KUCHING: An economic think tank is working on a new index to measure the affordability of housing.
Centre for Market Education (CME) economist Carmelo Ferlito said that this index will take into account both financial and social factors to provide a more accurate assessment.
He explained that the current methods used to measure affordability overlook important aspects such as the definition of affordability, how it is measured, and its policy implications.
“The way we currently assess affordability is through the Price Income Ratio (PIR), which is a somewhat limited tool,” Ferlito said.
PIR is a measure of how affordable housing is for people. Recent check by New Sarawak Tribune found that the PIR is typically around 4.5 to 5 times, and sometimes even 6 times. According to the World Bank and the United Nations, a PIR of 4.1 times and above is considered “seriously unaffordable.”
Additionally, in 2020, the median price of houses was RM295,000 while the median annual household income was RM62,508. This means that the PIR was 4.72 times that year. The higher the PIR, the less affordable housing becomes for buyers.
“We often use the PIR assuming that all families are looking to buy new houses, which is not the reality. In fact, 80 per cent of housing transactions occur in the secondary market,”Ferlito added.
The housing market consists of two main segments: the primary market and the secondary market. The primary market involves purchasing properties directly from developers, while the secondary market involves buying properties from homeowners, often with the assistance of real estate agents or negotiators.
Ferlito argued that the current PIR model fails to consider rental prices, neglects the importance of location, and does not clearly indicate what a median price can actually buy.
Moreover, a low PIR does not necessarily indicate a high standard of living. It may instead signal economic stress or a lack of demand, pointing to underlying problems in the city or state being analysed.
According to him, although the PIR can identify affordability issues, it is too simplistic to provide comprehensive policy solutions.
Ferlito cautioned against common mistakes made in government policies regarding affordable housing, such as overlooking factors like location and size, as well as relying too heavily on inaccurate data.
“A lot of government actions are based on flawed data, leading to incorrect conclusions,” he explained.
Disregarding data from the informal housing sector and underestimating the role of existing housing stock in transactions can result in misguided policies, he noted.
Ferlito proposed that the new index covering both the primary and secondary housing markets would influence policy changes based on three principles effectively.
Regarding affordable housing, he suggested the need to relax stringent regulations, such as minimum size requirements for low-cost developments.
“Considering factors like location and size can improve the balance of supply and demand in the housing market. This could create better housing opportunities for lower-income individuals, thereby enhancing social mobility,” he elaborated.
Ferlito also emphasised the crucial role of disruptive entrepreneurship in the housing sector.
“Innovation and cost reduction in housing projects can be driven by entrepreneurship, but it should be free from government control,” he advised.
Looking ahead, he highlighted the growing importance of the rental market. He proposed a unique role for the government in supporting the lower-end segment.
“The government could provide loan guarantees for developers investing in affordable housing and partially cover rent payments, ensuring the financial viability of the projects while keeping them affordable for tenants,” Ferlito concluded.
