The proposal by the Urban Well-being, Housing and Local Government Minister, Tan Sri Noh Omar, to permit developers to be money lenders is fraught with risks.
We all know that the property market is slowing down and developers are doing all they can to resuscitate the languishing market – ranging from giving free trips, cars, paying for settlement expenses; and now a proposal to give loans to buyers who don’t qualify for housing mortgages.
In fact it was reported that house buyers be given loans equivalent to 100% of the house price. In other words, no down payment is needed.
This is a recipe for disaster for a couple of reasons.
First, the normal and prudent down-payment ratio for house purchase in most countries is 20%. This equity contribution by the buyer acts as a safety buffer for bank lending.
Second, zero down-payment is an incentive for a borrower to walk away from his obligations and monthly payment in times of difficulty. Without an equity stake in the house, buyers would hand in their keys and happily walk away in the event of default.
There is an inherent conflict of interest in having developers also provide loans.
Developers would like to sell as many houses as possible and hence are incentivized to provide financing for the products they sell. Developers, unlike banks, do not have expertise to do due diligence and credit analysis.
Developers are not deposit-taking companies that provide financing. They must borrow from banks in order to lend to borrowers, earning a fee in between. This no doubt pushes up interest rates to borrowers (estimated at between 12% and 18%).
Now, if a borrower does not qualify for a bank loan at 5% interest rate, how is she able to service a loan at 12%? It just doesn’t make sense.
Most developers are highly leveraged: they borrow from banks to purchase land and for working capital. To provide loans to buyers, they will also borrow from banks to finance their house buyers and become even more leveraged.
Housing loans, at RM418 billion, now form the largest category of bank lending, accounting for 29% of total outstanding bank loans as of December 2015. By piling more financial risks on to developers who are now more closely connected to banks and the financial system, we are effectively introducing more risks and fragility to the whole financial system. Such lending will be outside the purview of Bank Negara which is in charge of financial stability.
The problem with the lack of sufficient affordable housing available to a large portion of Malaysia’s population is not because of lack of financing. The primary reason is that house prices have run way ahead of income growth.
A healthy and sustainable housing affordability ratio (i.e., median house price divided by median household income), should be in the region of 3 to 4. However, this ratio is over 8 times in the Kuala Lumpur area and over 10 times in Penang island. This is totally unsustainable and must be brought down.
House price inflation is due to many factors such as a low interest rate environment, too many purchases by foreigners and overseas Malaysians, marketing gimmicks by developers, and poor government policies that have not curbed prices but in fact encouraged speculation and housing price inflation.
Bank Negara did introduce a few policies, though too little and too late, to control property price escalation. These policies include higher property gain tax for shorter holding period, and lower loans to house value ratio for purchase of third property. Policies curbing speculation should be further strengthened.
State and local governments can also play their part with better policies that discourage building of expensive houses, and policies that encourage and incentivize building of affordable houses.
The right to shelter is a human right while the right to ownership is not. Not every one has to own a home up front. Different schemes have been introduced in other countries to provide affordable and decent shelter such as subsidised rent, public housing, rent with option to own, shared ownership between state and private individuals. These should be explored and adopted.
Finally, property growth and house prices cannot be expected to grow forever, defying the laws of gravity. Healthy and balanced development cannot be about just adding more bricks and mortar to the economy. Certain amount of healthy correction can be expected in a property market.
The last thing for the government to do is to encourage more speculation and unsustainable property market growth by allowing developers to become lenders.
Dr Lim Mah Hui is an economist and former international banker.