The era of easy credit is about to come to an end


The era of easy credit is about to come to an end. Normalisation of interest rates will be keenly watched.

AN economist from a think-tank suggested diversifying into non-ringgit assets in 2009 after the 2008 Global Financial Crisis.

Six years later, those who heeded would be quite happy today. For others, is it too late to diversify into non-ringgit assets? Or for that matter, is it time to buy into local properties now? Is cash still king?

It all depends who one talks to.

The same economist who suggested diversifying into non-ringgit assets is today spewing caution and prudence, both for the local and global markets.

“If you buy foreign assets or go into forex today, it shows the state of your confidence here,” he says.

His advice for today – look at your household debts. Can you afford it knowing full well interest rates are on the rise?

A developer will say now is the time to buy because prices have stabilised and huge rebates – given currently – may end.

A property consultant will say prices are still consolidating and may have some way to go.

Against such differing views and a lack of clarity ahead – a possible US interest rate rise on Dec 16, a slowing China and weak local sentiment – many are staying on the sidelines.

While these have dampen sentiment, maybe the most important factor is the changing tide. Since 2008, borrowers have benefited from easy credit and low cost of funds. This is going to change, some say, in December. Whether the US opts for a small increase of 25 basis points, or a larger quantum, this imminent rise this year or the next marks an end to an unprecedented era of cheap money.

Khong & Jaafar managing director Elvin Fernandez says it does not matter if the Federal Reserve opts for a low or higher increase in interest rates. The fact remains that the cycle is turning.

“When Malaysia increases interest rates, mortgages will go up. This will hurt household income further in addition to the rise in toll and the goods & services tax (GST) and the generally slow growth in salaries.

“When there is risk, people run to cash but cash is not the answer. There is no where to hide,” says Elvin.

Differing views

PPC International Sdn Bhd managing director Datuk Siders Sittampalam differs.

Siders, who is also president of Association of Valuers, Property Managers, Estate Agents and Property Consultants in the Private Sector Malaysia (PEPS), says although the US is expected to raise interest rates, it is uncertain if Bank Negara will do likewise.

“This will weaken the economy further. Sentiment is already weak,” says Siders.This will hasten what is already a slow property market this year, he says. This will make the residential sector even less affordable.

Siders says the market is already suffering from depressed oil prices, weakening ringgit and rising inflation rate. This will not augur well for the real estate market.

“It can contribute further to the slowdown. We do not foresee a recovery in 2016 given the current economic challenges both internally and externally,” says Siders.

Assuming that Malaysia does raise interest rates eventually, speculators who bought multiple units with developers interest bearing schemes (DIBS) may hurt.

VPC Alliance director James Wong says the increase in the interest rates has a very minimal impact on borrowers.

If the house price is RM450,000 and there is an increase of 0.25% per year in interest, this works out to RM54 per month for loan repayment compared to the current interest rates, assuming a 30-year maximum loan tenure, at a loan margin of 20:80, he says.

Wong’s concern is more on the completion of properties purchased on DIBS. Wong says those who bought in 2013 will be getting their units in 2015/2016 and will have to service the loan. Having bought multiple units in order to flip, they will be impacted. Under DIBS, property buyers need not service the loan until the property is completed.

Introduced in 2009 as an incentive, speculators purchased units under DIBS because of the initial low outlay. Wong says if they are unable to rent their properties to generate some form of revenue, many will be forced to sell at lower prices.

“It is this factor that would further dampen the secondary market in 2016. Hence, in 2016, we expect to see more non-performing loans and more buyers under the DIBS arrangement force-selling their properties in the market,” says Wong. Those who bought from 2014 – when DIBS was scrapped – are expected to be genuine buyers with purchasing power, he says.

Stubborn high prices

Amid these various concerns in the local property market and the lack of clarity, prices however remain stubbornly high.

It is against this backdrop that the government, local authorities and developers must work together to further reduce house prices, says Wong and Elvin.

While the residential sector is held by many and will remain fairly resilient, it is the commercial properties that will have a higher cost of funds. The looming rise in interest rates will impact this segment of the market even more.

The three consultants say while the government and private developers cannot take their hands off the rudder in their drive to build more social housing, there are other measures they can take to bring some semblance of control in the housing sector.

They agree that while it is impossible to bring down prices to more realistic levels over the short term, developers and government can work towards reducing prices in the medium to longer term.

Wong and Elvin say compliance costs, which is borne by developers, have been increasing over the years. If this can be reduced, it will help to reduce prices.

“Developers have to pay various contributions and fees to Telekom Malaysia, Water Works Department, Tenaga Nasional Bhd in addition to building the water storage tower, power sub-stations, etc. If government institutions can reduce the contribution fees, it will help to bring down the selling prices of houses,” says Wong.

He says the government has to facilitate private developers by providing tax rebates and give waivers on stamp duty. Reducing red tape in order to speed up approvals will help developers to reduce holding costs.

Even as the government goes about with these measures, it must ensure that the above cost savings is translated into lower house prices, says Wong.

The unique situation facing the country when it comes to solving the housing dilemma is that land is a state matter.

PEPS president Siders says anything that involves land matters may be easier said than done.

“Although property consultants generally agree that compliance cost and statutory payments for development forms a substantial cost to the developer, it is no easy task to streamline and reduce such cost for all states in Malaysia.

“Land is a state matter and each state has different development compliances and charges such as conversion premium, development charges and requirements with regards to affordable homes, bumiputra quota and discounts and price ceiling,” he says.

Lack of leadership

Perhaps the thrust of Malaysia’s housing dilemma was neatly summed up by a speaker at the 25th National Real Estate Convention on Nov 12.

Dr Suraya Ismail from Khazanah Research Institute says only with a crisis, can the country understand the temerity of the issue the country has at hand.

Asked if it is possible for Malaysia to have a scheme similar to Singapore’s Housing Development Board instead of relying on the Housing and Local Government Ministry which is currently taking care of various matters coupled with the different state and local authorities’ laws and regulations, Suraya says there is currently “a lot of duplication of the nature of the state and federal planning authorities.”

She says Malaysia “does not have the sort of leadership” that is needed to remove all the duplication.

Suraya released a report Making Housing Affordable in September and called for a national housing survey to be carried out.The subject of house ownership was brought up by Bank Negara governor Tan Sri Zeti Akhtar Aziz in November who agreed that there is a shortage of affordable homes.

At a press briefing after announcing Malaysia’s third quarter gross development product growth in the middle of November, she said: “Of course, while we are promoting house ownership, it is only to those who can afford to own houses. We do not want to see individuals and families enter into debt that they cannot service because it will end up with the house being repossessed… This is not a direction that we want to move to, but we do want to provide homes to the community.”

House ownership should be offered to those who are creditworthy, she said.

She opined that affordable homes should also be made available for rent, providing an alternative for those who cannot afford to take up a home loan.

In short, while it is understandable that Rehda, representing developers are eager to sell, buying a house should not be at the expense of rising household debt levels.

Key stakeholders appealed to the authorities to relax some of the cooling measures to boost the sector in October’s Budget 2016 proposals. Appeals to reduce the real property gains tax and to have DIBS reintroduced were given the rebuff. Developers were disappointed.

No place for fear

With prices expected to self-correct and a further drop in the launches for next year, Elvin of Khong & Jaafar says fear should not enter the residential sector.

Fear should not characterise the residential market despite the soft and subdued market simply because the market is not expected to plunge that easily.

“Thousands of individuals own these properties. The property market is unlike the stock market where shareholders can buy and sell easily,” he says.

It is this which allows prices to hold. However, although residential prices may hold, this does not mean there are no weaknesses in the market.

“Do not measure the residential market by falling prices. Instead, check for falling yield. Can you get the rent you were getting two years ago? When you buy for investment, can you get a tenant? These are questions buyers and owners should ask themselves.”

Owners are comforted when they see prices holding up but this may be a fallacy. They have forgotten to analyse the fact that interest in the overall property sector is falling due to over supply in nearly every segment, he says.

He is of the view that dark clouds are forming and this calls for prudence.

– Malaysia Property News

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