IT was one of those long eye-opening conversation between father and his soon-to-graduate son.
“What are you going to do when you graduate?”
“Get a job, buy a car.”
“Don’t you want to buy a house?”
“It’s too expensive. I can always live with you and mum,” says Sonny.
There was a long silence.
“Dad, I went into environmental studies because I believe I can do my little part for the world we live in today. I am not looking for a fat salary,” says Sonny.
“But you need to have a decent salary in order to buy your own house one day. You can’t live with mum and dad forever, although I know your mum would like that,” says Dad.
“I read somewhere that it is possible for young people to buy their own house without taking a two-generational loan. And I am trying hard to be independent. I just need to get around some puzzling issues.
And so begins the little lesson in house ownership.
What sort of loan tenure will be suitable for a young person?
A 35-year loan is more than adequate. If he needs a loan tenure longer than 35 years, it just means that he is buying something that is far beyond his current income levels.
What sort of loan tenure do most banks provide?
Most banks only give housing loans up to 30 years. Selected banks previously gave loans up to 45 years. These are two generational loans. Most people are against two generational loans as the second generation is born into debt – “Slave into debt”.
How much of my salary should go towards housing loan repayment?
The rule of thumb is always the following:
(a) Any single loan repayment should not exceed a third of the borrower’s income
(b) All combined loan repayments should not exceed half of the borrower’s income
(c) The price of the house ideally should be three times that of the borrower’s annual household income to be deemed as affordable based on a study by Harvard University and World Bank. A young couple with RM10,000 between them is equivalent to RM120,000 a year. The value of the house that this young couple should be looking at is RM360,000 at the most.
Does a young person need help from parents to buy a house today?
It has become almost impossible for a fresh graduate to buy a property without parental support. Many condominiums are now launched in excess of RM500,000 even in suburban areas and landed properties in areas such as Kota Damansara are almost RM800,000 and above. How is a fresh graduate with a starting salary of RM3,000 ever going to afford such properties?
Here are some numbers to chew on. The monthly repayment for a housing loan of RM450,000 (average condo price of RM500,000 less 10% downpayment) for 30 years is RM2,175. This is 72% of the fresh graduate’s monthly income of about RM3,000.
Fresh graduates will have to continue staying with their parents until both the parents and the borrower have saved enough money for a larger downpayment, or for the parents to withdraw their own EPF funds to help their children.
What about young people applying for government-linked projects like Perumahan Rakyat 1Malaysia (PR1MA)?
Some quarters have commented that young professionals still have the option to do that. PR1MA has just raised the ceiling price of their properties to RM450,000 and the maximum household income eligibility to RM7,500. Based on a study by Harvard University and World Bank, the ratings of the Value of Property over Annual Household Income are as follows:
Based on the above study, the Value of PR1MA properties are actually not affordable by international standards. In fact, it is between “Seriously” to “Severely unaffordable”.
Under PR1MA, the borrower need not pay the 10% downpayment and can take a 100% loan for the RM450,000 property.
We have illustrated a typical household income vs expense of a prospective PR1MA buyer (see table above).
Hence, it would not be unusual for banks to reject PR1MA applicants for housing loans as many of them are buying far beyond their income eligibility. In other words, PR1MA properties are just too expensive. House Buyers Association (HBA) has suggested a price of between RM150,000 and RM300,000.
By this time, both dad and son are glad the conversation is coming to an end. There does not seem to be a happy ending though.
“What does this mean, Dad?”
“It means the Government must introduce further measures to reduce speculation in the property market. The Government must bring back the old formulae of real property gains tax, higher stamp duty for buyers of multiple properties, further reduction of loan to value ratio,” says Dad.
Chang Kim Loong is the honorary secretary-general of the HBA (www.hba.org.my), a non-profit, non-governmental organisation (NGO) manned by volunteers. He is also an NGO councillor at the Subang Jaya Municipal Council.