The Effect of 3 Major Housing Acts On Malaysia Real Estate

The Effect of 3 Major Housing Acts On Malaysia Real Estate Market

Changes in Crisis

Much has been said on the grounds with regards to the issues Malaysia is facing on all fronts, as well as the hit in the global financial markets facing some of the world’s most important economies right now.

Amongst the many issues at hand, there is a very strong likelihood for US to raise interest rates this year d which will put a damper on economic activities. Not only that, the long buoyant sentiments in China’s production capacity is looking bleaker than ever as the country is experiencing a slowdown that has hit its stock and real estate markets.

Malaysia is also faced with numerous internal and external pressures, including the fall in oil prices, depreciating ringgit as well as political disputes. It is inevitable that many people are comparing our current performance to that of the 1997 Asian financial crisis.

Midst of Changes in Policies

It has been 18 years since that major crash and despite many economists and analysts reassuring that Malaysia’s fundamentals remain robust, the sting of widespread bankruptcy continues to worry many.

The truth is, projects being shelved are not limited only to financial crisis as there were some 216 private developments being shelved between 2009 and April 30 this year. A total of 45,206 units were shelved, affecting some 29,903 homebuyers.

The government has restarted 165of those development, but the legal loopholes in the 1966 Housing Development (Control & Licensing) Act was making the problem.

The government introduced the mandatory built-to-sell plan in 2015 and homebuyers only need to pay a 10% deposit with the remaining 90% to be cleared only when the houses are complete. However, the authorities had to temporarily halt the plan in May as the huge amount of funds developers had to come up with would greatly reduce the number of supply, thus further putting pressure on the market which leads to upward price pressure.

Having halted the built-to-sell policy, the government needed to further protect homebuyers’ rights and begun enforcing the Housing Development (Control and Licensing) (Amendment) Act 2012 (HDAA), the Strata Titles (Amendment) Act 2013 (STAA) and the Strata Management Act 2013 on 1 June 2015 (SMA).

New Policies, NewChallenges

Under the HDAA, the homebuyers would have the right to seek for refunds if the developers did not carry out construction work for six consecutive months after the signing of the S&R However, the homebuyers must first obtain written certification from the Ministry of Housing that the developer has indeed halted work for six consecutive months before they can initiate the contract termination.

Upon the execution of the termination of contract, the developer would have to return the sum paid within 30 days less any interest incurred. However, do note that contracts signed prior to 1 June 2015 do not fall under the purview of this law.

The developers or any other stakeholders are also barred from collecting any forms of payment from homebuyers prior to the signing of the S&R Under the old law, it is common for developers and agents to collect money as booking fees for properties. The new law will also likely reduce impulse buying as homebuyers must now go through the proper channels for purchases.

Developers have expressed that these new regulations have inevitably led to increased cost of production which made funding difficult for developers who are highly dependent on bank leverage, as well as do nothing to help the government stabilise housing prices.

Increased Cost of Production

Developers are required to put forward 3% of the total construction cost to the government as security deposit. While this may effectively weed out the black sheep of the industry, it is more likely to contribute to increased cost as developers incur additional opportunity cost as they would have to look for other ways of funding the security payment.

Under the previous system, it is also common for developers to test the market with their launching and modify the finer details a as order come in. For example, a developer might launch X units of Type A and Y units of Type B within a project, should there be very low demand for Type A and overwhelming demand for Type B, the developer can switch production from A to B thus better answering the market’s demand. However, under the new system the 36 month time frame between signing of S&P and project completion means that developers would not have time to make adjustment, further contributing to increased risks.

Already faced with a slowing market, the new regulations will further restrict cash-flow for developers and some developers do not rule out retrenchment if there bleak outlook continues. Another issue is that the additional cost incurred will likely be expressed as increased cost of production and passed on to the market eventually. In a way, homebuyers might have to pay more for the increased security offered by the new laws.

The new regulations meant that cash- rich large-scale developers are more likely to be able to achieve a large scale needed to offset the increased risk. This might well push smaller developers out of the market and thus reducing choices for buyers.

Market Remains Firm

Despite all the changes and challenges, the property prices have remained very resilient, especially in duality areas. Once again, this is sign that the demand has not abated and many buyers are still looking to buy their own properties.

The changes in the market will also create a more robust environment where developers have to make more calculated choices and there is likely to be a host of highly quality production in the future. However, the current challenges remain real and it is up to the market to readjust to a new equilibrium position amidst the many changes faced.