Will Bank Negara’s recent loan regulations herald a local credit crunch and bursting of the bubble?
These are interesting times, said a property consultant over lunch
recently. The pumping of liquidity by the US, UK, Europe and Japan into
their economies, and by extension into the world, by the trillions of
dollars, has been on an unprecedented scale. It’s like being part of a
mass global experiment, the results of which we’re not quite sure, but
will surely be of massive consequences.
So far, quantitative easing seems to have worked. The US is showing
positive figures and we have not seen the collapse of capitalism. The
“we are the 99%”-ers have not taken over from the purported 1%
Illuminati controlling the world’s wealth and economy. Nor has the US
fallen off a fiscal cliff.
The Occupy movement still continues but seems to have lost momentum
In Malaysia, we have smugly ridden out the turmoils. While the
property market has frozen for several years in the UK, banks still push
you credit cards here (I just picked up a cool suitcase, Ikea freebies
and travel miles upon approval) and people don’t think twice about
eating out on RM50 per person.
In terms of property, launches have been aplenty, and panel bankers
line up to serve you. Prices in some places have doubled since 2008 and
we can even now take over parts of London… Malaysia boleh!
What, me worry?
If you were to read Bank Negara’s latest Financial
Stability and Payment Systems Report 2012, everything sounds hunky dory.
The percentage of impaired (or non-performing) loans dropped last year
to 1.5% for household loans, down from 1.8% in 2011 and 2.3% in 2010.
“Indicators of aggregate household resilience are sound with total
and liquid household financial buffers remaining stable,” goes the
report. “More importantly, indicators in the banking sector continue to
support the sound overall credit quality of household loans from the
banking system.”
All very controlled and dependable, just like our iron banking lady, Tan Sri Zeti Aziz, it seems.
Special
advisor to Consumers Association of Penang (CAP) Dr Lim Mah Hui (left)
and CAP president S.M. Mohamed Idris showing charts on the comparison of
household debt and disposable income as well as the debt service ratio
in Malaysia.
Yes, Bank Negara may have lost a bit of cool recently by admitting
that profligate loans have encouraged households to accumulate excessive
debt. Housing, car, credit card and personal loans have increased “at a
strong pace”–12% per year over the last few years–and now represents
81% of our national income.
This is risky because if interest rates rise and the economy falters,
people will lose jobs and find it difficult to pay their debts; banks
then would be out of money which they owe to deposit holders or other
banks.
To counter this, Bank Negara recently announced it would limit
mortgage tenures to 35 years. It may also curb developer
interest-bearing schemes (DIBS)–where property builders pay for buyers’
loan interests during construction. Luckily, all these are calculated
moves to slow down rather than crash a vibrant property market, aren’t
they?
Over the last couple of weeks, however, we’ve been hearing phrases
which would not normally be mentioned crop up: bad words like “interest
rates increase”, “capital flight”, and “price correction”. Do we
possibly see the tide turning?
Interest rates won’t rise, or will they?
Bernanke
testified in Capitol Hill recently that there is a risk that
Congressional fiscal policy “will restrain economic growth over the next
few quarters by more than we currently expect.”
Economy
watchers have for some time placed any increase in interest rates
beyond the immediate future, next year at the earliest.
Low interest rates have provided cheap and easy credit and
mortgages in Malaysia have grown steadily. Last year, more than half of
all household loans–56%–were for buying properties, said Bank Negara’s
report. The proportion of them taking multiple loans, furthermore, had
risen, “signaling a resumption in demand for housing credit for
investment purposes”.
After all, advertisements tout property as a means of
achieving wealth and financial freedom. Gurus tell you that if you
stretch your loans out, your monthly instalments will come out lower
than your rentals (“positive cash flow”), and with enough properties,
you may even quit your job!
Recently however, US Federal Reserve chief, Ben Bernanke
(the American Tan Sri Zeti) indicated that it might begin tapering off
quantitative easing as long as labour markets continue to improve.
Although he’s qualified this in several aspects, US interest rates have
risen in response, making the dollar and US assets possibly attractive
propositions again. Many thus anticipate funds, which had flowed into
emerging markets during the financial crisis, to flow back to the US and
Europe again.
Manulife Asset Management Services Bhd chief investment
officer Jason Chong indeed hinted that there may be a possible mass-exit
of foreign investors from the Malaysian bond, money or equity markets.
To stem this capital flight, and also to protect attendant currency
falls, India and Indonesia have increased interest rates up to 2%. Bank
of Canada has also said that it would “gradually normalize” borrowing
costs over time as the slack in the economy disappears and inflation
picks up. Brazil, meanwhile, increased rates 0.5% to battle inflation.
Here in Malaysia, Standard Chartered made the recent, bold prediction
that rates might increase by 0.25% as early as November.
What would be its impact? For me, it means an increase in monthly
instalments of RM100 per month. Imagine if I had three mortgages and my
instalments went up on all of them? If I were a professional landlord, I
could now be cash flow negative with my dreams of financial freedom
soured.
Another development to tighten funds would be the Basel III reforms,
which require the world’s banks to have enough cash in their vaults and
not to lend out too much, to avoid further banking failures. Bank Negara
is confident that our banks would have no problem meeting the
requirements by 2018, but it would surely mean a constraint on lending.
Already, word on the ground from property sales people goes
that some banks are starting to approve only 80% loans for those
already servicing another residential property loan.
Potential correction
The
figures show noticeable spikes in the Malaysian House Price Index and
Index of Units Launched by Price for properties priced above RM1mil from
late 2010.
Investors have also started talking about a “potential
correction” in the property market, that runaway property prices
indicate the top of a property cycle.
“There are risks faced by Malaysian banks in relation to high
household debt and a potential correction in the country’s property
market, but we think there is a low likelihood of these risks playing
out in the next 12 to 18 months,” said credit ratings firm Moody’s in
Singapore recently.
The
property life cycle, as drawn out by real estate blogger AgentDiary,
postulates that Malaysia is at the top of the cycle, with
characteristics including transaction price peak and the “property price
never drops” rhetoric.
You wouldn’t have known it from the primary market. YTL Land &
Development Bhd’s preview of its Fennel project in Sentul East, priced
at RM700 per sq ft, sold out two blocks within two days.
Low
Yat Group’s Tribeca project on Jalan Imbi has managed to sell at prices
ranging from RM1,800 to RM2,400 per sq ft to mainly foreign buyers.
Even at stratospheric prices between RM1,800 to RM2,400 per sq ft,
Low Yat Group sold almost half its apartments in its Tribeca project on
Jalan Imbi. Arcoris Mont’Kiara by UEM Sunrise Bhd, meanwhile, managed to
chart about 90% of sales before its show units debuted to the public.
The majority of Tribeca’s units were sold to foreign buyers, from the
likes of Indonesia, China and Taiwan, however, while Arcoris’ developers
gave significant rebates as sales incentives.
Arcoris Mont’Kiara has seen nearly complete take-up, as packaged with significant incentives.
Property investor Michael Tan reckons that if there were to be a
bubble bursting, it could happen within the next couple of years, when
many projects bought during the 2010 to 2012 property bull run are
completed: “Many were sold on DIBS, so buyers didn’t fork out any cash
until completion, not to mention all the attractive rebates. But when
the properties come on stream, many will be looking to flip or rent out,
and that will be the first test: whether they can find buyers or
tenants.”
In terms of housing affordability, the ratio of average
house prices in Malaysia, in relation to household income, comes in at
about four. In rapidly emerging markets, this is still acceptable, noted
valuer Elvin Fernandez has said. However, the figure rises to six,
seven or even eight in certain areas of the country, he adds, and this
is similar to the ratios that were seen in American houses prices
“before they crashed down towards the figure of three during the
sub-prime crisis, and three is some kind of gravitational pull for house
prices”.
A return to Danaharta?
Mitraland
Group chairman Dato’ Johan Ariffin (left) and group CEO Chuah Theong
Yee believe that regulation of the property market will benefit the
industry in the long run.
Datuk Johan Ariffin, previous senior GM for Pengurusan
Danaharta Nasional Bhd’s property division, and now chairman of property
developer Mitraland Sdn Bhd, doesn’t believe there will be a return to
the last Asian Financial Crisis however. So many loans defaulted then
that the government formed Danaharta to buy them out from cash-poor
banks.
“No, it’s a different landscape today,” says Johan who also
sits on the board of Maybank and Sime Darby Properties. “Then, it was a
currency thing, many people had overgeared and businesses had borrowed
too much. Today, our banks are much stronger, they have been
recapitalised and are very well run compared to 12 years ago. It would
take a lot for something to affect the whole system.”
One thing’s for sure, restrictions cool buyer sentiments, such as
when the 70% loan cap for the third home and net income rule were
announced in 2010 and last year, respectively.
Bank
Negara’s regulations may dampen sales but they will weed out
speculators, says Dato’ Johan Ariffin, chairman of Mitraland Group which
develops projects such as 16 Quartz in Taman Melawati, pictured.
“While it may have taken us three months to hit 60% sales in the
past, today it takes us six months to do it, because your buyers come,
they are interested but they can’t qualify for a loan then you have to
find new buyers,” says Johan.
This means that developers must have enough funds to tie them over a
delay in sales. “In our cash flow planning, we already anticipate and
make provision for a longer initial sales period. This just means less
speculators and more genuine buyers.”
So is everything really under control then, as Bank Negara intimates?
Are we just having a controlled slowdown rather than a crash? As a
property watcher said over breakfast, you never know. Just like in the
late ‘90s, the Asian Financial Crisis took most of us by surprise. We
are living in one of history’s largest financial experiments, though,
and whether Malaysian property sees a harsh or soft ride towards
fundamental values will surely be affected by its outcome… Watch this
space.
“We are expecting a nice steady growth of 10% maybe 12% or 13%
if we are lucky. The growth won’t echo the phenomenal growth of about 30% like we did previously,” Siva said in a Property Market Outlook: Post GE13 briefing yesterday." so... there's the words "if we are lucky" we (citizen) are the unlucky one as usual~~~ They are asking the estate agents. I'd always say my flowers smell nice when I'm a Florist.
Update article:
http://www.nst.com.my/nation/general/soaring-house-prices-a-major-concern-1.328036
