Vital steps needed to make property more affordable
View(s):Property prices soaring in value and being unaffordable to many isn’t something unique to Sri Lanka. However, many other countries have come up with solutions to make property buying affordable to the public and Sri Lanka also needs to look into these possibilities to accommodate the growing housing needs of the country.
Some brief facts about Sri Lanka’s households: Sri Lanka has just under 6 million occupied housing units, according to the 2012 census. Of this 83 per cent are owned by the occupier, 85.7 per cent are of single storied housing units and condominiums make up only 0.1 per cent of the total housing units in the country. Another significant fact is that the average household size has reduced from 5.2 in the 1970s to 3.8.
There is a transient population of one million in Colombo. Most of those commuting to Colombo aspire to live in an area close to the city so that the time they spend on the road can be reduced. However spiralling prices in Colombo, where a 2-bedroom house will cost at least 7 million (mainly in north Colombo) and apartments starting from 10 million make buying a property in Colombo unaffordable for many.
Affordability of properties
Colombo, unsurprisingly, has the lowest property affordability levels in the country, according to LankaPropertyWeb’s Affordability Index. Anyone planning to buy a property worth Rs. 7 million and with a 25 per cent down payment and a 10-year home loan, will need to pay back roughly Rs. 80,000 per month in repayments for the housing loan (for a loan rate of 13 per cent). This equates to someone having a monthly salary of Rs. 320,000, if you assume that 25 per cent of the salary will be used for repayments. According to the Central Bank, the mean household income per month was Rs. 62,237 in 2016.
Closer to Colombo, the most affordable properties can be found in Padukka and Hanwella. Nationally, North Central Province has the most affordable properties for its residents.
So, what are the options available to make properties more affordable and accessible?
Build more affordable houses
One option is building affordable houses. The country’s National Housing Development Authority (NHDA) estimates that the country needs 500,000 new houses in the next 5 years, that’s building 100,000 units a year. This is quite a challenging number and the houses will be spread across the country, from estate housing to resettlements. The condominium sector is expected to contribute around 10,000 new units in the next 5 years, excluding the new units coming up from the Port City.
While building more houses by the government, and mainly affordable ones will help the growing housing need, these alone will not be sufficient and privately constructed houses would make bulk of the new units coming up.
Offer better credit options
Credit or loans given by commercial banks for housing and construction has slowed down in recent years, with the growth coming down from 40 per cent in Q1 2016 to less than 20 per cent in Q2 2018. The willingness of banks to lend for house construction on better credit terms is a necessity for the market to pick up and for would-be home owners to construct their properties.
Recently some state banks have started offering concessionary home loan rates for first-time buyers and those earning less than 150,000 a month in salary. This is a commendable initiative and hope that other banks will also offer similar products for the home buyers. Accessible home loans which are affordability tested are a critical factor for sustaining a healthy property market.
Unoccupied houses
According to the 2012 census, there are 5,905,574 housing units in the country, out of which 12 per cent (or 714,129) is unoccupied. This could be due to many reasons such as owners living abroad, ownership disputed properties or investment properties. Some countries like Canada and Australia have introduced an Empty Homes Tax, where the owner of the vacant property is taxed for keeping it empty, in the hope that the house would be sold or rented out. While such a tax is intended to add more units to the market and help buyers, these schemes are however not without its challenges, mainly stemming from how to identify a property that’s intentionally left vacant.
Shared ownerships
Shared Ownership or Help To Buy schemes are where part of the property is owned by the buyer, and the rest is owned by either the developer, a government institution, housing association or the lending institution. The buyer only needs to buy a minimum 20-25 per cent of the house and can move in. The remaining share can be bought at a later date in a tiered way or the property sold altogether. The institutions benefit from this as the value of equity that they hold increases in time and when property is fully bought or sold they will make a profit. In some countries the buyer needs to pay a rental value for the percentage of property that they don’t own.
The other benefits of the scheme are that a deposit is only paid on the part that you’re buying, and stamp duty can be deferred or exempted, making buying a property more affordable, especially for first-time buyers. Such schemes exist in countries such as UK and were recently introduced in Malaysia.
Such schemes will immensely help the buyers as it’ll make buying property affordable as they can only buy the percentage of property they can afford. It will also help the developers of housing and apartments as they will be able to sell the units and focus on building more affordable housing units. A scheme like this will need government support and support from lending institutions but will greatly help the buyers struggling with affordability in the market.
Affordability of property in a market is vital for the functioning of the country’s property market. Not having affordable property can also lead to socio-economic issues among other things, therefore it’s vital that the government and relevant authorities look into these issues and bring in policies that facilitate the ease of access to the housing market, especially for the first-time buyers and those looking for a home for their family.
(The writer is Managing Director of LankaPropertyWeb.com and can be reached at daham@lpw.lk)