Deep-diving into the Oversupply of Properties in KL and Selangor (Part 1)
When you think about the property market in Kuala Lumpur and Selangor, one thing always comes to mind — how expensive and unaffordable houses are to you. Your salary and income is not enough to afford yourself a house. In Malaysia’s context, loan availability has always been blamed as the main root cause of why people can’t afford to buy houses. This sentiments is echoed mainly by property developers especially in Kuala Lumpur and Selangor.
However, of course this can’t be the only main reason. I would argue that this problem is multi-pronged and that we as the general public need to understand this problem a bit more in-depth. For this research piece here, we will first focus on the residential property market in Kuala Lumpur and look at what the authorities and property developers have been doing and how the property market has evolved.
The amount of completed residential houses (including serviced apartments) that are unsold is at decade highs
The problem of overhang in Kuala Lumpur can be summarized in the following way. Overhang of properties gradually decreased after the financial crisis of 2008 in the early 2010s, before sharply increasing in the latter part of 2010s. There were a total of 2,562 properties that were completed and unsold in 2008, and it decreased to 2,102 in 2012. That number later increased slightly to 2,354 units in 2016 before ballooning to 7,585 units in 2020.
What price ranges were these unsold properties priced at? The majority of them were priced above RM250,000, a standard benchmark of the price of an affordable house in Malaysia, consisting an increasing percentage of unsold in recent years. Worryingly, properties priced above RM500,000 consist of almost 95% and 83% of total overhang in 2016 and 2020 respectively. The amount of take-up in the mid- and high-end market has really been lacking, with properties priced above RM500k tripling from 2,239 units in 2016 to 6,318 units in 2020. It’s not just mid- and high-end properties that are in danger, low-end properties that are priced below RM500k has grew by 10 times from 115 units in 2016 to 1,267 units in 2020. What does this mean? The problem of overhang is not just an affordability problem now, instead it is an overbuilding that are increasingly also hitting affordable housing also. How can this be?
Completed and unsold houses are worth RM7.1bn currently, with almost 94% of them priced above RM500,000
The value of houses that are unsold and completed currently stands at RM7.1bn as of 3Q 2020. Back in 2008, the value was only at RM945m, where is has since grew by 7.5 times. Much of the growth in value of unsold was during the late 2020s, where 2016 registered a value of RM2.9bn.
By price ranges, about 94% of properties are priced above RM500,000, reaffirming the narrative that most of them are trapped at the mid- and high-end property market. About RM6.7bn worth of mid- and high-end properties are actually up in the market now with no buyers.
The context of RM7.1bn and 7,585 units: Represent a small amount of the total property market currently but on a rapid rise
7,585 units consist of only about 1.3% of the total residential properties at 573,935 units in Kuala Lumpur in 2020. By this measure, it doesn’t represent a big amount of the total property market in Kuala Lumpur. Using the median house price of RM480,000 in 2019 for Kuala Lumpur (DOSM), it is estimated that the Kuala Lumpur residential property market is worth RM275bn. This implies that the unsold and completed houses are worth 2.6% of the total property market in value.
While these percentages represent a small amount of the overall property market, we shouldn’t ignore the increasing trend of unsold houses in Kuala Lumpur and their increasing influence on it.
What drove the increases in unsold houses? A combination of unaffordability and easy property incentives
Let’s talk about housing affordability in Kuala Lumpur. In the past 6 years, housing affordability as measured by median multiple (Median house price/median annual household income) has declined from 5.4 times in 2014 to 3.8 times in 2019. A median multiple of above 3 times indicate that houses are unaffordable, where Kuala Lumpur was considered severely unaffordable in 2014. This unaffordability was part of the reason why unsold houses increased towards the latter half of the 2020s
The period after the financial crisis of 2008/2009 saw a slew of property incentives to stimulate the economy. This included stamp duty exemptions and real property gains tax reduction.
However, this period also saw the emergence of a problematic scheme in the property market — Developers Interest Bearing Scheme (DIBS). DIBS was introduced in 2009, and enabled developers to pay for the interest of the housing loan during the construction period. This means that many housebuyers could engage in speculative behaviours without putting their money in upfront. For example, a person can purchase the house during the construction period but do not need to pay for any interest. When the construction is over, he or she can then sell it to another prospective buyer for a higher price which effectively meant that he or she can profit off of this investment without paying any interest. Property developers were more than happy to support this scheme as they can just set a higher price for these buyers when they are selling to compensate for the interest.
Developers Interest Bearing Scheme fueled a rise in speculative activities and sharp rises in house prices from 2010 to 2014
Due to the increased speculative activities in the property market in Kuala Lumpur, this drove house prices to unprecedented levels with the peak growth of 14.1% in 2013.
During this period, it was the high-rise properties (condominiums, flats, etc) that drove much of the increase in house prices at a cumulative annual growth rate of 11.6%. This was followed by landed properties (terraced, detach, semi-detach) at 10.2%.
It can be inferred that a substantial amount of the house price increase during this period was driven by high rise properties which is supported by the fact that many high rise properties also entered the market during this period. In 2008, there was a total of 273,022 high rise units, where it already consists of 70% of the total properties in Kuala Lumpur. That number has since increased by 17.4% to 321,066 units in 2014, driving much of the entry of properties. Landed properties on the other hand declined from 116,100 units to 113,418 units.
Which areas have the most unsold currently? City Centre and Mukim Kuala Lumpur, the higher end property markets
In 2020, Seksyen 1–100 (areas like Wangsa Maju around City Centre but excludes central business district) and Mukim Kuala Lumpur (Jalan Pantai Baru, Bangsar, Bukit Kiara, Damansara Heights, Jalan Damansara, Taman Tun Dr. Ismail and Jalan Duta) recorded the highest number of unsold in the Kuala Lumpur state. For a detailed breakdown of the geographical location, please refer to the map below from NAPIC.
These 2 mukims encompass a whopping 66% of unsold, and the total units in them have quadrupled from 1,262 units in 2016 to 5,044 units in 2020.
Transaction prices around these 2 mukims have also been exceptionally higher than the other mukims, which means that they mainly have higher-end properties that are at higher price ranges. Kuala Lumpur Town Centre (Seksyen 1–100) registered an average transaction price of RM954,481 per property in 3Q 2020, while Mukim Kuala Lumpur registered RM1,124,304 per property. These make them one of the highest in the Kuala Lumpur state. This is also consistent with Mukim Batu (Jalan Ipoh and Jalan Kepong).
Conclusion: A variety of easy incentives for property developers and escalating house prices that affected affordability inevitably hit the mid- and high-end market hard in Kuala Lumpur. This drove developers to build many high rise properties that are unaffordable in locations that cater more towards the richer population.