Building Investment (May - June 2022)

that houses initially targeted for B40 and M40 income groups are
a major contributor to the overhang, with 31% or 11,610 units
derived from those priced less than RM300k, while another 26%
or 9,461 units are priced within RM300k – RM500k. In terms of
unsold units under construction and not constructed, majority of
them are also coming from products priced below RM300k, both
at 41% (or 29,083 units) and 44% (or 9,641 units). New launches
also share the same trend, with 35% or 15,332 units are products
priced below RM300k, and 36% or 15,723 units are product
priced within RM300k – RM500k.
All these signify that the supply side of the property industry
is responding to the market demand by providing products that
matching the mass buyers’ affordability level. Even right before
the pandemic, the problem of mismatch in our housing supplydelivery
system has been softening as majority of new launches
since 2018 were generally priced below RM500k. It is just that
the weak economic performance and the reduction in household
income due to the unforeseen pandemic-induced recession have
greatly dampened mass buyers’ housing affordability; whereby
houses supposed to match people’s affordability level before are
no longer in-fit for the current market condition.
To add salt to the wound, fluctuations in building material
prices – due to the pandemic-related shutdowns and restrictions;
lingering tariffs and quotas; the resume and increased
construction activity in the post-COVID-19 era; and even
instances of hoarding and profiteering – could trigger another
round of house prices growth that would further decouple
household income from house prices. As pointed out by the
Real Estate & Housing Developers’ Association (REHDA), a 20%
increase in construction cost will lead to a 10% rise in house
prices, as the cost of construction materials accounts for 50% to
60% of the total development value of a project.
Such a rise in building material prices may have a significant
impact on certain ongoing projects as not all the construction
costs are locked in when the contracts were awarded; but it is
sure to increase the cost of doing business for new projects,
leading to the increase in fundamental house prices. For example,
up to March 2020, prices for steel, glass, and metal sections have
grown up by 28.8%, 25.8%, and 24.1%, respectively, since January
Figure 1: Status of overhang in the Malaysian property industry.
(Source: NAPIC)
2020; compared to a relatively slower growth rate of 9.8%, 1.2%,
and 7.5% within July 2017 – December 2019 (Figure 2). Except for
floor & wall tiles and roofing materials which have experienced
a decline in prices, a significant increase in prices is observed in
other building materials as well, ranging from 2.7% (for sanitary
fittings) to 14.4% (for bricks & wall) within the period of January
2020 – March 2022.
While it is not uncommon that any risk associated with
price uncertainty will eventually be passed on to the end
users, property developers nowadays are caution about price
increases of their products, as they may have to bear with the
consequences of dampened sale performance in respond to the
rise in selling price. This is of particularly true when the housing
market is generally flattish and is being marred by issues such
as reduced affordability, high household debts, tighter credit
standards etc. Unless the soaring is too high and there is no way
to curb the increased price tag, developers tend to offset the
increase with strategic material procurement (i.e., bulk purchase,
advance payment, or cash purchase) and smarter spending
processes to ensure the final prices for potential homebuyers are
affected as minimum as possible.
In fact, managing fluctuations in a contract has been
practiced for decades – especially among parties conducting
(Image Sources: aathaworld.com)
May-June 2022 | www.b-i.biz 27