Do you know about the ‘DIBS’? It sounds like the start of a bad movie, but we promise it was once a very important part of Malaysia’s property market!
The Developer Interest Bearing Scheme (DIBS) was a controversial investment scheme introduced in 2009.
It was designed to allow developers to pay the interest on a property buyer’s home loan, during the time of construction. If that all sounds a bit confusing to you, allow us to explain further!
Under the DIBS Malaysia scheme, a buyer would still pay the standard 10% deposit upon signing of the Sale and Purchase Agreement (SPA). This also includes all relevant associated legal fees.
The real selling point of the scheme for homebuyers was that the developer would pay the interest fees of the home loan itself during construction of the project.
How Did DIBS Benefit Homeowners?
Construction times can sometimes be uncertain for new developments, and that’s a big problem if you’re trying to plan your finances. Taking out a home loan to purchase a property is a pretty standard affair.
But once you’ve taken out that loan, you’re going to have to start thinking about the repayments immediately. No time to lose!
The trouble is, if you’re waiting to move into your shiny new house, you not only have to pay for the home loan, you might have to also pay for the place you’re currently living in.
The DIBS was a scheme designed to help tackle that problem.
Under DIBS, a developer in Malaysia would pay back the interest element of a home loan during the period of construction.
While homebuyers would still ultimately responsible for paying the capital element of the home loan, it still meant a clear reduction in their expenses while waiting for their new home.
That’s particularly good news if you’re worried about your construction period running longer than what was initially promised.
Was DIBS Too Good To Be True?
A lot of people thought so! Most importantly, Bank Negara Malaysia (BNM) agreed that it was.
You see, while DIBS worked for some people, it also was viewed as having a broadly unfavourable impact on the property market.
Investors looking for a quick flip property benefited from purchasing a DIBS home, reducing their loan payments during construction, and then quickly selling it for a profit when it was complete.
Not a bad job if you can get it done accurately, eh?
The drawback was that an analysis of the property market (as a whole) seemed to indicate that DIBS properties actually ended up being more expensive in the long run.
Developers were pretty smart about calculating the additional loan costs as part of their own finances, and factoring that in by increasing the final selling price.
That means rather than saving financially, homebuyers ended up paying what amounted to a speculative future price for the property… today. That’s just not a great deal all around.
Since the selling price of DIBS properties were pushing up property costs, that also created a wider artificial inflation of the market.
Existing property prices would be matched against the latest selling prices of DIBS properties, making housing less affordable for everyone. That creates a real chance of a negative property bubble.
These fears weren’t just theoretical questions, but played out in the figures for house prices seen between the DIBS period of 2009-2014.
Khazanah Research Institute analysis shows the compound annual growth rate (CAGR) of property prices in Malaysia rose from 3.1% in 2000-2009 to 10.1% during the DIBS period.
There were undoubtedly other factors at play, but the role of DIBS can’t be overlooked.
Why Else Was DIBS Controversial?
In the most cynical interpretation of this system, DIBS actually resulted in homebuyers ‘loaning’ a financial benefit to developers.
Since developers are already factoring in the future costs related to DIBS, the purchaser is essentially paying an upfront down payment against a more expensive future cost of construction.
We’re definitely not sold on this idea, and neither ultimately was BNM.
It’s not just the economics of a complete project that caused concern for DIBS. There were real question marks hanging over the problem of projects that were abandoned.
As a homebuyer, you’re happily invested in your home loan, enjoying the benefits of the developer covering your interest rate payments, when suddenly the development is abandoned.
Now you’re not only stuck without a home, you’re stuck with the burden of a home loan signed up in your name. That’s definitely a lose-lose situation.
And what about all that stuff you boxed up ready for the move? There’s so much to consider here. Another problem emerged in the speculative nature of the market that DIBS created.
Since many investment buyers were banking on a quick-flip scenario where they made a good cash return on an initial investment, the exposure to slowing market conditions was significant.
What do you do if nobody wants to buy your DIBS-funded house? You’d probably cry, count your losses, and wonder what you’re going to do with this property you weren’t even planning to keep.
How And When Was DIBS Stopped?
With the growing evidence that DIBS was having a negative impact on the property market, an announcement was made in Budget 2014 that the scheme would finally be ended.
With Malaysia’s property market facing challenging conditions at the time, concerns about inflated prices and a potential property bubble created a particularly compelling argument to curb the DIBS scheme.
The ending of DIBS was seen as a broadly positive move for individuals looking to buy a home.
With speculation that DIBS was pushing up prices as much as 20-25% in some developments, the ending of the scheme is likely to have resulted in those prices levelling out over time.
While it does mean that prospective homebuyers have to factor in interest payments into their home purchases again, it also means they can be more confident of paying a fairer price for that home.
Don’t be down just because DIBS isn’t around! Want to understand more about your own home loan opportunities? Why not explore PropertyGuru’s Complete Guide to the Basics of Applying for a Home Loan.