Bank Negara Malaysia new ruling to curb interest capitalisation and developer interest bearing housing loan schemes

Fee ling the heat: Although the guidelines on the prohibition of the DIBS is not surprising, the new rule on using the net selling price to determine the loan- to-value ratio is a negative surprise to some analysts.

PETALING JAYA: A new circular from the central bank that took effect last Friday will pile more pressure on an already hard-hit property sector, even if its merits are likely to be felt in the long-term, analysts and industry executives said.

In a bid to make the property market sustainable, the new rules have put the brakes on interest capitalisation schemes (ICS) and the developer interest-bearing scheme (DIBS).

It also calls for the use of the net selling price of a property as the benchmark for obtaining bank loans, which raises the amount to be paid upfront.

Alliance Research’s banking analyst Cheah King Yoong said the measures were “more onerous” than anticipated and posed downside risks to his 9% loan growth estimate for the banking sector next year.

“Although the guidelines on the prohibition of the DIBS was not a surprise, the new rule on using the net selling price to determine the loan-to-value (LTV) ratio is a negative surprise to us.

“While it is difficult to gauge the impact on banks, the fact that this new rule applies to all property financing, including first-time home buyers, means that property buyers’ affordability will be affected, and this will lead to lower property loan growth,” Cheah said in a report yesterday.

“We believe the latest policies illustrate the sheer determination of the authorities to contain the growth of household debt.

“These measures, together with potential rate hikes in 2014, fiscal tightening by the federal government and subsidy rationalisation next year, could further drag on loan growth in the retail segment, temporarily leading to a rise in credit costs, and dampen investor sentiment on the banking sector,” he added.

The circular prohibits financial institutions from granting end-financing facilities to individuals or non-individuals for the purchase of property offered under an ICS, including the DIBS.

Financial institutions are also barred from granting a bridging facility to finance a property development that offers ICS.

According to Alliance Research’s Cheah, this effectively removes any alternative incentives that developers might concoct to replace the DIBS.

“Nonetheless, our channel checks show that for the banking groups under our coverage, property loans with the DIBS only made up 1% to 3% of their outstanding mortgages,” he said.

Affin Bank is the exception, with some 7% of its mortgage loanbook comprising loans tied to the DIBS.

“Given that property loans with the DIBS are immaterial to overall outstanding mortgage loans as well as new mortgage loans approved, we do not expect the restrictions to have a significant impact on the banking sector,” Cheah said.

Public Bank has the highest exposure to housing loans at 56% of its gross loans, followed by Alliance Bank with 55% and Hong Leong Bank, 46%, company data showed.

Another key item on the circular requires banks to calculate the LTV ratio based on the net price of a property instead of its gross price.

To illustrate, a property with a list price of RM1mil, rebate of 5% and 90% financing would incur a down payment of RM50,000 after discount.

Under the new regime, the down payment increases to RM95,000 because the 90% loan will be computed using the discounted price tag of RM950,000.

While property executives expect a slowdown in sales, they believe that genuine buyers will remain undeterred.

Mah Sing Group Bhd group managing director and CEO Tan Sri Leong Hoy Kum told StarBiz via email that demand for properties would continue to be robust, especially among those buying to own or for long-term rental income.

“There is still a large supply-demand gap as supply growth for properties has been on a decreasing trend since 2003, with Malaysia’s supply growth in the second quarter of this year at only 0.8%.

“The fundamentals driving the property market’s growth in recent years have not changed, for example a younger population leading to new household formation, a rising middle-income group, the supply-demand gap and stable employment.

“Initiatives in Budget 2014 may remove the speculative element, but not the fundamentals,” he said.

Leong noted that the lending environment was still conducive, with low interest rates and banks offering BLR minus 2.4%, from BLR minus 2.1%-2.2% a year ago.

Mah Sing had stopped offering the DIBS for most of its launches since the start of the year. None of its projects in Iskandar Malaysia feature the DIBS.

-  Contributed by John Loh The Star./Asia News Network

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Increase transparency in property prices

Companies factor in freebies into the cost of the property

 

The marketing tactic of offering lifestyle-oriented freebies is often quite effective when it comes to high-end premium homes

DEVELOPERS often offer sales gimmicks and marketing ploys like free legal fees, rebates, air-conditioners and furniture. Budget 2014, however, seems to make it a requirement that developers be transparent about their property prices.

The adage “There’s no such thing as a free lunch” rings true in this instance. While developers are quick to advertise various blandishments such as “free legal fees/stamp duty, etc”, such freebies are always factored into the property price. These freebies should be translated into cash incentives to be deducted from the purchase price of the property, as otherwise, it becomes meaningless to offer these gimmicks, which are usually recovered in the form of substandard materials. Here, we again thank our Prime Minister for announcing that developers, when offering their products, should disclose the value of the freebies to the buyers. Such transparency is a move in the right direction so that buyers would know what they are letting themselves in for. The enforcers of the law should be able to count on the Urban Wellbeing,

Housing and Local Government ministry to do its job to ensure that there is strict compliance and observance.

Whilst such a requirement will not deter speculation, it will hopefully educate house buyers on what makes up their final property price and not to be misled by developers advertising such freebies.

Additional measures

The National House Buyers Association (HBA) reiterates its call on the Government to take additional measures to stem the steep rise in property prices. There are basically two ways to reduce speculation: increasing the entry cost and increasing the exit cost.

Whilst Budget 2014 has increased the exit cost in the form of the higher real property gains tax or RPGT, more measures are needed to increase the entry cost to further reduce speculation.

The current stamp duty payable for the transfer of properties is based on the value of the property. This does not deter speculators, as the stamp duty payable is the same, regardless of the number of properties already held or bought.

The Government’s current low stamp duty regime has been misused by property speculators to accumulate multiple properties, driving up these prices by creating false demand and denying genuine buyers the opportunity to buy such properties.

It is every Malaysian’s wish to buy at least one property in their lifetime for their own dwelling, and perhaps an additional piece of property as a long-term investment or to fund their children’s education.

Hence,HBA has proposed that the current scale stamp duty remains the same for the first two properties bought, but is increased to a flat rate based on the property price for the third and subsequent properties to discourage speculative buying.

(See table for a comparison between the current stamp duty and the stamp duty proposed by HBA.)

With the same scaled stamp duty payable regardless of the previous number of properties held, speculators are not deterred from buying multiple properties.

Even for properties costing RM600,000, the stamp duty payable is only 2% of the value of the property.

The HBA-proposed stamp duty would not cause any disruption to genuine house buyers who can only afford two properties in their lifetime (one for their dwelling and one for long-term investment).

On the other hand, property speculators would be discouraged as the stamp duty greatly increases their entry cost.

RPGT will not lead to higher property prices 

Certain parties with vested interest are claiming that the revised RPGT rate would lead to higher property prices, as speculators would definitely factor in the RPGT into their property prices, only for the subsequent buyer to end up paying the RPGT indirectly.

Such statements only confirm that speculators are indeed responsible for driving up property prices.

If indeed the speculators factor in the additional 20% to 30% RPGT into their property prices, then it would make the property prices unattractive to the next buyer.

Financial Institutions may be unwilling to finance such exorbitantly overpriced properties, as such institutions have their own market intelligence to determine the fair value of such properties.

RPGT will lead to an orderly property sector
 
The aspiration of every rakyat is to own a roof over their heads and shelter their young rather than making money from properties. Hence, having the RPGT in place would deter speculators, and eventually lead to a more orderly property sector driven by market demand and not speculative forces.

Therefore, HBA supports the Government’s RPGT proposal and urges the public to support such a move to curb the current excessive speculation in the property sector.

HBA strongly believes that the cost of a roof over one’s head should not be left to market forces. The repercussions whereby a large section of society is deprived of affordable housing is serious and far-reaching. The present property price increase does not commensurate with the present rise in wages. The affordability of house ownership is becoming an elusive dream to the present generation. Controlling the upward spiral of property costs is not in the interest of housing developers. In fact, they certainly favour it. Therefore, it would be totally unrealistic to expect any developer to be interested in bringing down property prices.

Contributed by Buyers Beware Chang Kim Loong

CHANG KIM LOONG is the honorary secretary-general of the National House Buyers Association (www.hba.org.my), a non-profit, non-governmental organisation (NGO) manned by volunteers. He is also an NGO councillor at the Subang Jaya Municipal Council.

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