News: EPF Funds A Possible Solution Against Affordable Housing Issues

Dec 2, 2019

The increase in cost of living has resulted in a significant decrease in take-home income and is becoming a growing cause for concern. This has made more Malaysian youths and job entrants unable to afford homes in urban and suburban areas.

The situation is exacerbated by the country’s struggles in finding a way to keep real estate prices in check. Despite several government agencies being put up, affordability continues to be a problem, reported Manokaran Mottain, Alliance Bank Malaysia Bhd chief economist.

Recent data reveals that the house price index moderated to 0.9% year-on-year (YoY) with an average price of RM420,345 for the second quarter 2019 (2Q2019). The first quarter 2019 (1Q2019) had the index at 2.5% YoY and average price at RM422,860.

Even with house prices maintaining an upward trend, demand is still focused on affordable houses priced from RM150,000 to RM300,000. This indicates a decline in affordability, caused by relatively slow growth in wage and income compared to house prices.

You can use your EPF money to purchase a property! Learn how by reading this guide. 

With the average price of houses nearly 48% higher compared to affordable homes in Malaysia, most citizens cannot afford to purchase newly launched homes.

According to Bank Negara, RM282,000 is the highest affordable house price based on the household median income.

Housing affordability in the country has not improved significantly since 2002, with the median multiple going anywhere from 4.0 to 5.0, which exceeded the 3.0 threshold for housing affordability.

For the period of 2002 to 2016, the median house price increased at a compounded annual growth rate (CAGR) of 26.5% from RM175,000 to RM280,000. On the other hand, household income grew a lot slower at a CAGR of 11.7%, less than 50% of the rate of increase in house prices.

The high house prices at unaffordable levels have been a big factor for the increased household debt level in Malaysia. According to Bank Negara, house price-to-household annual income sat at 4.8 times as of 2016.

As at end-June 2019, the country’s household debt hit 82.2% of gross domestic product (GDP) compared to its highest at 86.9% in 2015. It is one of the largest in Asia and has even gone past that of other high-income nations such as Japan (58.2%) and the United States (75.0%).

The Singapore Housing and Development Board (HDB) is often praised as being successful in providing affordable and quality homes, which leverages on the Central Provident Fund (CPF) as a financing tool.

Under the scheme Special CPF Housing Grant (SHG) and, Additional CPF Housing Grant (AHG) were set up for eligible first-time purchasers of HBD’s government-subsidised flats. Buyers could already afford to buy houses within several years of working.

The CPF accrues 23% in the Ordinary Account (OA), while 6% and 8% are appropriated into Special Account (SA) and Medisave Account (MA) respectively.

The SA and MA are designed for retirement-related financial products and medical expenses respectively, while the OA is set aside for housing, investment, education and insurance purposes.

Thus, a good solution would be to use the Employees Provident Fund (EPF), according to the chief economist.

Currently, the withdrawal limit to buy a home is 30% of total EPF savings or all savings in Account 2. Manokaran Mottain suggested that a full withdrawal of total EPF savings for a first-home purchase be allowed, along with certain conditions.

One such condition is the withdrawal having a lock-on period of about five years, where the individual is required to pay the principal amount withdrawn from the EPF in addition to the accrued interest upon sale.

As an example, a 25-year old fresh graduate earning RM2,800 monthly, wanting to own a home after five years, could have saved around RM58,000 under the proposal. This is taking in the country’s average wage growth of above 5%.

The amount would be more than enough to pay for at least a PPR unit.

In essence, the economist recommended that the government should focus on sustainable policies to ease the burden and decrease the cost of owning residential properties, especially for first-time buyers.

 

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