With the Covid-19 disruption, slowing income trend and contraction in gross domestic product, CGS-CIMB Research does not expect the latest cut on the overnight policy rate (OPR) to have a significant boost on the property sector.
“Home-buyers’ purchasing power will likely improve due to lower loan instalments but we expect the spillover effects on the property sector to be negligible, given the anticipated contraction in GDP and slowing household income trend this year,” it said in a report.
“Our economist is forecasting a GDP contraction of 4.3% for the country in 2020.”
Citing National Property Information Centre (NAPIC) data, it noted that total property overhang fell 8% year-on-year primarily due to developers launching fewer new projects and the government’s Home Ownership Campaign (HOC) 2019.
And despite the OPR cut, the research house expects the property overhang for this year to increase since property transactions and sales may be lower due to the movement control order’s (MCO) impact and the absence of HOC incentives, reported The Star.
The MCO was introduced by the government on 18 March and extended on 12 May.
Bank Negara on Tuesday (5 April) lowered the OPR by another 50 basis points to 2%, following January and March’s 25 basis points cuts. Historical trends show that this could lead banks into slashing their indicative lending rates.
“We estimate that every 50 basis points reduction in borrowing rate would reduce the monthly instalment for mortgage loans by 2% to 7%, depending on the loan tenure,” said CGS-CIMB.
“Our sensitivity analysis shows that every 50 basis points cut in borrowing rate would reduce the monthly housing loan instalment for properties in the affordable range of RM300,000 to RM500,000 by RM64 to RM131 or raise a buyer’s eligible loan amount by RM8,000 to RM30,000.”
With this, CGS-CIMB reiterates is “neutral” outlook on Malaysia’s property sector.
“We stay sector neutral given the weak macro outlook, affordability issues and expected lower property sales, even though the KL Property Index is currently trading at 0.4-times price-to-book-value, which is below its historical 10-year price-to-book value of 0.75-times.”
Meanwhile, analysts believe that there could be another overnight policy rate (OPR) cut this year, depending on how the economy would perform in the second half of 2020.
AmBank Research noted that Bank Negara Malaysia’s (BNM) decision to slash the OPR by 50 basis points to 2% is in line with the market and the research firm’s expectation, reported The Borneo Post
“Possibilities for more rate cuts are still on the table. Much will depend on the transmission effects of the latest cut on the economy – how effective it is on spending, containing non-performing loans (NPLs) and supporting loan growth, especially after the moratorium period,” it said.
“Also, any decision on more cuts is possible if the downside risk on the economy remains high. Besides, the inflation outlook for 2020 remains weak, at between 0.3% and to 1.5%, suggesting that there is ample room for more rate cuts, if necessary.”
The research arm of MIDF Amanah Investment Bank Bhd (MIDF Research) also expects to see one more rate cut for this year. Its initial estimate was for the OPR to reach 2% level with two cuts, at 25 basis points each.
“However, based on the latest 50bps, we are looking at another 25bp cut for this year.”
This would bring the total cut for this year to 125 basis points, pushing the interest rate to 1.75% – which is lower than the level registered during the Global Financial Crisis and reflecting the “expectation of a worse economic conditions than the previous crisis”, said MIDF Research.