Why Are Houses So Expensive to Buy? (P.O.V based on Personal Experience Working with a Developer)

You may be in your twenties, fresh out of college, just got yourself a job, and looking at the prospect of buying a house. You may also be in your thirties, with two toddlers in tow, trying to break free from renting a house and eager to move on to own your own asset.

You look through multiple property sites, and cannot find anything that suits both your wants and needs. Perhaps you already have the price range in mind, and you have already imagined your kids going to a certain neighbourhood school - but property size is too small for the money you can afford, or the mortgage is triple the amount of your monthly rental. Or you may have found the house of your dreams, but it is located somewhere so remote, that you need to commute hours on end to get to work.

Of course, you need someone to blame.

Developers! Developers ni cekik darah, tau nak untung je,

Well, it's true. Developers want profit. They are business people.

Alah, sebenarnya boleh je buat rumah guna RM100,000. Developer ni kaut untung banyak sangat.

Mungkin boleh. But, RM100k maybe only covers the construction part. There are many other costs that add up to the actual price of a house.

Sure, some developers do garner a lot of profit. However, most developers are happy to get 20% profit, which is reasonable within the industry standards.

20%? That's a lot!

Is it really, though?

You have to imagine it this way - to get 20% profit, a developer has to sell 100% of the houses built. You have to remember, again, that developers are doing a business, and as per every business, you need profit to thrive.

What happens when a developer only manages to sell 60%? On top of having no profit to get by, the developer also has to bear the cost of maintenance of unsold units. Money again!

So, how much does a developer usually spend?

These are some of the expenses that I can think of without reference to anything. It could be more or less, but generally most of these costs are a lot and invisible to buyer's eyes. A significant portion are used aside from construction costs.

Gross Development Value is usually calculated as total revenue that a developer will get once every property is sold. Gross Construction Cost is the cost for construction alone, not including other costs such as land costs or marketing costs. Rule of thumb for feasibility is that the Gross Construction Cost is usually 50% of the selling price. Say, a development requires RM 250 psf of construction cost to build, the selling price of RM500 psf is considered safe.

Do not mistake this 50% as profit, as there are many other costs to consider.

At pre-development stage, the land cost and development cost is already high. If the development is proposed on a land with conflicting land use / zoning, to change the land use and zoning will require the developers to pay a certain premium to the Land Office and Development Charges to the local authority.

Sometimes, local authorities impose certain requirement in the Development Order such as - to implement 70% IBS (Industrialised Building Systems), or to input certain environmental feature- this will require additional cost, and may not have been included in the budget earlier.

Another example of invisible cost that buyers do not see is the Bumiputera release. Certain local authorities impose developers to have 30% of the units sold to Bumiputera only, with 5% discount. In some instances, this cannot be done - maybe the Bumiputera buyers are not interested in the location etc. To be able to sell to other buyers who are non-Bumiputera, developers will have to pay 5% incentive to the local authority.

Perhaps in the future I will provide you with the details to each and every element above, but I hope this shows how expensive it is to build a house- and therefore making it expensive for buyers to buy. There are many things that add up to the cost, which in turn - will cause buyers to pay more for a piece of property.

As developers who are business people - of course the main aim is for units to be sold - fast! If units are unsold, aside from losing profit, developers have to bear the costs of maintaining these unsold units. Unoccupied houses usually get worn down easier than those occupied, for some reason - hence maintaining the units can be quite tough on the bank accounts, too.

Perhaps, the issue of 'ridiculous house prices' shouldn't entirely be blamed on developers per se, but there are larger issues at play. Maybe our income level doesn't grow as fast as it should for decades- hence making it hard for people to buy houses. Affordability is a great topic that I will blog about in another entry.

But, I do agree - seeing the house prices these days makes it hard to breathe. Everybody is really working hard to survive these days.

Sigh.

Till next time.

Tl;dr : Why Are Houses So Expensive to Buy?

The answer is - from developer's p.o.v : there are many costs that cause the house prices to be high.

Disclaimer : This is my own personal view, doesn't represent the views of the organizations I belong to.