IN today's environment of rising home prices, is it more advantageous to buy a house or rent a house?
While most people unanimously agree that owning a home is better, the financial situation of the individual is important in assessing whether he or she can afford the home.
“Of course, it's better to buy than rent as the loan you pay to the bank is equivalent to the rental you are forking out,” says the boss of the property consultant firm.
James Wong ... ‘It’s better to buy than rent as the loan you pay to the bank is equivalent to the rental you are forking out.’
Young people are advised to look into their finances and ensure their existing debt ratios are not too high before buying a house. They also need to consider the stability of their jobs to ensure they will be able to make the monthly loan instalments, Wong says.
“If a person's debt ratio in relation to his salary is already close to 50%, chances are banks will not qualify the loan. If a person's salary is too low, meaning that the mortgage amount to be paid is more than 50% of a person's salary, the bank may also hesitate and require more documentation to approve the loan.
“These days, with the easy payment packages by banks and the ability to withdraw from one's Employees Provident Fund (EPF) savings, owning a house has become more affordable,” says Wong.
Certainly, potential house buyers can now tap on their EPF account 2 to purchase a property. First-time house buyers can still qualify for loans of up to 90%
During Budget 2011, the Government said it will introduce Skim Rumah Pertamaku through Cagamas Bhd, which will provide a guarantee on the downpayment of 10% for houses below RM220,000.
This scheme is for first-time house buyers with household income of less than RM3,000 per month. In other words, the buyers will obtain a 100% loan without having to pay the 10% downpayment.
First-time house buyers will also be given a stamp duty exemption of 50% on instruments of transfer on house prices not exceeding RM350,000. The Government also proposed that a stamp duty exemption of 50% be given on loan agreement instruments to finance such first-time purchase of houses.
“If you rent a home, especially in today's environment of rising prices, you will never benefit from the increase of the property value. Furthermore, even if the value of the home does not increase over time, the mortgage balance decreases and equity builds,” says another property consultant.
“With the problem of inflation creeping up, the more you delay buying a house, the more expensive it becomes over time. Buying property is one way to fight inflation,” he adds.
In terms of disadvantages in owning a house, there are many variable costs involved, for example the house assessment, service or maintenance fees and fire insurance among others.
“Selling the house may also not be as quick as, say, selling your investments in shares. The whole process of selling, along with documentation by lawyers can take up to a year, depending on the location of the home. If there is already a potential house buyer, the process can be sped up to 3 months,” says the property consultant.
If a typical middle class 2-storey terrace house in Kuala Lumpur is RM400,000 and the rent is RM1,500 a month, the nett yield is RM3.8%.
“This is a reasonable return from such a landed property,” he says.
Assuming that the household income is about RM7,000 a month, this means that the ratio of the household income per annum to the house price is 4.76 times.
“To buy this house based on 90% financing at a fixed interest loan for 30 years, you would have to pay a 5% interest, which means a monthly expense of about RM1,900 a month. At this point of the exercise, it is clearly better to rent than buy,” he elaborates.
Still, he adds: “This analysis is based on what I consider the typical housing unit. Different considerations may apply for different types of housing units in different areas.”
Another powerful motivation in favour of buying rather than renting is the social imperative to own a home.
“Owning a house also allows you to raise credit as and when it is needed, for family expenses and for business purposes, and this is a powerful motivation for ownership,” says Fernandez.
AT Harvard, I really enjoyed graduate macroeconomics taught by Nobel laureate Prof W. Leonfief and Prof Martin Feldstein. In particular, the philosophies underlying different policy approaches by Keynes, Hayek and Friedman. Simply put, Hayek (the Austrian school ascendant in the 19th and early 20th centuries) promoted the idea that private sector should be left free to find its own balance in a downturn.
The markets' resulting purging power served the United States well in the 19th century when the economy emerged stronger after each recession. But, it was later taken too far in the mix of tight money and high taxes that led finally to the Great Depression. That's when the Keynesian idea of fiscal stimulus took root.
In October 1932, Keynes made the case that depressions are caused by a spending deficit which can only be made up by government spending. Because of “a lack of confidence”, there is no assurance excess funds “will find its way into investment in new capital construction by public or private concerns.” With global recession, the consensus made us all Keynesians resorting to heavy government spending to resuscitate the economy was the answer to severe downturns. First cracks appeared with the outbreak of the fiscal crisis in Greece early in 2010. Critics argued government spending brought-in diminishing returns, producing an anaemic (jobless) recovery that benefited mainly special interest groups.
In the United States, Federal Reserve chairman Ben Bernanke stood steadfast and let it be known more stimulus was needed. His monetary activism led to an open-ended commitment to pump as much money into the system as is required to push for maximum employment. He added that he was doing what Friedman would do.
Milton Friedman advocated that the Great Depression was largely the result of a major contraction in money supply.
Milton Friedman (father of monetarism) advocated that the Great Depression was largely the result of a major contraction in money supply. And could have been avoided had the Fed held money supply stable. There is now growing backlash against the Fed's new approach. As I read it, Keynes would not have supported big deficits during boom times, such as those that led eventually to the 2007/'08 crisis. Similarly, Friedman is unlikely to have backed the Fed's monetary activism in engineering economic expansion rather than merely cushioning the pain in downturns. So, systematic perversion of Keynes' and Friedman's thoughts has led to their falling out of favour once again.
Confidence
The greatest disagreement between Keynes and Hayek was over benefits of government spending financed by deficits. Keynes pointed out that public interest in a recession cannot rely on private economy went so far as to say: “to spend less money than we should like to do is not patriotic.” But Hayek argued: “The existence of public debt on a large-scale imposes frictions and obstacles to re-adjustment very much greater than that imposed by the existence of private debt.” Simply put, no stimulus is needed. Nevertheless, both agreed this lack of confidence is simply destructive to any weakened economy.
For Keynes, confidence will come by bridging this gap in aggregate demand. “Private economy” was the culprit that impeded a return to prosperity by hoarding savings. That is, the potentially pernicious consequences of an increase in demand for money being not met by a corresponding increase in the supply of money. Even Hayek agreed hoarding is deflationary and “no one thinks deflation is in itself desirable.”
For Hayek, the way forward to building confidence in the face of destructive Smoot Hawley Tariff 30 protectionism, is for governments world-wide, led by the United States, to “abolish all those restrictions on trade and the free movement of capital.” Only expanded trade can rebuild confidence to enable the United States to pay off the public debt.
Growth vs debt
With recovery, albeit anaemic, attention is turned to exit (of stimulus) and fiscal consolidation (bringing down deficits and debt). After more than a decade of good times, the world awakens to face the reality of painful cuts and tax increases which are now needed to restore sanity in public finances, battered by a combination of years of overspending and the effects of global crises.
When recession set in in 2007, advanced nations' budget deficit averaged 1.1% of GDP. By end-2010, this had exceeded 9% according to the IMF, as revenues plummeted and banks got bailed out big time. Government gross debt will exceed 110% by 2015, against 73% of national income in 2007. This global rise in mounting debt will require nations to (i) reduce accumulating debt to bring down debt ratios, and (ii) inject fiscal discipline to reduce deficits. This, the International Monetary Fund warns, means “sizeable and sometimes unprecedented efforts as failing to do so would ultimately weaken the world's long-term growth prospects.”
While this is all well and good, there are fundamental differences in policy on opposite sides of the Atlantic. Germany's finance minister puts it this way: “While US policy makers like to focus on short-term corrective measures, we take the longer view and are, therefore, more preoccupied with the implications of excessive deficits and the dangers of high inflation.”
Last week's Franco-German move to end wage indexation, raise retirement age and lock-in debt limits into national constitutions across the euro-zone is bound to be provoking. In a public lecture, the infamous Soros said: “Something has gone fundamentally wrong in Germany's attitude towards the Economic Union.” By not only insisting on strict fiscal discipline for weaker euro-zone countries but also reducing its own fiscal deficit, Germany was in danger of setting in motion “a downward spiral.” This policy stance ignores a lesson from the 1930s Depression and so is “liable to push Europe into a period of prolonged stagnation or worse. That will in turn generate discontent and social unrest.”
Much of this is already today's reality. President Obama's stance is different but clear: secure a sustainable recovery first, while setting the stage for fiscal consolidation over the near medium-term. Growth is critical to success in reducing budget deficits. The US position is unique in that with US dollar at the heart of the global financial system, it can afford to tighten fiscal policy only when expansion is invigorated. While the US fiscal deficit (10.7% of GDP) is larger than the euro-zone, the Greek and Irish crises have prompted a flight to, rather than from, the US dollar and US bonds. Indeed, there is no market pressure to adjust. So, while the United States recognises it has to seriously tackle problems of fiscal deficit and high debt, there is an unwillingness to act politically.
Is debt too high?
Today's deficits which are leading to ever higher debt and servicing burdens are plainly unsustainable. What level of public debt is appropriate? Conventional wisdom says a safe level in a rich economy is 60% of GDP pitched at the limit enshrined in The Maastricht Treaty which governs membership in the euro. That's before the crisis.
As I see it, there is no empirical evidence to support this limit. Of course, the lower the better since it is unlikely to crowd-out private sector initiative. In the past, this limit was often by-passed anyway. Recent studies by Harvard's Rogoff and Reinhart find that public debt burdens of less than 90% have scant impact on growth; but they see significant impact at higher levels. No one-size fits all.
The United States, with the broadest and deepest bond market and dollar as reserve currency, surely will be able to carry a higher debt than any euro-zone members. In the end, the right level of debt depends on the means used to get there, consistent with growth targets. Evidence shows that cuts in spending are more sustainable and friendlier to growth; whereas, tax increases can harm growth. Taxes that do least harm to growth are on consumption and immobile assets (eg. property). Green taxes also make good sense. But politics often point elsewhere, eg. towards making the rich pay to clean the environment. In UK and US, the highest marginal income tax rates are possibly poised to rise. Good for populists but it will not boost growth.
Debts matter but assets also count
During the Great Depression, Keynes advocated spending “of any kind, private or public, whether on consumption or investment.” The immediate aim was to urgently fill the void in demand. Hayek took exception for it mattered to him the form spending took since “revival of investment was particularly desirable.” Sure, once recovery comes on-stream, it does matter what the spending is on.
Henry Morgenthau, President Roosevelt's Treasury Secretary, advised: “You can do something about the railroads. You can do something about housing. Above all, you must do something to reassure business We want to see private business expand. We believe much of remaining unemployment will disappear as private capital funds are increasingly employed.” History suggests the new respect for market confidence helped in the recovery following a double-dip in 1937-38. A lesson for US Treasury's Geithner those who forget the past condemn us all to repeat it.
Come to think of it, fiscal consolidation is not just about deficits and debt. Depending on how they are incurred, assets are usually created. It is true we should not burden the future with unproductive debt. All societies have infrastructure assets, i.e. transport, energy & water systems. They also have basic education, health, judicial and defence systems. These systems provide a “public good” which are not usually provided by competitive markets.
Surely, it does not make sense slashing infrastructure and utility investments and support for university teaching when borrowing can be had at absurdly low cost. Indeed, never has there been a better time to borrow than now to productively build public assets. Such Keynesianism is worthy of support especially in the face of large unused capacity.
I think it is wrong to insist that solving the problem caused by debt can't be solved by piling more debt. It's wise to look at net debt. Yale Prof Shiller argues there is “an arbitrage opportunity for governments to borrow massively at these low real interest rates, and invest in positive returning projects Unlike private firms, government can count as “economic profits” on their investments with positive externalities (benefits that accrue to everyone). Of course, unsustainable government consumption must be curbed. Borrowing is no sin so long as they create productive assets. Assets created cannot be ignored when looking at debt.
The Keynesian way
I should end on a lighter note. I well recall a fascination with Keynes' lesser known short essay written in 1930: “Economic Possibilities for Our Grandchildren”. While in the thick of the Great Depression, Keynes reminded us that “the long run trend was inexorable growth.” He then went on to predict ... “the standard of life in progressive countries one-hundred years hence will be between four and eight times as high as it is today.” After 80 years, with all the disasters in between, US and Western Europe are already about 5-times richer. And still counting.
In emerging nations, income growth in the past 30 years has been even more impressive. What's of concern is the quality of sort of growth we are after in the end. Keynes acknowledged the insatiable desire of human beings to blindly pursue wealth. Recent events have shown, even with wealth, people still wanted to borrow more than they could repay. In the end, most would adjust, albeit grudgingly, to a life of plenty. It is in this future good life Keynes famously imagined economists could be thought of as “humble, competent people on a level with dentists.” Economists have a way to go yet.
Former banker, Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time writing, teaching and promoting the public interest. Feedback is most welcome; email: starbizweek@thestar.com.my.
PAS is inherently conservative and wants to Islamise daily life. The DAP has to understand and accept that through its rapport and close cooperation with the party, it is helping to advance intolerance and a narrow view of a great religion.
NO MATTER how hard liberals in PAS, a minority in the party, try to limit the damage and paste over the excesses of the conservative majority, the party’s true face keeps surfacing every now and then, severely embarrassing the Pakatan Rakyat coalition whose secular member, the Chinese-majority DAP, is left to carry the brunt of the damage.
From banning alcohol to proposing chopping off hands for theft to hudud laws, it is the DAP that has to scramble to defend, deny, explain or justify the excesses of its ally PAS.
The DAP’s task is made difficult because PAS is unable to rationalise between its desire to Islamise daily life to respecting fundamental liberties and the secular legal foundations of the country.
The latest outburst by PAS Youth leader Nasrudin Hassan Tantawi, 41, to police society on Valentine’s Day has all the top DAP leaders – from adviser Lim Kit Siang to Selangor Speaker Datuk Teng Chang Khim and Dapsy leader Anthony Loke – working overtime to limit the damage, assure the public, refute the claim and criticise Nasrudin, a rising hardliner in PAS.
Nasrudin, who particularly targets Valentine’s Day, a Western practice that is now marked the world over as a day to celebrate affection, is into moral policing in daily life.
He is a leading advocate in PAS and in conservative Islamic circles for a sin-free society through the application of strict Islamic rules.
Nasrudin, elected as PAS Youth leader in 2009, announced on Wednesday that serious measures would be taken to quell “immoral acts” during Valentine’s Day in the Pakatan-ruled states of Kelantan, Kedah, Selangor and Penang.
The crackdown is part of the PAS campaign to instil sin-free living and will include searches and raids by local authorities, police action and distribution of pamphlets on the virtues of Muslim morality.
“We have identified spots in these states which are used by lovers and we are deploying local religious department officials, party members and Rela to stop acts like casual sex, which violates Islam,” Nasrudin reportedly told the AFP news agency which flashed the statement worldwide.
He has since said he was misquoted but his inclination for moral policing is well known.
PAS liberals like Shah Alam MP Khalid Samad, feminist NGO Sisters in Islam and DAP leaders criticised Nasrudin, questioned his credentials and authority to implement the measures and virtually told him to “shut up”.
Khalid and a few others like him are moderate Muslims and liberal in their views on contentious issues like hudud laws, alcohol consumption and moral policing, which are best left to the individual and family to decide.
Such leaders are far and few in PAS. Because the same “morality issues” keep cropping up and from a wide range of PAS leaders, so it cannot be dismissed as the odd behaviour of a few.
In fact, leaders like Khalid are the odd ones, trying and often failing to defend a “moderate” position in a conservative, fundamentalist party like PAS.
One cannot deny that PAS, being a religious party, is inherently conservative and bent on imposing its narrow view on society.
This is what the DAP has to understand and accept, that through its rapport and close cooperation with PAS, it is helping to advance intolerance and a narrow view of a great religion and not the pluralism and multi-culturalism that are the pillars of the “Malaysian Malaysia” concept, the party’s founding philosophy.
It is not enough for DAP leaders to each time deny, reject, justify or assure the public on the excesses of PAS leaders but to engage with PAS and find an acceptable and permanent solution that is consistent with the Federal Constitution.
If a permanent solution is impossible, then the DAP should reappraise its pact with PAS.
Being members of the same political coalition and having a common political agenda and policy framework, they should be able to eliminate ambiguities, offer the rakyat a dependable solution and permanently end the pretence.
Nasrudin, from Kuantan, enjoys a wide following in PAS and outside for his uncompromising views on sin and morality.
He has been consistent in his views from when he was an Islamic student leader in 1992 till now, as the PAS Youth chief.
His early education was in government schools in Felda Keratong but his formative years were at the Maktab Ittibai Sunnah, Negri Sembilan and later at the famous Madrasah Ad-Diniah al-Bakriah, Kelantan.
Married with six children, Nasrudin continued his higher education at the Ma’ahad Fathul Islami and at Al-Azhar University.
He returned to build a reputation as a devoted missionary, strong supporter of madrasah education, blogger and writer on Islamic issues.
Always in a turban, his advocacy makes him a rising star in PAS. As PAS Youth chief, he is member of the party’s Syura Council.
He stood for the Maran parliamentary seat in 2008 but lost to Umno’s Ismail Muttalib by a big margin.
This is not the first time Nasrudin has come under fire for his statements. Last year, he blamed Valentine’s Day and New Year celebrations as among the main causes of baby dumping.
Nasrudin’s background, education, beliefs and strong networking skills make him an ideal PAS leader of the future but in his conservatism, he is the antithesis of Khalid and his moderate philosophy.
The PAS grassroots endorsed Nasrudin, electing him youth chief in 2009 – the year when delegates at the party election in Shah Alam wiped out PAS moderates like Kelantan exco member Datuk Husam Musa, Khalid himself and others, leaving them isolated and fighting a rising conservative tide in PAS best represented by leaders like Nasrudin.
James Wong ... ‘It’s better to buy than rent as the loan you pay to the bank is equivalent to the rental you are forking out.’ 
