It does describe the Malaysian situation.
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Author: Hafiz Noor Shams
For more about me, please read this.
It is not a crime to dream of a place to call one’s own. It is hard to beat having a roof none can take away in the worst of times. If anything happens, at least there is a home to run to. It is a comforting feeling to have a haven. That is the sort of sentiment fuelling the dream of homeownership. So pervasive is the thought that the inability to own one is seen as a problem by many.
Across the Pacific Ocean, the American Dream is invariably linked to having a good home. With a government subscribed to the Dream, measures were taken to encourage homeownership. As the housing market crashed partly due to the pro-homeownership policy, the Dream grew distant to create a pessimistic American worldview.
Across the straits, the Singapore government built high-rise flats all over the island, partly to encourage homeownership. The product of that encouragement is a contemporary culture. These flats are ubiquitous enough to form part of the Singaporean consciousness. The Complaints Choir of Singapore sings: ”I’m stuck with my parents till I’m 35, ”˜cause I can’t apply for HDB.” Failure to own a home is a source of shame.
It is no different in Malaysia. Homeownership occupies the collective mind. The high prices of ordinary homes stand as a barrier. That barrier is stirring up discontent among the middle class and down.
The Malaysian government knows this and it has introduced various incentives to make homeownership a cheaper endeavor for Malaysians.
For the longest time, the government has relied on low-cost housing projects to encourage homeownership. Despite the name, the term low-cost can be a misnomer. What is cheap for the financially well-off Malaysians may not be cheap for the impoverished. The whole enterprise can add too much financial burden to would-be owners, pulling them down into a deep unsustainable debt hole.
That concern does not stop the Najib administration from expanding its pro-homeownership policy by introducing the 1 Malaysia Housing Program. Proponents of the program tout the initiative as an affordable home program. Just as the term low-cost can be misleading, so too can the term affordable.
In the eagerness to translate private dream into reality through very public means, not many have asked, is there a better option to homeownership?
Popular opinion immediately accepts homeownership as the only respectable option.
The debates on homeownership ignore other housing options altogether.
For one, renting can be a superior option to ownership. That can be so when rental cost can be much cheaper than mortgage payment, when mortgage payment eats too much of current income and when the financial market is sophisticated enough to handle the substantial saving arising from the difference between the mortgage and the rental rate. The saving can present a whole lot of possibilities that homeownership cannot. There is virtue in flexibility and whatever virtue homeownership has, flexibility is not one of them.
Perhaps more substantially, one has to realize the importance of having decent home. If a decent home means homeownership, so be it. The relationship can be true but it is not necessarily true. Neither does homeownership absolutely mean decent home.
Pro-homeownership sentiment ignores this complexity and instead falsely assumes homeownership stands above having a decent home or that homeownership is about having a decent home.
Despite an alternative that focuses on having a decent home instead of homeownership, many individuals and the government continue to believe in the virtue of homeownership without question. The former complains about the affordability of homeownership and the latter, indulging the former, refuses to believe and to adapt to a new reality.
Ownership must have made sense in the past but just as time changes, so too can the justification for homeownership. It could very well be that individual and societal preferences, formed after years when the financial logic actually made sense, lag behind the market. When expectation lags behind market and with the government supporting the indulgence, something bad is bound to happen.
As sovereign insolvency hogs headlines around the world, so heightens the popularity of deficit-reduction agenda. No more only wonks make the noise. Some men in the streets are echoing the slogan of economic conservatism as well, filling the lonely space sitting not quite centered in the Malaysian political spectrum.
One ratio has been brandied around whenever there is a discussion on fiscal deficit: deficit-to-GDP.
In the first reading of the federal budget as well as in the Economic Report published on the same day, the government highlighted the ratio to show that the government is pushing the deficit down earnestly. I myself used the ratio to suggest that the government could have a lower deficit if it was not for the slew of dishonest populism the government is engaging in.
The ratio can be misleading if you are unfamiliar with it. It is a simple ratio, yes, but it is deceivingly so because of its denominator.
Assuming the projection of lower ratio for next year will be achieved, the absolute deficit will not actually fall as dramatically as the ratio suggests. In 2010, 2011 and 2012, the actual and the projected absolute deficit are RM43.3 billion, RM45.5 billion and RM43.0 billion respectively. In terms of deficit/GDP, -5.6%, -5.4% and -4.7%. You can immediately see the relationship between absolute deficit and the ratio is not one of straight line. From 2010 to 2011, the absolute deficit is expected to increase but the ratio is expected to fall. From 2011 to 2012, the absolute deficit is projected to fall modestly. Modest is not an adjective to use to describe the ratio in the same period however.
What reduces the ratio is not so much the reduction in absolute deficit but the increase in GDP. When the increase in GDP overwhelms the increase in deficit, then the ratio will go down.
For this reason, I prefer a more down-to-earth ratio as typically used in business. I prefer the deficit-to-revenue ratio to deficit/GDP. (In fact, if small government is a concern, the absolute deficit figure is a better measure although here, one has to be careful of the context. Absolute figures are important but there are limits.)
In business parlance, it is the net loss margin, if I am not mistaken. This ratio provides a clearer picture of any deficit-reduction effort and the state of government finance than the deficit/GDP ratio, which is meant to be more macro in nature by too much.
One may protest in defense of deficit/GDP, stating that higher GDP translates into greater revenue to the government. That protest will not go far because the positive correlation between GDP and revenue is imperfect. In the case of public finance, GDP is only a proxy to revenue. Why use the proxy when we can use the actual thing the proxy tries to track?
Deficit/GDP has its uses and those uses are mightily useful. I am not going to elaborate that. But if you want to actually reduce debt, then deficit/revenue is the proper metric to use. Deficit/revenue delivers the message of deficit-reduction and its progress—or lack of it—more effectively than the other ratio.
I find it hard to take the masses seriously sometimes. Here is a story why that is so.
I attended a Pakatan Rakyat-organized forum a few weeks ago. The organizers were promoting the coalition’s proposed federal budget. There is nothing wrong with that.
My problem is with the audience.
Since the proposal is a plan for public finance at the national level, the numbers do run to the billions. The nominal size of the economy itself is more than a trillion ringgit and the federal government intends to spend more than 200 billion ringgit in 2012. Various ticket items come with large numbers indeed.
These large numbers awed the audience. I found this a bit shocking. Yet another billion mentioned, there came another chatter. These murmurs mostly came in the fashion of “that’s big.” They were too easily impressed with a lot of things. The way they experienced the awe made me doubted that they understood what impressed them.
For instance, they were surprised that the federal government owes billions but they did not know that that is normal all around the world, and what matters is the ability to service the debt. Even so, the absolute billions impressed them. If the Malaysian government had a debt of only one billion ringgit, they would awe still, never mind that a billion to 200 billion is like 0.005 sen to a ringgit. They could not grasp the triviality of the large numbers.
To them, large numbers are, well, large. It is so large that, it has to be awfully serious.
Granted, the most of the audience did not seem like the professional type. They were not the overly-critical wonkish type. They were those whom loved their politics instead.
They are probably the majority within the realm of electoral politics. And democracy demands they are taken seriously. That is dispiriting.
But at least I learned something new. If you want to pull a fast one, just mention something very, very big.
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[2443] Guess who?
Nope ladies and gentlemen. It is not Germany. Despite voter backlash and political discontent, Germany went ahead. What is EUR211 billion among friends?
Nay. It is not the Netherlands. The Dutch were vocal but voted for it anyway. What is another EUR44 billion?
No, it is not Finland. For all the demand for collateral, Finnish lawmakers said “yes, let us do it.” Who cares for another EUR14 billion?
Sixteen countries passed the amendment to the European Financial Stability Facility, seeking to expand the facility from EUR440 billion to EUR780 billion.
It has to be Slovakia. Slovakia has to say no. Slovakia has to say, we have arrived.
That notwithstanding, the market is relatively pretty cool about. There was no panic. I half expected a storm. The market is probably expecting Slovakia to pass the EFSF amendment regardless.
Not that it will be enough, if Italy goes under anyway…