High life of the young, carefree and broke Malaysians hit a new low

Younger set not living within their means and are bankrupt before they are 30

 

"When they start their own lives, they are not financially stable. Some want to get married." - Datuk Abdul Rahman Putra Taha

They are young and carefree to the point of being careles, and have expensive tastes. Branded handbags, holidays to exotic places, fancy cars and lavish weddings all lead them into huge debts. By the age of 30, they are bankrupt. Some as young as 25 are among the shocking 60% of the 94,400 people declared bankrupt in the last four years.

PETALING JAYA: They lived the fast life, a life of Pradas and Guccis. When the cash is out, they max out on their credit cards.

Some even go as far as taking up personal loans to finance overseas trips, buying the latest expensive gadgets and holding lavish weddings.

And before they even turn 30, they are bankrupt.

Malaysia’s youth are seeing a worrying trend with those aged between 25 and 44 forming the biggest group classified as bankrupt.

They constituted almost 60% of the 94,408 cases reported from 2013 to August, according to the Insolvency Department.

Director-general Datuk Abdul Rahman Putra Taha said there were multiple factors that contributed to the trend, but singled out that many of them just wanted to “start their own life”.

“When they start their own lives, they are not financially stable. Some want to get married, but if the in-laws ask for hantaran gifts such as cars or a house, they need the money.

“Their pay can be considered low but they need expensive gifts. Where else can they go other than applying for personal loans?” he said in an interview recently.

Abdul Rahman also listed the top four reasons why a borrower was declared a bankrupt.

“Car loans took up 26.63%, personal loans (25.48%), housing loans (16.87%), and business loans (10.24%),” he said.

He revealed that the total number of people declared bankrupt from 2013 stood at 296,712 as of August, with Selangor having the most at 72,114, followed by the Federal Territories (46,377), Johor Baru (41,179) and Penang (22,136).

He urged the public to manage their finances prudently to ensure they would not be burdened by debt.

At the same time, Abdul Rahman said Bank Negara Malaysia (BNM) was making huge efforts to ensure it would not be so easy for the young to obtain credit cards.

In response, he said the department was committed to ensuring that the Government meets its target, especially with the Voluntary Arrangement under the Insolvency Act 1967.

Almost 58,000 bankrupts have been cleared or had their bankruptcy annulled by the courts in about the last five years, marking the first phase of the Government’s efforts to reduce bankruptcy cases following amendments to several bankruptcy laws.

From 2013 to August 2017, the courts have cleared 1,356 cases while another 11,627 cases have been terminated upon annulment of the bankruptcy order.

A total of 44,950 cases were discharged via Insolvency Certificate from the director-general.

However, the Government is pushing to slash the number of people being declared bankrupt to just about 4,000 to 5,000 cases per year.

“The enforcement of the newly amended bankruptcy law began this year. If they meet our criteria, qualified borrowers will be automatically discharged as bankrupts three years from the date of filing of the Statement of Affairs (Penyata Hal Ehwal),” said Abdul Rahman

Under the amended laws, someone at risk of being declared a bankrupt can settle his debt without bankruptcy proceedings with a voluntary agreement.

“Our intention is to ensure that borrowers will be able to pay back their loans without undue suffering and creditors will get their money back, too.”

He said debtors must adhere to the agreed sum of contribution paid to the creditors and they must also file their pay and expenses slip statement every six months throughout the three-year period.

“As long as they fulfil the payment within the period, we will release their names,” said Abdul Rahman.

Under the new amendments of the Bankruptcy Act 1967, the Government has introduced a rescue mechanism with a single bankruptcy order to replace the receiving order and adjudication order from the courts as practised previously.

“This move ensures that creditors are also protected under the amended laws,” he said.

The Act has also paved the way for the setting up of the Insolvency Assistance Fund and a release from bankruptcy without objection by the creditors for certain groups of people.

These include social guarantors made bankrupt under the Bankruptcy Act 1967, those who have died, those categorised as people with disabilities (OKU) by the Welfare Department and those certified by government medical officers as suffering from chronic or serious diseases.

The Star Malaysia by RAHIMY RAHIM rahimyr@thestar.com.my

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Cars are more expensive than houses? A house can buy how many cars?

IN about 3 weeks' time, we will be celebrating the New Year.

Each New Year comes with new resolutions and new goals. Some would plan to own big ticket items such as a house or a car as part of their resolution. If your plan is to own a new car, finish reading this article before nailing down that resolution.

Owning a car in Malaysia is expensive. In one of my previous articles, I highlighted that Malaysia was ranked second in the world where owning a car is expensive.

But what many do not know is by how much, relative to homes. Yes, homes in Malaysia are expensive too, but relative to Australian homes and cars, our cars are 10 times more expensive than those sold in Australia compared to homes. Let's do some simple math together.

Khazanah Research Institute (KRI) reported that the median house price in Malaysia is about RM250,000. This is the cost of two Honda Civics (priced at RM110,000 per car).

In Australia, the median house price is A$660,000, while a Honda Civic costs about A$30,000. This means, a median-priced Australian house of A$660,000 can buy 22 Honda Civics, versus a median-priced Malaysian house of RM250,000 which can only buy two cars of the same model. Yes, our homes may not be cheap but our cars are more expensive in comparison.

I further compared Malaysia against the United States and United Kingdom. A median-priced house in US and UK can buy 12 and 16 Honda Civics respectively, which is still more affordable compared to the two which can be bought with a median-priced Malaysian house.

The story does not end here. In addition to the cost of purchasing a car, there are many other financial commitments that comes along with owning a car. These include petrol, parking, toll charges, maintenance, and repair costs. Then, there is the cost of depreciation which ranges from 10 per cent to 20 per cent per year. It does not help that most of these supplementary expenses are frequently being increased. Our cars are indeed costing us a lot.

It is undeniable that a car is a necessity to those who have limited access to public transportation. Until our public transportation system is good enough, people will still need private vehicles to move from one place to another.

Unfortunately our cars are so expensive that the rakyat, especially the younger generation, are forced to put off buying a home until they can afford it. In the meantime, that "wait" causes house prices to appreciate, thus making it even more unaffordable for these people to own a home. This vicious cycle will continue until the government has a permanent solution to address both public transportation and affordable housing.

Perhaps, it is also timely to revisit the rationale behind our National Car Project which was introduced in 1982 to bring a higher level of industrialisation in Malaysia. Since its inception, the price of national and non-national cars have progressively increased through increase in car taxes and excise duties.

The price of non-national cars in Malaysia generally cost 50 per cent to 100 per cent more than the price of the similar make of car in other countries. On the other hand, one of my managers came back from his Aussie trip and shared that a Proton Preve in Australia is RM11,000 cheaper than one that is acquired in Malaysia.

Originally, the National Car Project was a form of protectionism for the national car industry. After more than 30 years since its inception, it has now become a burden to the rakyat, by eating more and more into our disposable income. The National Car Project has served its original purpose, and it is time that we review it.

So now, instead of jotting down my resolution, my wish list for 2016 is for the Government to rationalise and reduce the taxes imposed on cars. This will put more money back into the rakyat's pockets to start their home ownership journey much earlier. Concurrently, the Government can continue to channel and reinvest some of these funds to build a comprehensive and effective public transportation system in Malaysia which will greatly reduce the rakyat's dependency on private vehicles.

And for those who still wish to buy a car, think twice as owning a car is too expensive and unaffordable - it may also cost you your home.

By Datuk Alan Tong Food for Thought

Food for thought  By DATUK ALAN TONG

> FIABCI Asia Pacific chairman Datuk Alan Tong has over 50 years of experience in property development. He was FIABCI World president in 2005/06 and was named Property Man of The Year 2010. He is also the group chairman of Bukit Kiara Properties. (email atfeedback@bukitkiara.com) 


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Not all debts are bad

Rising household indebtedness could be a signal of robust consumption pattern that is the driver of domestic economic growth.

Construction workers at work in Kuala Lumpur. About 46 of household debt is for the purpose of financing purchase of residential properties.

Rising household indebtedness could be a signal of robust consumption pattern that is the driver of domestic economic growth.

FEDERAL government debt, external debt, household debt, non-financial corporate debt – these debts amount to billions of ringgit each and there should be proper context and understanding of the different classifications of debts to be fully informed of the economic issues at stake.

At face value, debt is money owed that has to be repaid in principal and interest. To look at debt from a more constructive point of view, debt is also future consumption brought forward. Furthermore, the benefit derived from consuming at the expense of expected future income should equal or even outweigh its associated costs of financing.

The point is, there are good debts and there are bad debts. Debts raking in billions or outstanding loans growing at an increasing rate could potentially be alarming. However, it would be misleading to label huge debts as unsustainable and destabilising before making sense of the origins and the purposes of the money borrowed.

Debts continue to pile up

A recent research on global debt and leverage by the McKinsey Global Institute in February highlighted that global debt continues to grow post-global financial crisis. These debts – the sum of money owed by governments, households, corporates and financial sectors in the 47 countries under the research – have grown to US$57 trillion since 2007 and a significant portion of the growth came from the public sector.

Overall, the research pointed out that only five developing economies showed signs of deleveraging while most of other countries saw increased debt to GDP ratio during the period.

With hindsight, global growth recovery post-global financial crisis has been rather slow and a handful of governments had pursued expansionary fiscal programmes funded through debts.

Unfortunately, as the global pace of growth is still relatively tentative, high level of government indebtedness would take longer time to deleverage.

Meanwhile, the increase in household and corporate sector debts could signal deeper financial system penetration and also recovery in household and corporate balance sheets for private sector expenditure to grow again.

As of end-2014, Malaysia’s federal government debt amounted to RM583bil (54.5% of GDP); external debt totalled RM744.7bil (69.6% of GDP); household debt increased to RM940.4bil (87.9 % of GDP).

In the past four years, the compounded annual growth rate for government debt was 9.4%; 14.4% for external debt and 12.2% for household debt.

While these numbers seem alarming, the major concern over debts arises when they are unsustainable.

While there are concerns over the sustainability of our fiscal deficit over the long term, the Government has embarked on a fiscal consolidation effort in recent years. Because of this, government debt should be under control in line with its commitment to achieve a balanced budget by 2020.

The Government operates on a few crucial self-imposed budgetary rules and it caps the maximum limit of government debt to GDP ratio at 55%.

On external debt, Bank Negara has adopted the new debt definition in early 2014, keeping in line with the International Monetary Fund’s (IMF) new guidelines of widening its definition to better reflect the depth in financial markets and the real economy.

In essence, external debt refers to the debts owed by residents to non-residents, be it denominated in ringgit or foreign currencies.

Therefore, the public and private sector’s offshore borrowings, Malaysian Government Securities held by foreigners are included in the classification of the external debt.

Since the last quarter of 2013, the external debt growth has been on a downward trend, easing to 6.9% in the last quarter of 2014, down from the peak of 15.7% growth recorded in the last quarter of 2013.

Besides, the bulk of the growth in external debt since 2013 was primarily from offshore borrowings as it made up almost half of the total external debt.

Bank Negara, in its recent annual report, guided that private sector offshore borrowings are sound and sustainable, given that 70% of the corporate sector’s offshore loans were sourced from associated companies, parent companies and shareholders.

High household debts a concern

However, Malaysian household sector indebtedness undoubtedly tops the chart in the region.

According to McKinsey’s study, Malaysia’s household debt to income ratio is highest at 146% in 2014, way above the level of the United States (99%) and Indonesia (32%).

When we break down the household debt, 45.7% of it is for the purpose of financing purchase of residential properties. Hire purchase financing (16.6% of total household debt) and personal financing (15.7%) made up the remaining major components.

Even though Malaysia’s household financial asset to total household debt ratio is relatively high at 214% in 2014, the associated risks of high household indebtedness cannot be taken lightly.

The IMF, in its financial sector assessment on Malaysia in April 2014, cautioned that in the event of a sharp fall in housing property prices coupled with a recession in the economy, the burst of the housing asset bubble would have dire consequences on the real economy.

The Government and Bank Negara have in recent years attempted to rein in the growth in housing loans and also put a check on the property market through various macro-prudential tools.

For instance, the last Overnight Policy Rate hike in July 2014 by 25 basis points was primarily to mitigate the financial imbalances within the economy.

In January 2015, the growth of household outstanding loans from the banking institutions has slowed to 9.7%, down from the peak of 13.9% in November 2010.

Although it is a sign of improvement in domestic financial stability, a continued assessment of household loans would be a prudent measure.

Responsible use of leverage

Bad indebtedness is often described as how an overleveraged economy collapses on its own pile of toxic debts when triggered by an overlooked external event – the subprime mortgage crisis in the United States is a classic example.

On the other hand, good debts are those that are used to finance productive and sustainable purposes.

A government manoeuvering an economy out of recession could issue bonds to fund its fiscal stimulus programme while a company could maximise its true potential through the proper use of leverage.

In fact, given a youthful population and a stable work force in Malaysia, rising household indebtedness could be a signal of robust consumption pattern that is the driver of domestic economic growth.

Therefore, regulators and policy makers should not, in their fear of “indebtedness”, stifle the credit lines and the channels to expand present consumption for future capacity of growth.

Unfortunately, with a lack of hindsight, it can be difficult at times to ascertain if a debt is good or bad, A-tier quality or just a default waiting to happen.

In the end, it is not only the viability in repaying the loans but also the realised output and gains from entering a debt contract that should be examined to determine the sustainability in taking up debts.

In short, indebtedness is not necessarily bad. A responsible debtor should have a clear and comprehensive business or personal financial planning and ultimately transparency in dealing with all parties. After all, a good debt is a good customer for the other end.

My point By Mandkaran Mottain

Manokaran Mottain is the chief economist at Alliance Bank Malaysia Bhd.

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Unfair housing loan agreement

MOST if not all house buyers will require financing to buy their dream homes. While there appears to be stiff competition among banks for ...

Unfair housing loan agreement

MOST if not all house buyers will require financing to buy their dream homes. While there appears to be stiff competition among banks for market share and interest rates may be kept low, house buyers are ultimately at the mercy of banks when it comes to the detailed terms and conditions of the housing loan. (Banks in this context refers to commercial banks, Islamic banks and other financial institutions).

Unfair legal fees

When a borrower takes a housing loan, the borrower is required to execute a loan and other related agreements. This entails the borrower having to pay legal fees, the amount of which varies, depending on the loan amount – the higher the loan amount, the higher the legal fees although the complicity and level of work does not necessarily commensurate directly with the loan amount.

Although it is the borrower paying the loan lawyers’ fees, the said loan lawyer is actually acting for and on behalf of the bank. As such, the loan lawyer is not in the best position to advise the borrower if there are clauses in the loan agreement which are not in the best interest of the borrower.

In addition, in the event of any dispute between the borrower and the bank, the borrower cannot ask the loan lawyer for advice as the loan lawyer is acting for the banks.

If this is the case, then is it “fair or equitable” for the borrower to pay such legal fees when it is clear that the lawyer is actually acting for the banks? Obviously not. Hence, the bank should absorb the legal fees as the lawyers are clearly there to act for the bank and protect its interest.

Exorbitant fees for simple letters

The banking sector in Malaysia is a very tightly regulated industry. Any fees that banks intend to charge must be approved by Bank Negara. It is disheartening to note that borrowers continue to be charged exorbitant fees which seem to have the explicit blessings and consent of Bank Negara. Instances of borrowers being charged unreasonable fees for copies of redemption statement, EPF statement letter etc are common.

Allocation of monthly repayment to principal and interest

This is a story about three friends who took a housing loan (HL) of RM500,000 ten years ago. They were offered the same HL interest rate of 4.2% (base lending rate of 6.60% less 2.40%) but took different loan tenures as follows:

Albert took a 20-year HL. Eric took a 25-year HL and Jamie took a 30-year HL.

After servicing their monthly loan instalments diligently for the past 10 years, they decided to fully settle their housing loan using a combination of their EPF monies and own savings. When they asked for a redemption statement to find out what was the principal sum outstanding, they received a shock of their lives.

Albert, Eric and Jamie were under the impression as they had served 50%, 40% and 33.3% of the loan tenure, their principal sum outstanding would be RM250,000, RM300,0000 and RM333,333 respectively.

So, when their respective redemption statement showed that Albert, Eric and Jamie still owed respectively RM301,654, RM359,415 and RM396,652, they got a big shock.

So, why did they still owe so much more than what they had thought? The answer lies in the allocation of the monthly instalment towards covering the principal sum and interest charged by the bank.

In an equitable world, the monthly instalments would be allocated on a “straight line basis” to cover the principle and interest charged. Thus, a borrower who served 10 out of a 20-year HL would only owe 50% of the original loan amount.

However, the reality is that the borrower still owes 60.3% of the original loan amount.

The typical borrower will always be “penalised” for settling his loan before the maturity date. Even in the penultimate year of the original loan tenure, the actual amount outstanding is still higher than the theoretical amount, which should be the amount outstanding had the allocation of monthly instalments been done on a straight line basis.  

Is it fair and equitable?

Most borrowers do not know or even understand how this allocation is calculated. Is such an allocation “fair and equitable” to the borrower? Under such circumstances, are borrowers supposed to accept that the bank’s own generated computer system has calculated the interest correctly and allocated the payments in the correct manner?

To the borrower, they have paid 10 out of a 20-year loan, he should only owe balance 50% and not 60.3%. Is this manner of allocation not just another unjust way for the bank to generate higher profits, after all the bank did receive the payments on time and in full every month. It is the dream of every borrower to be debt-free as soon as possible and it is not fair to the borrower to be penalised in such a manner when he wants to settle his loan early.

That said, borrowers have no choice but to accept the calculation of the bank as correct and final. If the borrower were to reject and not pay the required sum, the loan will not be considered as repaid in full. The borrower could even be blacklisted and even have his property auctioned off by the bank to recover the remaining sum outstanding if the borrower refuses to pay up.

It would be more transparent and equitable if the monthly payments made by the borrower are allocated in a “straight line basis” to interest and principal equally over thetenure of the housing loan. Short of that, borrowers are at the mercy of banks.

Some banks operate like a “cartel” and standardise their fees to be charged to customers. One wonder whether such unfair practices are condoned by the regulators like Bank Negara.

It is also interesting to note that banks are exempted by the Malaysia Competition Commission allowing banks to agree and collude on unfair fees, penalties and practices to be charged to borrowers.

Unnecessary expenses

Loan agreement “printing charges” – sold between RM150 and RM350. The banks’ solicitors need to purchase a standard loan agreement from the bank (via soft copy) and adds the borrowers’ details in order to complete the loan agreement. The banks charge the lawyer and the lawyer charges the borrowers.

Standard loan agreements are now downloaded from the bank’s website or from soft copy. The bank no longer need to print them and should not charge for such documents. Alas, this has been continuing till to date. Lopsided terms and conditions

Lopsided terms and “add-on” products are aplenty, if the borrower wants to identify with them. It would be good practice to remove or qualify the banks’ arbitrary powers.

Conclusion

The National House Buyers Association (HBA) had on Sept 4, 2014 made representation to the Finance Ministry (MOF), Bank Negara. Housing and Local Government Ministry in the presence of Association of Banks Malaysia and Islamic Banks of Malaysia in the form of slides presentation on some observations and unethical practices of some banks.

HBA is looking to work closely with MOF, Bank Negar and all related stakeholders to level the playing field for housing loan borrowers in the long-term interest of the banking industry. We had proposed to set up a working committee to resolve all unfair practices. MOF and Bank Negara have a legitimate interest in the final shape of the banking industry into operating a principled and towards a “customer friendly arena”.


Buyers Beware By 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 manned purely by volunteers.

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Car or house buying cooling off measures?

Cooling off measures for car purchases also?

Key points: 

(1). Higher percentage of bankruptcies from inability to repay cars HPs than housing loans.
(2). The second largest household debt component, about RM145bil, is paid for an asset that is contracting in value every year.

WHAT are the considerations when you purchase a car?

Are the model and its functions important? Does the status symbol carry more weight? Or affordability is the main concern? Don’t get me wrong, I am not conducting a survey to change my profession. I am just curious to find out the major considerations of purchasing a car.

The topic interests me as car ownership among Malaysians, especially the young adults keep increasing. Many times, their choice of car is somewhat extravagant compared to the income they may be generating at this early stage of their careers.

This issue caught my attention when a news report last month stated that 122,169 Malaysians were declared bankrupt between 2007 and 2013, according to the Department of Insolvency. About 26% of the bankruptcies were due to the inability to settle the hire-purchase payment for vehicles, which involved 33,570 people since 2007.

When I searched further for other causes of bankruptcies, the available information for the period from 2005 to May 2010 indicated that car loans was also the chief reason for bankruptcy during that period. It was followed by 11.8% due to personal loans, 10.9% of bankruptcies due to non-repayment of business loans, and only 7.5% was caused by housing loans. Looking at the statistics, it is significant that for many years, more than one-fourth of bankruptcies in our country had been caused by car loans. It reflects on the household stress in repaying car loans, and this high default rate should trigger some thoughts among the authorities and the people.

According to Bank Negara statistics, as at April 2013, housing loans account for 57.5% of total household debts, while car loans, personal loans and credit cards account for 26.5%, 10% and 6% respectively. It means that the second-largest household debt component, about RM145bil, is paid for an asset that is contracting in value every year.

I wonder how many households are struggling to repay their car loans today, and how many of them, especially the younger generation, have deferred their financial wealth planning because of car loans? With the high percentage mentioned above and the rising household debt, there arises the question of whether cooling-off measures should also be extended to the car industry which is causing severe household stress.

Cooling-off measures for the car industry that can be considered include shorter loan period, more stringent loan-to-income ratio, and to impose certain charges if a car owner purchases additional cars in less than a certain number of years. These measures may help to reduce the number of cars on the road and discourage household spending on private vehicles. In the process, we will also be reducing traffic jams.

As shared in my previous articles titled “Reality Check on Debt Mountain” and “Good Debt, Bad Debt”, a car depreciates 10% to 20% per year based on car insurance calculation and accounting practice. In contrast, housing loans have underlying assets that are likely to appreciate over the long term.

Depreciative asset

Do we want to defer our financial planning instead and trade our opportunity of owning an appreciative asset for a depreciative asset? Perhaps, the authorities should encourage the people to borrow only for very good reasons, and to purchase assets only after thorough research.

This reminds me of an episode that I am personally aware of. It goes back to the early 1900s, when a 16-year-old migrant from China came to Malaya (now Malaysia) to seek a living, with no money in his pocket. Due to his diligence, hardwork and frugality, he was able to marry a young pretty girl ten years later and start a family and they eventually had 13 children.

What was astonishing is that he was able to send 7 of his 8 sons overseas for their tertiary education, all due to his frugality, hardwork and integrity. When he passed away, he was even able to leave behind a legacy of a bus company with over 30 buses and 4 small pieces of land in a small town.

Would this episode stimulate our young people to contemplate about what is best for their future?

Although the cooling-off measures for the car sector may be a new idea to ponder, however, with the Government’s plan to upgrade our public transport facilities and services, it is an area for consideration to increase public transport usage and encourage healthy financial planning in the long run.

After all, if senior executives in major cities like London and Tokyo are comfortable using public transportation to commute in their daily lives, can we not also do likewise (if our public transportation are improved)?

Coming back to the questions I asked in the beginning of this article... while I understand people put emphasis on different features of a car depending on their requirements and stage of life, it is always good to include the affordability aspect in a car purchase decision, so as not to be dragged down by the car which is bought to carry us forward.

P/S: The 16-year-old migrant happened to be my late father. He passed away at the age of 63 in 1962.

Contributed by Datuk Alan Tong

FIABCI Asia-Pacific regional secretariat chairman Datuk Alan Tong has over 50 years of experience in property development. He is also the group chairman of Bukit Kiara Properties. For feedback, please email feedback@fiabci-asiapacific.com. The views expressed are entirely the writer's own.

Related posts: 

•  Our cars are costing us our homes!

•  Is having a car still a symbol of freedom?

•  Make the right money moves: investing in a property is still best..

• Malaysia needs to produce more houses to achieve 20/20 by 2020

• Property investments: good Infrastructure a way to huge profits and success

• Increase transparency in property prices

• New kid on the block: Singapore's 'shoebox king' Oxley spices up Kuala Lumpur a record RM3,300 per ssq ft

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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New tax rate on property to keep away flippers

 

Profiteering nipped: Flip-happy property ‘investors’ – or rather, speculators – are not laughing now with the new stringent government measures to rein in excessive speculation.

Property prices have been spiralling and Budget 2014 introduced tough measures to cool prices down.

AHYAT Ishak was in the midst of selling off a property when Budget 2014 was tabled which saw hikes in the Real Property Gains Tax (RPGT).

It was higher and tighter than he expected. “Because of this announcement, I would have to make several different decisions. I bought that house less than three years ago.

“Previously, I would have been taxed 10% as RPGT, but with the recent announcement, I would need to fork out 30% of my profits for the RPGT.

“So right now, I am thinking that I should not sell it,” says the 30-something Ahyat, who has been investing in properties for the past 10 years and also runs workshops for wannabe property investors.

“If you have been strategic about investment, you would have known that the RPGT can go up anytime and you would have taken that into account in your investment plan. The worst strategy is when you have only one strategy,” he stresses.

Change of strategy: Property investor Ahyat is having second thoughts about selling a property he bought less than three years ago because of the higher RPGT. >

So he is not worried about hanging on a bit longer to the property that he had originally wanted to sell, because one of the rules he goes by is to make sure what he buys is an “investment-great asset”.

For him, this means two things – that the property is “tenant-able” and that it has good potential for capital appreciation.

As a player, he also makes sure he has the holding power to hang on to a property and service the loan.

“But it’s seen as uncool and yucky to talk to young investors about tenant-ability and capital appreciation. ‘Buying for rent’ is so old school to them. I’ve had people calling me a ‘sissy investor’ .

“Everyone was talking about ‘I buy, I get the keys, I flip’. How can that be sustainable?

“When I advocate responsible and sustainable investment, it is like a joke,” he says.

But those flip-happy property “investors” – or rather, speculators – are not laughing now with the new stringent government measures to rein in excessive speculation.

Other than the higher RPGT, the government is also prohibiting the developers interest-bearing scheme (DIBS), making developers spell out details of the house price and all the so-called “freebies” included, as well as making it a regulation that foreigners are only allowed to purchase properties that cost RM1mil and above.

Viewing the budget announcement as “very positive”, marketing and strategic consultant for developers Dr Daniele Gambero thinks this is what the market has been looking for.

“It is necessary to curb completely the investment of investors or speculators who are using property as if it is a forex or stock exchange market (where there is massive buying and selling in a short period).

“Property is not an asset for the short term. It is for the medium or long term, otherwise it becomes unhealthy and the market blows up,” he warns.

Gambero, who has been in the business for 15 years in Malaysia, says the kind of packaging housing developers have been offering over the past five years has been “ridiculous”.

“They are offering renovation packages, ‘free’ trips to, say, China and some even had a lucky draw for a Mercedez Benz.

“It’s ridiculous because these are actually not free. It is factored into the pricing and this is what has been pushing house prices up by a good 20%,” he says, stressing that developers are not angels and are merely responding to what the market is asking for.

He also takes to task the buyers for their “short-sightedness” in following their “emotions” instead of using practical and logical consideration when they buy property.

“If the value of the house is RM400,000 and these ‘free, free, not-so-free’ things bring the house price up to RM500,000, do they calculate how much this extra RM100,000 will cost them at the end of the loan tenure?

“At the end of the 35-year period, they might end up having paid RM180,000 extra in loan for these ‘free-free, not-so-free’ things the developer has thrown in to sweeten the deal. Don’t look at how much you are paying today but how much it will cost you in 20 to 30 years’ time,” he advises.

Besides, Gambero’s personal feeling is that most of the renovation offers built into the house price in fact ends up going down the drain, because about 40% to 50% of buyers end up having to renovate again because they want something that suits their personal taste.

One other thing that people should really sit up and take notice of is that with developers having to come clean with all the pricing, how will this impact on the amount of loan they can get to buy a property.

Both Ahyat and Gambero talk about the repercussions from banks.

“How is the banking industry going to react to this?

“When it is stripped bare and developers have to be transparent with details of the pricing, such as club membership, aircon, renovation and so on, the banks are going to be looking at that RM600,000 house and saying ‘Hey, this property’s value is actually RM500,000’ and that extra RM100,000 is just ‘fluff and whip cream’.

“Valuers from banks would give ‘zero’ value to those elaborate plaster ceilings, aircon and chandeliers. In the world of valuers, it is a big sin adding on all these add-ons.

“You can’t give loans on something that is inflated. You give loans based on the fundamental value,” says Ahyat, warning that the repercussions could be massive.

Concurring, Gambero says, the purchaser is at a “double losing end”.

“Say you bought the property for RM600,000 and a few years down the line you want to sell it for RM800,000, and find someone willing to pay that price.

“But when that person goes to the bank to ask for financing, the bank will look at the sales and purchase agreement and get their valuer to do a valuation and the valuer will give a value for the bricks but ‘not the plus, plus free-not-so-free’ package added in by the developer.

“And that real value of the house might only be RM700,000, so the bank will slash the margin of financing. So you might not be able to sell the house at RM800,000,” he says.

But will these new measures bring down the price of property?

Adrian Un, the founder and CEO of a property education arm, says the Budget announcement brought in the first wave and caught new young investors, aged 25 to 35, who came into the market with minimum downpayment, by shock.

The second wave, he believes, will come in when the details of the actual guidelines are spelt out.

“What has been announced is very general and the tip of the iceberg. Investors want to know in detail ‘if I do this or that, do I get a waiver’,” he says.

He thinks seasoned players will wait for a while and that after the Chinese New Year, when the news sinks in, they will continue to buy.

Un notes that developers with new launches planned will have to launch “no matter what” and they will now strategise on how to innovate and find new ways to entice people to buy.

“When they do away with the DIBS (a scheme where the developer bears the interest during the construction period and buyer pays nothing because that interest had already been factored into the price of the house), people might now be asking if it is worthwhile to buy the property.

“Developers might find a way to reimburse the buyer on the interest in a different way. For example, they may ask the customer to pay it first and then give a rebate or reimbursement every quarterly,” he says.

Un says it’s hard for house prices to come down.

“The cost of raw material has gone up, developers are going to have to pay GST from April 2015 (on supplies and material), the cost of labour has gone up, inflation is going to creep up with the introduction of GST and land cost is not getting any cheaper.”

Coming back to Ahyat, he says he doesn’t disagree that the property market is overvalued and that DIBS, among other things, had helped fuel speculation.

And he wonders too if other fiscal policies might be in the offing, like a hike in interest rates.

“We are in a low-interest environment right now and cheap credit fuels speculation.

“If there is a rise in interest rate, some say it would signal the bursting of the bubble because more people would die standing as their holding power would reduce significantly. And people can’t get loans or buy too if interest rates are too high.

“My question is, can Malaysia afford to let the development and construction industry contract and cool down? This is a very scary question to ask,” Ahyat notes.

Contributed by Shahanaaz Habib The Star

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Invest earlier, get real estate-tic

Income earners in their 20s are fast making their presence felt in the property market. But getting there takes discipline.

HE acquires one property a year. He has been doing this for the past five years. Today, at the age of 38, his one regret is that he didn’t start earlier, when he was in his 20s.

Entrepreneur JS dishes out advice that he himself takes seriously. He tells young people all the time that they should invest in property from a young age, or the money that could have gone into real estate would be frittered away.

He believes that investment in property delivers the best returns. Apart from property, where else can young investors leverage on a 10% investment for a stable future gain? Any other transaction, whether in silver or shares, requires payment in full.

As real estate is based on supply and demand, one has greater control over it compared to paper investments like unit trusts and shares.

JS believes that if a person is determined to own a piece of property, he can do so when he is in his 20s.

His formula is simple: the minute you start working, you should start saving for a property.

Put aside a sum of 20% of your salary every month for two years towards a property. But the challenge will be to live within the balance 80%, especially if it means giving up Starbucks, clubbing, smoking and shopping.

If your take-home income after several years of working is RM4,000 and you put aside RM800 a month, by the end of 24 months, you would have saved about RM20,000.

And that is good enough for a 10% down payment for your first foray into the property market, probably a small apartment in the fringe of the city.

While the cheapest high rise properties in inner Petaling Jaya and Kuala Lumpur are in the region of RM400,000 to RM500,000, it is still possible to buy properties close to RM200,000 in outer KL areas like Puchong, Sentul, Cheras, Seri Kembangan, Serdang, Cyberjaya, Bangi, and in Shah Alam.

With Klang Valley’s population at 7.2 million and expected to rise to 10 million in another seven years, there will be a constant demand for living quarters.

If you are renting out your property (the average yield is about 5%) you will probably have to top up the rental you collect on your property to cover your loan repayment.

As a simple ballpark, the loan repayment would be estimated at RM1,200 a month based on 20-year loan for a RM200,000 loan.

But after a year or two, you can increase the rental and eventually your property will be self-financing.

One father who is completely sold on getting his kids to start young is Ten. He got his daughter, 29, and son, 25, to fork out RM13,500 each to purchase their respective three-bedroom apartments in Puchong for RM135,000 more than a year ago.

His daughter sold her unit a year after the purchase for RM170,000. After the real property gains tax and other costs, she was able to make a net profit of RM25,000. The capital appreciation on her apartment was about 20%, not including her rental income that year.

With that, she now has close to RM40,000 (seed money plus profit) for her next – and higher value – property. In fact, the senior manager of a multi-national is now eyeing a RM600,000 condominium in Petaling Jaya and Ten is fully supportive of her next purchase (only a 10% downpayment is needed for the first two existing loans).

A great believer in property investment, Ten, a retiree, is all smiles these days as his total property investment which was valued at RM3mil in 2010 has since more than doubled. His own house, a double-storey corner lot in Section 17, which he bought for RM63,000 in 1978 after working for five years, is now worth about RM1.5mil.

The phenomenal increase in property prices in the past few years, shares the CEO of a realty firm, is unprecedented. He attributes it mainly to a prevailing low housing loan interest rate of about 4.1%, which is barely above the 4% government housing loan rate.

According to a report by Oriental Realty and Zeppelin Real Estate Analysis Ltd, the residential property market in Malaysia has seen an overall price appreciation of 78% from the first quarter of 2000 to the third quarter of 2011.

While the CEO thinks that buying a property or two for a young adult is a good form of forced savings, he cautions that one must buy within one’s means and be careful with one’s cash flow.

“What if you lose you job tomorrow? Don’t overstretch. As the Chinese saying goes, don’t try to cover 10 woks with nine covers,” says the real estate man who has been in the business for more than 30 years.

A tip he shares for “good deals” is to look out for “leftover” property – often balance or unsold units developers want to clear cheaply or bumiputra units – which are not advertised but handled by the bigger real estate agents. Usually, there will be innovative schemes to make the units affordable. New launches are a good place to start too.

Sometimes, it’s also a fine balance between patience and research and paralysis by analysis.

Leigh, 35, was on the lookout for a property to buy when he was in his 20s. But every time he found something in a new development that he liked, his real estate businessman father would pooh pooh it.

“The first property I looked at was a studio apartment going for RM90,000. My dad was not keen as it was a new area. Today, it’s worth RM250,000.”

On his fourth attempt in 2009, he managed to buy a condominium unit still under construction in Subang at a good price from someone who had an overseas posting. He sold it two years later at RM600,000 and pocketed more than RM200,000.

When Leigh bought his current home in Mont Kiara, he took his time and studied the area, went to the ground and spoke to owners instead of researching only via online portals.

“Most of the owners were asking for RM580,000 to RM620,000. So I told real estate agents that if there were any units going for below RM550,000, please alert me,” says Leigh who joined his father’s realty firm four years ago.

After three months, he got his break when a Singaporean owner wanted to sell his unit and Leigh paid RM530,000 for it!

His advice to young investors: do your homework. Study the master plan; look into the background of the developer, quality and design of the product. Be clear on what you want: are you looking for capital appreciation or rental income? If you need the rental income to cover the bulk of your monthly housing loan, you would choose the latter.

For an investment of RM20,000 plus a housing loan, your return after three years upon completion of the property could be more than two fold.

And the key to your first property – based completely on your own finances – is to save for it.

When it comes to saving, don’t worry about the amount, worry about the habit. Says a financial coach, if you’re an employee and you’re not earning the income you need to make that first property, look at how you can add value to your boss to get that increment. If there’s a will, there’s a property waiting….

Common Sen-se by LEANNE GOH

Note: A recent chat with a 29-year-old colleague was enlightening. She has already sold one property, bought the one she’s living in and has invested in another. Among 10 of her friends, four have already bought property. 

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