Soft landing: Assuaging concerns about the transparency of market pricing

The real estate market has garnered attention from both foreign and domestic investors seeking a strong return on investment amid consistently low interest rates. However, the government is seeking to rein in residential property growth to limit broader economic damage in the event of a market downturn as well as to keep home prices affordable for the less affluent. Some of the regulations put in place to add drag to the sector include raising the real property gains tax (RPGT), implementation of a loan-to-value (LTV) cap and banning a developers interest bearing scheme (DIBS).

“Whether or not these lending curbs will have an effect on the market remains to be seen, but their effectiveness will likely be limited due to the delay in implementation from the time the first economic indicators showed signs that the market was slowing down. Laws may not make any difference at all as the market itself is causing the slowdown at this point,” Ho Chin Soon, director of Ho Chin Soon Research, told OBG.

Exposure

The total exposure of Malaysian financial institutions to the property sector increased by 14.3% in 2013 after a 15.1% expansion the previous year to RM553.5bn ($172.75bn), equivalent to 21.9% of total financial system assets, according to Bank Negara Malaysia (BNM) and non-bank financial institutions. Banks held most of this exposure with RM526.2bn ($164.23bn), up 14.7% over 2012 and comprising just over a quarter of total bank assets. The residential sector accounted for 65% of this. Development and non-bank financial institutions held another RM17bn ($5.31bn) in exposure with 72.2% of that in end-financing for residential property while property market exposure for insurance and takaful operators was limited to RM10bn ($3.12bn), or 4.3% of total assets.

Warning Signs

After expanding by an average of just 3.6% from 2001 to 2010, house prices began to spike in 2011 and experienced double-digit growth rates each quarter until the middle of 2013, according to data from the National Property Information Centre (NAPIC). Prices in Kuala Lumpur shot up 25.3% in the second quarter of 2013, and 17.4% in the fourth quarter of 2012, while home prices in Johor increased 20% and 24.1% in the first two quarters of 2013. Property transactions were the first indicator to tail off starting in late 2012 when they declined by 8.6% in the last quarter of that year before falling another 12.6% in the first half of 2013 according to data from BNM. Shortly thereafter, the Malaysian House Price Index grew at a rate of just 8.1% in the last quarter of 2013, its lowest increase since the third quarter of 2010 while residential building completions, starts and approvals dropped off in the fourth quarter as well, according to preliminary data from NAPIC.

Lending

As lending is curbed and developers become increasingly creative in their financing, other concerns are increasing regarding the transparency of pricing in the market. Practices such as DIBS, which overprice units but offer substantial discounts which can refund upwards of 20% of the price back to the purchaser, are one such practice which can distort prices,” Datuk Abd Hamid Bin Abu Bakar, the director-general of valuation for the Ministry of Finance’s Valuation and Property Services Department, told OBG. “The practice can also be used to sell units to foreigners who would otherwise be barred from purchasing lower priced units.” The BNM limited the repayment period for the purchase of properties to 35 years and personal financing to 10 years while banning pre-approved personal financing facilities without an application from the borrower.

Secondly, the BNM concluded that the DIBS schemes inflated property prices by as much as 30% while encouraging speculative activity in the property market by lowering the entry cost for buyers. The bank prohibited financial institutions from financing the development and purchase of properties with elements of interest capitalisation schemes, including DIBS. In a move to restrict bulk purchases of houses, the Ministry of Housing and Local Government announced in mid-2014 that any developer that sells more than four units to one buyer must register the buyer with the ministry.