Lower-priced homes suffer from too many regulations.

The Malaysian construction and housing industry is subject to level upon level of laws, policies and guidelines. It is considered one of the most highly regulated sectors because these standards are imposed at federal, state and local government levels, adding to compliance costs for the industry. Controls and limitations throughout the various stages of the housing delivery process are set in place to prevent issues such as overbuilding, usage of lesser quality materials, negative environmental effects and misuse of land. Approvals, permits, fees and deposits will need to be made to various agencies at each stage of construction. These costs, in turn, have contributed to the rising cost of housing, making it increasingly difficult for many Malaysians to achieve homeownership.

The term compliance cost describes all of the expenses incurred to adhere to the applicable laws. Pay for compliance staff, time and expenses for reporting, new systems required to fulfil retention commitments and so forth are all included. The cost of compliance is rising in value as more regulations are implemented and more time is needed to comply with them. For the construction and housing industry, these costs are passed on to consumers in the form of higher housing prices. Developers often incorporate compliance costs into their project budgets, leading to more expensive housing units.

With 98,274 agencies, the construction industry ranks as one of the largest sectors, contributing about 17.3% of Malaysia's GDP as of 2Q 2024. But there's a big problem for the construction industry, especially the real estate and housing sectors that comes with the rising cost of compliance.

During the Budget 2025 Roundtable hosted by StarProperty, Sabah Housing and Real Estate Developers Association (Shareda) president Datuk Chua Soon Ping shared that compliance cost issues continuously prevent residents of the East Malaysian states from accessing basic necessities like electricity and water.

“For Sabah, we just formed the Sewerage Department that follows KL's model. But the contribution of RM1 million from GDV is something we feel cannot be done. In addition, we also suffer from electricity and water shortages. And it is not just a water shortage, the water is not good for drinking. But the water department continues to impose additional conditions, so without digressing too much, I agree on compliance cost reduction,” he said.

Higher development costs, driven by compliance requirements, contribute to increased housing prices. This, combined with rising interest rates and other economic factors, makes it even more difficult for many Malaysians to achieve homeownership.

An estimated 21% of Malaysians did not own a home in 2020, despite the country's high demand for housing after population growth. Despite Malaysia's average annual housing production of 138,900 units, a large number of unsold units remain because of the country's growing housing costs. Cost considerations may be the primary cause of the rising housing prices. In addition, the Consumer Price Index (CPI) and interest rate increases are also factors driving up housing costs.

The rising cost of housing in Malaysia is a pressing concern. A significant portion of the population, particularly low-income earners, struggle to find affordable housing options. This can lead to housing insecurity, overcrowding, and other social problems. The regulatory burden on the construction industry plays a significant role in this affordability crisis.

Cross subsidies and price distortions

The practice of cross-subsidising, mandated by the government's blanket imposition of affordable housing requirements on developers, has inadvertently contributed to higher prices in the open market. This has created a mismatch between the supply and demand of affordable housing, as developers continue to fulfil the requirements while the completed units remain unsold.

A significant portion of the housing overhang, amounting to 28.6%, consists of units priced at RM300,000 and below. This suggests that the issue may not solely be a matter of supply, but also of affordability for the targeted group. Factors such as access to end financing and other bridge financing could be hindering their ability to purchase these affordable units.

Given the direct impact of affordable housing policies on open market house prices, a comprehensive review of these policies is essential. Not only does this ensure the sustainability of affordable housing supply, but it also guarantees that these units reach the intended homebuyers.

A successful revamp of the affordable housing policy requires a collaborative effort involving the government, developers, and financial institutions. By working together, these parties can create an ecosystem that effectively balances the supply and demand of affordable housing, ensuring that it meets the needs of the target market.

Addressing the issues of affordability

In collaboration with developers, more comprehensive nationwide studies should be regularly conducted to accurately determine affordable housing demand and supply in various states and locations. This study should consider factors such as the size and growth pattern of the target population, existing housing stock and the population's affordability level.

Real Estate and Housing Developers’ Association Malaysia (Rehda) president Datuk Ho Hon Sang proposed using artificial intelligence (AI) to conduct the studies. “We are in AI and data analysis age, so why not do something more detailed? For example, the government allocates a budget to do a very big study to see the supply and demand of affordable housing based on location. Which location needs more? Which is under-served or over-served? We have a lot of completed but unsold. Based on (such a study we come up with a predictive analysis on what is the demand every year so that the housing industry is ready to handle the scenario. I think it will be very good for us to have a systematic approach to this (issue).

To ensure consistency and efficiency, the different state policies on affordable housing should be evaluated and streamlined into a standardised national policy.

For lower-income states like Sabah and Sarawak, a federal allocation could be used to purchase housing from the open market and rent it to those who cannot afford the rent, particularly in strategic areas where their workplaces are located. Additionally, this allocation could be used to provide subsidies to developers of affordable housing and offer more sustainable and direct grants to homebuyers of units priced up to RM500,000.

Sarawak Housing and Real Estate Developers’ Association (SHEDA) deputy president Louis Ting suggested the Sarawak ministry buy houses from the market and rent them out to those who are unable to afford a house in strategic locations.

The point was brought up by Sarawak Housing and Real Estate Developers’ Association (SHEDA) deputy president Louis Ting. “On making the housing ecosystem more sustainable, in Sarawak, we also feel the situation where many affordable housings were built but people still say it is inadequate. We have a lot of land and a population of less than three million. If affordable housing is built 30km or 40km away from workplaces, it is definitely not going to be sustainable. When you have to build say 100 affordable housing units that are far away from the workplaces, it is considered overbuilt,” he said.

“We have engaged with the Sarawak’s Ministry of Public Health, Housing and Local Government. There are suggestions for federal allocation, which we had raised in the last Budget meeting for a RM300 million allocation, one of the ways to utilise it is for the Sarawak ministry to buy houses from the market, to be rented out to those who could not afford a house in strategic locations. So perhaps RM150 million can used to buy maybe 300 units, and part of the remaining can be used as a grant, to assist the first-time homebuyers. This can provide up to 3000 to 4000 units to homebuyers every year. The social impact is a lot more than the few hundred million spent, so overall the government is still on a winning journey,” shared Ting.

To reduce construction costs and prevent them from being passed on to homebuyers, land premium reductions or exemptions could be offered for the development of affordable housing and public facilities. To encourage property developers to build affordable housing, incentives such as higher plot ratios, lower development charges and subsidised construction material costs could also be provided.

Banks should play a crucial role in facilitating affordable housing by providing 100% or at least 95% margin of loans to purchasers of affordable units. To ease the burden on homebuyers, interest payments during the construction stage could be absorbed. To ensure that these units are occupied by owner-occupiers, banks can provide loans with higher than 100% margins and impose a moratorium on resale for a minimum period of 10 years.

Furthermore, banks should allocate 30% of their loan portfolios to affordable home loans, ensuring better access to end financing for the target group. Additionally, offering step-up financing options can provide flexibility for homebuyers.

Rehda’s immediate past president Datuk NK Tong intends to make sure the industry stays resilient.

Rehda’s immediate past president Datuk NK Tong, who provided the role of moderator during the discussion, provided a conclusion of the discussions. “Making financing affordable and suggestions on leaning on EPF makes sense, as well as making it accessible. Another angle is getting the banks to chip in, for them to have a 30% quota of affordable loans, again, allowing EPF withdrawals for monthly payments. Compliance cost continues to be the issue, but it is again Federal vs states, and REHDA’s top wish is data-driven (solutions) on requirements for affordable housing, when, where and how many,” said Tong.

“The reason we are so keen to do this is, to make sure the industry stays resilient. If we look at the percentage of completed but unsold, people would say, why don’t you do market research? But we did. But we asked to cross-subsidise, we have to price it beyond the ability of the market to afford it. That’s why you have 28.6% of unsold priced at RM300,000 and below. That implies that there are 71.4% that are also completed but unsold and they are so because they had to be priced higher,” he concluded.

Addressing this issue requires a careful balance between ensuring quality and safety in the housing sector and reducing the regulatory burden on industry players. Policymakers need to consider measures such as streamlining regulatory processes and exploring innovative financing mechanisms to make housing more affordable for Malaysians.

Stay ahead of the crowd and enjoy fresh insights on real estate, property development, and lifestyle trends when you subscribe to our newsletter and follow us on social media.