Other taxes associated to development.
Perspective of private entrepreneurs
Extremely profitable venture take example shah alam.
• Almost 65% of company listed in KLSE related to housing directly or indirectly to housing sector.
• Especially properties, construction, banking and insurance, industries and especially plantation
• Most ‘unrelated companies’ have interest in housing industries.
How important is housing sector as an economic contributor to the Malaysian economy?
THE BUST-BOOM CYCLES
Impacts on HOUSING
Terminology-GDP
• GROSS DOMESTIC PRODUCT• Gross domestic product (GDP) refers to the
market value of all goods and services produced within a country in a given period. It is often considered an indicator of a country's standard of living
Deflation versus inflation
• In economics, deflation is a decrease in the general price level of goods and services.[1] Deflation occurs when the annual inflation rate falls below 0% (a negative inflation rate).
• inflation is a rise in the general level of prices of goods and services in an economy over a period of time.[
• inflation also reflects an erosion in the purchasing power of money – a loss of real value in the internal medium of exchange and unit of account in the economy
• Inflation's effects on an economy are various and can be simultaneously positive and negative
• Negative effects of inflation include a decrease in the real value of money and may discourage investment and savings, and high inflation may lead to shortages of goods if consumers begin hoarding out of concern that prices will increase in the future. Positive effects include ensuring central banks can adjust nominal interest rates (intended to mitigate recessions)
Recesssion
• A recession is a business cycle contraction, a general slowdown in economic activity.[
• Recessions generally occur when there is a widespread drop in spending often following an adverse supply shock or the bursting of an economic bubble.
• Governments usually respond to recessions by adopting expansionary such as increasing money supply, increasing government spending and decreasing taxation.
BUST OR BOOM AFFECT
LIQUIDITY IN THE ECONOMIC SYSTEM
IMPACTS OF ECONOMIC CYCLES
To HOUSING SECTOR
An economic boom
• Boom-bust cycles come hand in hand with periods of thriving stock markets and rapid growth in real state development.
• The boom phase of the cycle is often associated with a rapid increase of gross domestic product (GDP), consumption and specially investment.
• Eg. Malaysia in 1987
Scenario during the economic boom
• Investment (both invisible and FDI)• Employment • Income • Production and export• Composite Index • Lending policy liberalized• Economic policy – expansionary• Full employment• Inflation manageable (encourage lending)• Public spending and consumption
2,3252,209
2,0511,8771,7421,6391,4701,3331,171
3,8173,7103,5903,497
3,3253,2403,1542,976
0
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
4,500
1989 1990 1991 1992 1993 1994 1995 1996 1997
The number of service employment in ‘000
102.0131.0
151.0 144.0
268.0
181.0139.0
3,043
1,934
1,3381,2811,4291,259
923
0
50
100
150
200
250
300
1998 1990 1991 1992 1993 1994 19950
500
1000
1500
2000
2500
3000
3500
Quantity ('000)Value (RM'000)
The Car Import (CKD).
Housing Loans (RM‘000).
12,99514,479
16,63918,055
21,72121,00919,85319,469
16,64016,74114,04114,508
12,20311,588
9,5898,143 7,5707,3226,4676,039
4,9634,2893,3652,671
0
5,000
10,000
15,000
20,000
25,000
1989 1990 1991 1992 1993 1994 1995 1996
GovernmentCommercial BanksFinance Companies
0
100,000,000
200,000,000
300,000,000
400,000,00019
84
1985
1986
1987
1988
1989
1990
1991
1992
1993
1994
1995
Volume ('000)Value (RM'000)
KLSE TURNOVER In Terms of Volume and Value
Chart 13: Net Profit and Earning Per Share of the Malayan Banking Bhd.
1075.0
38.0 80.0172.0 210.0
864.0
644.0
391.0261.0
94
76
56
3435323126
12
0
200
400
600
800
1000
1200
1988 1889 1990 1991 1992 1993 1994 1995 19960
10
20
30
40
50
60
70
80
90
100
Net ProfitsEPS
EPS in cents
Net Profits in(RM millions)
Source:The Maybank Annual Report 1989 - 1997
Commercial Banks Loans to Construction Sector (RM’000)
9,30910,377
13,995
8,602
6,7305,5054,763
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
16,000
1989 1990 1991 1992 1993 1994 1995
An economic Bust characteristics
• The bust cycle follows with a downswing in which consumption and investment fall sharply, leading to a period of depressed economic activity.
• E.g. Malaysia 1997
Continuation…• extreme form of recession, a depression is characterized by its
length, by abnormally large increases in unemployment, falls in the availability of credit— often due to some kind of banking/financial crisis, shrinking output—as buyers dry up and suppliers cut back on production, and investment, large number of bankruptcies—including sovereign debt defaults, significantly reduced amounts of trade and commerce—especially international, as well as highly volatile relative currency value fluctuations—most often due to devaluations. Price deflation, financial crises and bank failures are also common elements of a depression that are not normally a part of a recession.
Triggering factors
• Greed and imprudent spending.• Can be uneconomically
unrelated factors
Scenario during the economic bust
• the reverse to the economic boom
Consequences to housing
• NPL• Bankruptcies• Abandoned projects…• Pending projects resubmitted• Drastic drop in housing prices and rental.• Can lead to failure in banking system e.g.
USA, Rep of Ireland, Greece• Limited availability of housing loans
How the banks react during the economic cycles?
• Bank reacts differently and contradicting during the economic cycles.
• Obliging during boom• Suppressive during bust• Intermediate situation – depending on the
bank negara reads the situation e.g. currently.
Housing Policy in Malaysia
An Historical Perspective
OBJECTIVES
• Dynamic of housing problems• Emphasis of ‘housing policy’ in
Malaysia• Capitalism in Malaysia
Independent day 31st of August 1957
• Gaining independent with conditions – citizenship for the immigrants – the birth of a multiracial country. With distinct characteristics – Distinction of race in terms of types employment– Distinction of race in terms of place of stay
• A perfect brew of racial/economic inequality and national instability as shown in 13th of May 1969
New Economic Policy
• Objectives – restructuring society in terms of place of stay and employment.
• Modus operandi – creating a new ‘economic cake’ and urbanizing the Malay (creating Malay urban population)
• NEP turns housing into ‘political animal’. Housing issue is ‘placed’ under the Min of Internal Affair in the 70’s.
Creating urban Malay urban population
• Only mentioned publicly in the 1990’s by the premier but implemented with the establishment of the New Economic Policy
• The creation of predominantly Malay population especially the generic new towns at the poorest predominantly Malay regions.
• In line with ‘mushrooming’ of squatters areas in major towns in Malaysia
Continuation….
• Government agencies such as UDA, SEDCs, DARA, KETENGAH etcs. Some projects are financed by borrowing from the foreign sources.
• State government directly involved in the development of low cost houses. Getting soft loans from the federal gov. and surrendering lands for the purpose
• Introduction of government end financing loan for the government servants
In 1980’s
• A complete philosophical turn-around with coming of Dr. Mahathir as the premier.
• In the 1970’s (Tun Abdul Razak) the housing policy concentrate of helping the new economic policy and the development of low income housing to help the Malay population set foot on urban areas.
• In the 1980’s the housing inspiration of the nation do not change but the implementation attempts of this policy are contradictory. A good example is the ‘30% policy’.
Continuation…• A philosophical change..in relation to the low income. Job
creation is more important than providing houses to low income groups.
• Bankers are given full autonomy in giving loan as result the low cost housing quota was abolished in 1989
• Integrated development concept is introduced in the 1980’s led to the development of ‘town within a town’. Argued that a way to provided town facilities can be provided efficiently and adequately inclusively housing for the poor can be provided line with the 30% low cost housing rule.
“the fact about all Malaysians owning a house and so-called house-owning democracy is sheer nonsense.........The wages of low income families had increased by two-fold if compared to the wages 20 years ago. (Mahathir, 1996) Page 1 & 2
“If the banks think that they will not get back their money, they will not lend” (Mahathir, 1989)
Housing problem?
• Characteristics – dynamic• Types – ever-changing• Causes – numerous- but the main ones are
politicians and the nature of the problem seem simplified and uncomplicated … therefore there is high tendency to be underestimated and misinterpreted.
Conclusion: Housing Policy in Malaysia?
• Policy between 1971 to 1980 and 1981 onwards a distinct contradiction
• No formal policy• Monitoring on housing based on 5 year plan
copied from socialist Russia• Ironically, the same tone for every plan – bias
towards low income housing.• Highly contradicting between plan intention and
actions.
Capitalism in housing provision
• Definition• Complete change of course after 1981• Responsibility of low cost housing
construction is given to profit motivated entities without any monitoring tools
• Led to the failure of low cost housing program
“If the banks think that they will not get back their money, they will not lend” (Mahathir, 1999)
“the fact about all Malaysians owning a house and so-called house-owning democracy is sheer nonsense.........The wages of low income families had increased by two-fold if compared to the wages 20 years ago. (Mahathir, 1996) Page 1 & 2
‘The research has shown that the low cost housing policy did not have the cutting edge to ensure the banking system and the construction sector tow the line in accordance to the requirement of the policy. Ironically, under the current political and administration setting, the governments both at the national and state levels, intentionally or unintentionally had acted against the spirit of the low cost housing policy.’
Injustice in HOUSING PROVISION – the housing
MISMATCH
• Looking into the priorities of housing machinery in Malaysia• Analyzing housing problem in
Malaysia in particular “housing the poor”
LECTURE OBJECTIVES
Explanation to the current housing problem
What is the current housing problem?Housing mismatch. The market bias towards the demand of
higher income section of the population. Not only negatively affected lower income of the population of the population but families of household income of rm4000 are also affected. A good case study is the Klang Valley and Shah Alam is included.
• Why this is happening? Maximization of profit. It is more profitable to build higher cost houses and it is easier to get housing loan for them.
• Who is to blamed for this?
Inappropriate banking system
• Geared for maximum profitability and the upmost security of investment
• Tendency toward lowering management cost• Tendency for high value of housing loans• Tendency to shy away from low income groups
– ‘unreliable groups’ or unsafe group to do bussiness’
Government change of stance• Responsibility of low cost housing scheme ‘given’ to private
developer i.e. 30% rule since 1980• Bank low cost housing loan quota abolished in 1989.• State refuse to surrender land for low cost houses led to
development of SPNB• State government become housing developer and shy away
from constructing low cost and affordable houses• State government ‘accept’ the notion that high price of land
in main town areas are ‘unsuitable’ for low cost and affordable house construction which led to mismatch problem
Private entrepreneur stance
• Very clear – low cost housing scheme is unacceptable – cross-subsidizing of profit is a myth
• Various tactics used to shy away from the ‘social responsibility’ and they are very successful
conclusions
• Housing demand for affordable and low cost houses are unattended.
• Even housing demand for household with monthly income of rm4,000 in main urban areas are also unattended.
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