Bank Negara looking at long-term solutions

BUYING a house can be an emotive affair. Selling a house can be equally so. Whether the emotions are on the part of the buyer or the seller, Bank Negara has found itself in a tussle between protecting the house buyer and the developer’s balance sheet.

It is very clear about its role and it will protect the people because it is of the view that when banks protect their customers, they naturally protect the banking system.

At the heart of the issue is affordability.

It is an undisputable fact that prices are today beyond the reach of a vast majority of even the middle-income group, what more those below.

The result is unsold completed units, and because sales are slow, it makes no sense for developers to build more of the same.

But the peculiarity about the sector is that, every year, developers have to sell in order to generate revenue.

Because sales were slow in 2014 and slower in 2015, Bank Negara was – and still is – inundated with calls by developers via different channels to re-introduce developers interest bearing schemes (DIBS) and to loosen lending restrictions. Bank Negara is doing neither, according to sources.

“When developers call for loosening restrictions, what sort of restrictions are they referring to?” a Bank Negara source asks.

“Do they want the potential borrower to eat less, not have any savings, reduce transport cost?”

If that be the case, then developers are merely targeting at “improving their own balance sheet but transferring their burden to the households.”

The source says Bank Negara “cannot pass the problems of developers to the households”. Household debt currently at 89% to gross development product is among the highest in South-East Asia.

Affordability is a complex issue and ease of lending is not the panacea, the source says.

Affordability computation

The central bank did an income/affordability computation with four income group categories, the average RM6,000 income earner, the bottom 40%, middle 40%, and the top 20%. (See table)

According to the analysis, those earning RM6,000 can only afford a RM360,000 house, the bottom 40% with a net income of RM2,200, a RM50,000 house.

Those in the middle 40% with net salary of about RM4,800, a RM265,000 house, and the top 20% net income earners of RM10,600, a RM850,000 property.

Even then, this computation is a very “simplified and imprudent one” because it does not take into account inflation, cost of living, other liabilities like student, car and personal loans, and only 10% or no savings at all.

“There is a difference between a house purchase and house ownership. A borrower may be able to buy a house, but this need not result in house ownership.

“There is no point doing a cursory credit assessment and a borrower services the loan for three to four years only to have it auctioned off later. Our objective is to make sure only those who can afford a loan can get a loan,” the source says.

The source says that while the bank is protected because it can auction the property, the borrower is left with a debt he can ill afford.

In this respect, the source says Bank Negara is aware of auction syndicates and their tactics. The property price drops 10% each time it fails to be sold at an auction. As the value drops, the burden falls on the borrower to make up the difference between the outstanding loan amount/interest and final auction price. The ultimate loser is the buyer/borrower.

If borrowers take a loan early, they should be able to pay it off before they retire.

“We do not want them to be in debt when they are retiring. We want a purchase to result in ownership.”

Beyond collateral

High house prices ultimately lead to high debts. The source says Bank Negara has advised banks and lending institutions to look beyond the collateral.

The onus is on them to ensure that the borrower does not default, that they have quality borrowers on their books.

“If banks were to protect house buyers/borrowers and not only themselves, they naturally protect the banking system. If banks consider only the collateral, they are actually only protecting themselves. In the event of a foreclosure, the ultimate loser is the borrower, not the bank, not the developer,” the source says.

Developers thinking up creative marketing schemes and gimmicks is one issue. Banks’ marketing staff pushing loans in order to meet their loan targets is another.

Whatever it is, if borrowers’ repayment profiles seem dicey, pushing them to buy a house impacts their future consumption. This ultimately hurts the overall economy, the source says.

Although non-performing loans (NPLs) are low at 1.6%, there may be a rise going forward. Those who bought a long time ago will not be affected by escalating prices. Those who bought on developers interest bearing schemes (DIBS) are being monitored.

The source says DIBS increase prices by between 20% and 30%. Instalments are higher. At the end of the day, DIBS is a gimmick, the source says.

As for developers calling for DIBS to be re-introduced for first time buyers, the source says this will not be prudent. The developer wants a sale, but the burden is laid on the house buyer. DIBs was banned in January 2014.

According to Bank Negara’s Financial Stability and Payment Systems Report 2015, annual growth of borrowers with at least three outstanding housing loans – a proxy for speculative buyers – was maintained at a low and stable rate of 3.1%, down from the much higher rate of increase last observed in 2010 of 15.8%.

On whether there is a price bubble, the source says no, adding that Malaysian banks have enough buffer to absorb a price drop of up to 40%.

The source also says the notion of easy credit without responsible guidelines just to help the property sector is misguided. This will only be setting up the banking system for a sub-prime situation. It was this which gave rise to the sub-prime crisis in the US.

Price adjustments

Ultimately, the thrust of today’s woes is price adjustment and Bank Negara’s view is that financing is not the only tool. A holistic approach is needed with other stake holders/authorities on board.

“If left to market forces, it is a tricky thing. The situation is acute in the Klang Valley, Penang and Johor,” the source says.

Stamp duty, speed of delivery and quantity/quality of affordable housing, the use of industrial building systems (IBS), a modern technique of building, are other tools.

Bank Negara is working with agencies and state authorities but there is a need for political will on the part of the government.

It has also brought up the setting up of a central agency similar to Singapore’s Housing Development Board, which is a systematic way to provide affordable housing. Malaysia currently has multiple agencies and different states have different measures.

Bank Negara is also working with Penang and Johor authorities in their delivery criteria. Authorities were allocating affordable houses to those earning RM1,000 and RM2,000 when they obviously cannot afford these purchases.

This cooperation will be extended to other state agencies/authorities, the source says.

There is also a dire need for more up-to-date information. The National Property Information Centre released last year’s figures while Singapore’s Urban Redevelopment Authority is speedier with its information.

Bank Negara is also studying the ownership versus rental aspect. It has noted that the more advanced the country, the lower the ownership level. But it is too premature to draw any conclusion, the source says.

“The jury is still out (on this),” the source says.

France has a 65% home ownership, Germany 52%, and Hong Kong 51%. People are more mobile today and may work in another country in two to three years. We are advising the government to consider a rental policy, the source says.

Germany was not caught in a sub-prime situation because it is essentially a rental market, the source says.

Commercial sector

As for the oversupply in office and mall space and whether low occupancy will contribute to instability in the financial/banking sector, the source says developers usually use private debt securities/bonds to raise capital for projects.

“Banks’ exposure is very small. Insurance companies’ exposure is also small as they have low risk appetite,” says the source.

On the role played by local authorities to curb supply, the source says they could stop giving approvals.

On the 50% discount for development charges given by City Hall last September if developers were to begin construction six months from getting their development order, the source says this could be for previous applications.

The discount was an incentive to speed up construction because development had slowed. As the situation stands today, it “makes no sense” for developers to launch new projects when there is an over supply, and no sense on the part of the local authorities to give incentives.

Source: TheStar.com.my

Every now and then some quarters will accept developers’ mantra to re-introduce the Developers Interest Bearing Scheme (DIBS). It should be noted that Bank Negara had prohibited and outlawed “any form of interest capitalisation scheme”. The economic downturn is seen as a fresh opportunity for DIBS to be reconsidered. This time around, it’s only for “first time house buyers”.

Creating property bubble

DIBS or any other permutation similarly “schemed” cannot be allowed to continue for the betterment of the housing industry because it risks creating a property bubble as prices have been artificially increased and they will create a snowball effect.

The prohibition of DIBS, announced in Budget 2014, had been effective in curbing the unbridled escalation of house prices.

Whatever the economic situation the basic facts of DIBS are the same and made worse by the economic situation – it involves developer advancing the expenses of construction and other expenses which are to be collected later as debt from the purchaser with interest element factored in and therefore making the property more expensive.

The purchaser actually lends money to the developer because at the time the deposit was paid, the developer would not have incurred any cost of construction as no work would have started at the time of the payment.

The scheme claimed to help first-time buyers as they do not have to pay for anything initially and the developer will absorb all expenses, interests and down payments.

If it was only a matter of building and selling houses it may be a valid argument. But is that so?

I shall list out the key reasons why the National House Buyers Association (HBA) is against the re-introduction of the DIBS, even if it is only for first-time house buyers.

It encourages speculation

Any economist worth his salt will say that price is a function of demand and supply.

In a situation where demand exceeds supply, prices will increase. Buying a house is a life-long commitment and requires careful planning and hard work from an early age.

Hence, by reducing the amount of cash outlay that a purchaser needs to make, DIBS will encourage excessive speculation and impulsive purchase. Many first time house buyers may think that they have a chance to make a quick buck by flipping the property on completion without having to pay during the construction stage. As a result, there is a perception of an increase in demand and house prices will be pushed up across the board, making it more difficult for people to purchase their dream home.

Progressive interest is not high

One of the Real Estate and Housing Developers Association’s (Rehda) contention that the DIBS is needed because many of the first-time house buyers are from outstation and therefore cannot afford to pay progressive interest and rent at the same time. This argument does not hold water as the average progressive interest payable is not back- breaking as alleged.

Progressive interest is only payable upon disbursement of the housing loan which is dependent on the stage of completion. We have computed the average interest payable for a mid-level high-rise apartment costing RM500,000 that a typical consumer buys when the developer launches the project.

For the first nine months (in some cases up to 12 months), there is no progressive interest payable as the project has yet to be completed (see table).

The typical progressive interest for the first 1½ years to two years is not very high as the stage of completion is not advanced.

The progressive interest only starts to get higher in the third year as the property is about to be completed.

By this time, if the house buyer has problems servicing both his current rental and the progressive interest, it means that:

(a) the house buyer will probably have difficulty to service his monthly instalment in full, or

(b) his current rental is excessive in comparison with the house buyer’s income.

It is also worth to consider that the borrower’s income could have increased in the third year when the progressive interest really starts to kick in as it has been three-years since the borrower’s loan was approved, thus offsetting any difficulty that the borrower may experience to service both his progressive interest and current rental, if any.

No free lunch

The typical progressive interest payable during the construction ranges between 3.5% and 4.5% of the property price, depending on which unit the house buyer buys and the pace of construction.

In our example above, the progressive interest is 3.77% of the property price.

However, based on HBA research data, the difference in property launched with DIBS and without DIBS was as high as 20% to 25%. This means that a property that only cost RM500,000 without DIBS where the purchaser pays RM18,843.75 in progressive interest would be launched by developer with DIBS at between RM600,000 and RM625,000. This represents a premium of more than RM100,000 over and above the progressive interest payable.

This artificial increase in selling price will in turn push up prices of existing completed properties and also inflate the prices of new properties, with or without the DIBS.

This will make it more difficult for future house buyers to secure their dream home.

DIBS period corresponds with steep increase in property prices

It must be stressed that DIBS was first offered in 2009 until it was banned by end-2013. This corresponded with the period of steep rise in property prices.

The report by Khazanah Research Institute showed that the Malaysian all-house price index grew steadily at a compounded annual growth rate (CAGR) of 3.1% from 2000 to 2009 and suddenly accelerated at a CAGR of 10.1% between 2009 and 2014.

It is no coincidence that the implementation of the DIBS had resulted in house prices spike as the scheme had created a false demand which in turn pushed up property prices making houses “seriously unaffordable” to the average person.

Pay nothing to own a house?

The argument that purchasers don’t have to pay for anything during construction is specious: attractive to the unwary and the desperate. The expenses, in any form, incurred by the developer will eventually have to be paid back, one way or another, by the purchaser with “premium”. The increased amount ranging from 10% to 20% and some even 25%, will have to be paid by purchasers in exorbitant instalments which they are likely to default.

Paying double interest

Consider if the sale price is RM500,000 without the DIBS and 90% financing is RM450,000. Factor in DIBS sale price, say, RM550,000 and 90% financing is RM495,000. The difference in financing is RM45,000. Thus, this difference is the DIBS factor – or in other words, the interest being financed. This simply means that the purchaser has to pay interest on the interest financed.

Not every purchaser borrows the same amount. Is the DIBS price across the board? If one needs only 50% financing, does he pay the same purchase price as a 90% financing purchaser? If yes, then he is obviously overcharged.

Conclusion

One should not lose sight of the basic fact that a roof over one’s head is a compelling and indispensable need of all human beings. Viewed in that light, not just as another package, it will be clear that if one cannot afford to have a roof over his head, he may consider renting. Renting a house has minimal risk compared with buying one.

Perhaps a way out is to expediate the rehabilitation of abandoned houses, numbering more than 90,000 to help buyers of such schemes.

Chang Kim Loong AMN is secretary-general of the National House Buyers Association: www.hba.org.my, a non-profit and non-governmental organisation (NGO). He is also NGO councillor with MPSJ.

Besides the Bayan Lepas belt, the other two relatively high density development corridors in Penang Island are the western Ayer Itam and northern Tg Tokong corridors. Adopting a similar approach by matching system capacity with projected travel demand, the monorail system has been identified as the most appropriate mode for both the Ayer Itam and Tg Tokong corridors.

Among the considerations made in arriving at the proposed monorail system (as opposed to other rail or BRT forms), include its better performance with respect to a narrower right-of-way (ROW) requirement, better noise performance and lower capital requirement. However, the final transit system for the Ayer Itam corridor would still be subject to future review prior to implementation by re-evaluating the travel demand, development intensity, transit system capacity, target modal share, socio-economic and socio-political reception of the proposed system, be it elevated or at-grade (on-ground) at the time of execution.

For the 12.8km Ayer Itam Monorail, the alignment will begin from KOMTAR and terminate at Paya Terubong with 13 stations. The transit line will improve transit reach to predominantly low- and medium-income residents in high-density neighborhoods in Ayer Itam and Paya Terubong areas.

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Deputy Finance Minister Datuk Chua Tee Yong expects the Malaysian housing property market to further soften this year. He sees developers focusing on the more affordably-priced homes. He is correct on both counts.

Speaking to reporters after launching the National Property Information Centre’s (Napic) 2015 Property Market Report on April 19, the deputy minister said the unsold housing stock – and by extension the country’s property overhang – could be reduced with fewer high-end homes launches.

Property overhang units must not be confused with unsold stock. The government has defined overhang units as properties that are completed and issued with Certificates of Fitness for Occupation (CFO) or Temporary Certificates of Fitness for Occupation (TCFO), but remain unsold despite having been put on the market for at least nine months.

As at end-2015, Malaysia’s housing overhang units totalled 11,316 and these were worth RM5.9 billion, up by 16.3% in volume and 56% in value from those in 2014.

It would be simplistic to assume that the higher-end homes account for most of the country’s overhang units. Or that people are no longer interested in investing in more expensive homes.

Consider this – residential property priced at RM500,000 and more accounted for less than one third of the housing property overhang in 2015. On the flipside, houses that are priced at RM300,000 or less made up half of the overhang numbers. In fact, homes priced at RM100,000 and below accounted for about 15% of the overhang. (Refer to chart).

Of the total 3,577 overhang units priced at RM500,000 and above, Johor housed 930 units, Penang (705), Selangor (512) and Kuala Lumpur (422).

Why are the cheaper homes not selling? One would have expected these to be snapped up, right?

Poor take-ups for the low- and low-medium cost homes are nothing new. They have been subjects of debate and discussion in the property fraternity for years.

Issues hampering sales would include that of inconvenient location, lack of accessibility and unsuitable design of the product. The inability to secure end-financing is another main problem.

As for the overhang of higher-priced homes, developers have pointed to the Bumiputera quota.

Land is a state matter. The Bumiputera quota varies not just from state to state, but also between zones in a state. For instance, in Melaka, the city centre has a quota of 40% while outside the city, it is 60%.

In Selangor, the quota can go up to as high as 70% while in Johor, it is 40%. In KL, it is 30%.

Bumiputera units that are unsold can be released from the quota – meaning they can be sold to non-Bumiputeras – but the process varies from state to state, entailing differing durations and payments to the respective states.

Clearly, the implementation of a structured and transparent release mechanism for all Bumiputera units would help reduce the overhang of the upper-mid and high-end homes.

There must be a will to clear the overhang units – and the answer does not lie with just reducing supply.

Source: TheEdgeProperty.com.my

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