The following commentary is written by Dr Lim Mah Hui:
The proposal by the Urban Well-being, Housing and Local Government Minister, Noh Omar, to permit developers to be moneylenders is fraught with risks.
We all know that the property market is slowing down and developers are doing all they can to resuscitate the languishing market – ranging from giving free trips, cars, paying for settlement expenses; and now a proposal to give loans to buyers who don’t qualify for housing mortgages. In fact, it was reported that house buyers be given loans equivalent to 100 per cent of the house price. In other words, no downpayment is needed.
This is a recipe for disaster for a couple of reasons. First, the normal and prudent downpayment ratio for house purchase in most countries is 20 per cent. This equity contribution by the buyer acts as a safety buffer for bank lending.
Second, zero downpayment is an incentive for a borrower to walk away from his obligations and monthly payment in times of difficulty. Without this equity stake in the house, buyers would hand in their keys and happily walk away in the event of default.
There is an inherent conflict of interest in having developers also provide loans. Developers would like to sell as many houses as possible and hence are incentivised to provide financing for the products they sell. Developers, unlike banks, do not have expertise to do due diligence and credit analysis.
Developers are not deposit-taking companies that provide financing. They have to borrow from banks in order to on-lend to borrowers, earning a fee in between. This no doubt pushes up interest rates to borrowers (estimated at between 12 and 18 per cent). Now, if a borrower does not qualify for a bank for at 5 per cent interest rate, how is she able to service a loan at 12 per cent? It just doesn’t make sense.
Most developers are highly leveraged – they borrow from banks to purchase land and for working capital. If they provide loans to buyers, they will also be borrowing from banks to finance their house buyers and become even more leveraged.
Presently, housing loans at RM418bn is the largest category of bank lending accounting for 29 per cent of total outstanding bank loans as at December 2015. By piling more financial risks on to developers who are now more closely connected to banks and the financial system, we are effectively introducing more risks and fragility to the whole financial system. Such lending will be outside the purview of Bank Negara which is in charge of financial stability.
The problem with lack of affordable housing to a large portion of Malaysia’s population is not because of lack of financing. The primary reason is because house prices have run way ahead of income growth.
A healthy and sustainable housing affordability ratio (ie, median house price divided by median household income), should be in the region of 3 to 4. However, this ratio is over eight times in Kuala Lumpur area and over 10 times in Penang island. This is totally unsustainable has to be brought down.
House price inflation due to many factors
House price inflation is due many factors such as low interest rate environment, too many purchases by foreigners and overseas Malaysians, marketing gimmicks by developers, and poor government policies that have not curbed prices but in fact encouraged speculation and housing price inflation.
Bank Negara did introduce a few policies, though too little and too late, to control property price escalation. These policies include higher property gains tax for shorter holding periods, and a lower loan-to-house value ratio for purchases of third property.
Policies curbing speculation should be further strengthened. State and local governments can also play their part with better policies that discourage the building of expensive houses and policies that encourage and incentivise the building of affordable houses.
The right to shelter is a human right while the right to ownership is not. Not every one has to own a home upfront. Different schemes have been introduced in other countries to provide affordable and decent shelter such as subsidised rentals, public housing, rent with option to own, shared ownership between state and private individuals. These should be explored and adopted.
Finally, property growth and house prices cannot be expected to grow forever, defying the laws of gravity. Healthy and balanced development cannot be just adding more bricks and mortars in the economy. A certain amount of healthy correction can be expected in a property market. The last thing for the government to do is to encourage more speculation and unsustainable property market growth by allowing developers to become lenders.