Friday, September 9, 2016

Putrajaya should abort the plan that enables property developers to become the loan sharks to home buyers.

Media Statement by Yeo Bee Yin, State Assemblywoman for Damansara Utama on Friday 9 September 2016 in Petaling Jaya.

Putrajaya should abort the proposed plan that enables property developers to become the loan sharks to home buyers.

I read with great concern the announcement by the Urban Wellbeing, Housing and Local Government Ministry that there will be an initiative from Putrajaya that allows property developers to give out loans to home buyers at interest rate as high as 12 to 18%[i]. More worryingly, under such scheme the developers have the autonomy to decide who to give the loan to and not only restricted to the first home buyers. The minister Tan Sri Noh Omar said that such initiative is a win-win situation for both the developers and home buyers. I beg to differ. I believe that this will only create “win” to the developers but leave the home buyers unnecessarily and heavily in debt.

Firstly, the proposed new scheme will cause artificial property price hike that does not reflect the real economic growth, similar to the effects brought by Developer Interest Bearing Scheme (DIBS), which was abolished in 2014. The newly mooted scheme enables the developers to loan to the buyers who can’t afford to buy in conventional way. The third (or more) house buyers, who can only obtain 70% loan or less from the banks, will now be able to get additional loans from the developers. The influx of easy loan from the property developers will enable them to sell their properties at artificially high price. Easy loan couples with artificial high price will in turn encourage speculative behavior, pushing the property price even higher and making housing even more unaffordable.

Khazanah in its report “Making Housing Affordable” reported that together with multi-generational loan of 45 years, DIBS inflated property prices by as much as 30%[ii]. The House Price Index (HPI) of the National Property Information Center (NAPIC) has shown clearly that while Malaysian all-house price grew steadily at compound annual growth rate (CAGR) of 3.1% between 2000 to 2009, the CAGR of HPI during DIBS implementation (2009 to 2014) was as high as 10.1%. Comparatively, the economy grew at only half the growth rate of housing price in this period of property boom. As a cooling measure, the government abolished DIBS in 2014. However, why now Putrajaya introduces another scheme that will fuel another round of unhealthy artificial price hike?

Secondly, the interest rates that can be charged by the developers, 18% without collateral and 12% with collateral, are simply too exorbitant. Is Putrajaya trying to make the developers to be the “loan sharks” to the home buyers? The Bank Negara Malaysia decision to tighten the loan approval requirement for banks according to debt-to-income ratio is to ensure that Malaysian household debts are at controllable level as our household debts have already reached record high with the total household debt to gross domestic product ratio of 89.1%. According to Khazanah report “The State of Household II”, only 10.8% the households in Malaysia were resilient to financial shocks such as unemployment, injury, death, divorce and changes in interest rates and more than a fifth of those would not be able to sustain for more than 3 months after their incomes were cut off. Allowing developers to loan to home buyers, especially at such high interest rates, will only further exacerbate Malaysian household debts problems, making households even more vulnerable to economic shocks.  

All in all, does the new scheme really help ordinary home buyers? No, allowing buyers to borrow more is not the solution to unaffordable housing as the home buyers will still need to take up loans to buy houses that they can’t afford. Perhaps the real intention of the scheme is to help the developers to clear their unsold units? (It was reported that there is an increase of 16% of unsold units in the first quarter of 2016 with 18,908 out of the 81,894 residential and commercial units launched remained unsold.)

The proposed new scheme will enrich the property developers at the expense of the ordinary home buyers in long term. It enables developers to sell their properties at higher price (or to clear their stagnant housing stocks) and opens up another channel of income for them through financing the purchase of their own products, while the ordinary Malaysians need to take up huge debt burden with unfavorable interest rates. With such system, the Barisan Nasional government has become the government only for the top 1 percent of the economic pyramid.   

Affordable housing is a structural issue caused by unresponsive housing sector to market demand. It is unsustainable to fuel housing growth with debts, especially debts at high interest rates, and speculations. This is a slippery road that we should never take.

With that, we call upon Putrajaya to abort the proposed new scheme that allows property developers to become the loan sharks to home buyers. Lastly, I sincerely hope that the minister will take some time to read Khazanah’s report “Making Housing Affordable”, which has proposed much more sensible policy recommendations than this to enable more Malaysians to own a house at a price affordable to them.