Developer Loans Should be Properly Deliberated

Diane Foo Eu LynnOctober 11, 2016


The proposal to allow developers to provide financing to home buyers should be property deliberated, said Manokaran Mottain, chief economist at Alliance Bank Malaysia Bhd.

He noted that the real estate sector supply chain has a high correlation with domestic economic performance.

The National Property Information Centre (NAPIC) data revealed that the Malaysian House Price Index growth has been moderating since 2014.

The index tapered to 7.2 percent in Q4 2015, down from a 7.4 percent growth in the previous quarter, or its fifth consecutive quarter of slower pace of growth.

Meanwhile, the growth of Malaysia’s growth domestic product (GDP) eased to four percent in Q2 2016, down from 4.2 percent during the previous quarter.

“Notwithstanding the current sluggish economic conditions, the pertinent issue surrounding the real estate segment is affordable housing,” said Manokaran.

“Even though broad property prices growth have plateaued, the high absolute price to own a house continues to be out of reach for the common Malaysian.”

A report by Khazanah Research Institute showed that the overall Malaysian housing market is ‘seriously unaffordable’, with house price to household income ratio of 4.4 times in 2014.

Using the ‘median-multiple ratio’ standard by the United Nations Centre for Human Settlement at the World Bank, a housing market is deemed ‘affordable’ if the house price to household income ratio is below 3.0 times.

Notably, the median multiple ratio for Sabah (5.1 times), Penang (5.2 times), Kuala Lumpur (5.4 times) and Terengganu (5.5 times) are considered to be ‘severely unaffordable’.

Given the high absolute value of real estates, household income – at a much lower base – would have to multiply much higher to catch up to the affordability threshold.

To ease the cost of home ownership – especially for first-time home buyers, he urged policy makers to focus more on the supply side dynamics.

“Keep in mind that there is no lack of demand for housing in Malaysia in light of the relatively young demographic.”

In 2016, the estimated age group younger than 24 years old accounts for 43 percent of the total population.

Moreover, the average household size is forecasted to shrink from 4.6 people in 2000 to around four people by the end of the decade, said Khazanah Research Institute.

According to Manokaran, the government should come up with an economically viable proposal to develop new townships across the country with a cost effective structure in order for a comprehensive public housing plan to take off.

The Urban Wellbeing, Housing and Local Government Ministry’s plan of developing a ‘Youth City’ township could be used as a platform of the government to deliver value-added townships for affordable housing.

“On the other end of the equation, besides providing dwelling space, real estate is also an asset class that yields cash flow from rental and also capital appreciation through time,” he said.

“Therefore, it is imperative that the housing market price should never be trapped in an asset class bubble.”

He cited the 2008 sup-prime mortgage crisis in the US as a grave reminder of the consequences and impact on the real economy.

Fortunately, Bank Negara has implemented various macro-prudential policies since 2010 such as limiting loan-to-value ratio to 70 percent for home financing, and increasing real property gain tax to 10 percent for sales of real estate within two years in order to stem market speculation.

“In light of these, the recent consideration to allow property developers to offer home buyers financing at a much steeper financing cost of 12 percent interest rate per annum should be deliberated properly,” said Manokaran.

He noted that providing an easier credit facility to acquire a property is entirely different from compromising the people’s capabilities to service their loan in the longer run as well as the spillover impact on real estate prices.

“In short, housing is a necessity and it is imperative for authorities to have a policy interest in the issue.”

“The policy challenges going forward would only be more challenging as demand for housing continues to surge. It would be interesting to take stock of the plan that government has in mind come Budget 2017 on 21 October,” he added.

Image sourced from ThinkGlink


Diane Foo Eu Lynn, Senior Content Specialist at PropertyGuru, edited this story. To contact her about this or other stories email


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