Reducing Interest Rates Will Only Cover Up Issues in Housing Market

Pavither January 30, 2018

 
Putrajaya’s proposal to reduce the interest rates of housing loans would only conceal the problems currently plaguing Malaysia’s residential property market, according to the Institute for Democracy and Economic Affairs (IDEAS).

“Artificial lowering of the interest rate will hide the fact that a speculative wave and a supportive credit policy took place,” said IDEAS Senior Fellow Dr Carmelo Ferlito.

“[It] will result in further supporting the growth of a market which probably reached its saturation a few years ago, and therefore now has to experience a readjustment crisis.”

He explained that interest rates are determined by market factors and this influence the purchasing decisions of consumers without the need for any intervention from the authorities. It is also possible that fixing the rate for mortgages could result in people buying properties beyond their means.

“The world economy experiences a strange situation whereby, even in those countries where the central role of prices emerging from free market forces interplay is understood, one of the key signals for the economic system, the interest rate, is centrally fixed by a monetary authority. Such a system easily drives market participants toward wrong choices.”

Ferlito argued that the top solution to deter speculation and bad investments is to abolish Bank Negara Malaysia’s (BNM) authority to dictate the interest rate and let market forces freely determine it.

“Only in this way, investment decisions would be based on a signal consistent with the intertemporal preferences of market participants,” he noted.

On 25 January, Deputy Prime Minister Datuk Seri Dr Ahmad Zahid Hamidi suggested lowering mortgage rates to make it easier for people to buy their first homes and reduce the monthly instalments paid by existing home owners.

On the same day, the central bank increased its overnight policy rate (OPR) by 25 basis points to 3.25 percent.

Ahmad Zahid said the high interest rate is one of the reasons why 3,605 dwellings priced between RM250,000 and RM500,000 were left unsold in 2017. He added that Malaysia’s interest rate of 4.65 percent is lower than Australia’s 5.3 percent, but is still higher than Singapore’s 1.65 percent.
 
This article was edited by the editorial team of PropertyGuru. To contact them about this or other stories email editorialteam@propertyguru.com.my
 

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