Banks, the Root of the Problem?
“Most Malaysians can’t afford to buy houses!”
Indeed, this is a complaint that many we have grown very familiar with, especially over the past half a decade.
After 3 to 4 years of property boom, 2014 saw signs of the fever abating as transaction volume started to decline, and the market continues to cool as we enter 2015. Amidst the slowdown, various parties including developers, investors, real estate agents, home buyers, and so on, are pointing fingers at the bank’s low loan approval rate as the reason for the slowdown.
However, from another perceptive, the high loan rejection rate brings attention to the elephant in the room; our excessive household debt that has reached worrying proportions.
Serious Implications of Loan Rejection
According to Datuk Seri Fateh Iskandar, REHDA noticed at the beginning of the year that mortgage rejection rate has risen to nearly 50%, a huge jump from the 23% registered in2014,and the association that the phenomenon is cause for concern.
The interest in affordable housing below RM 500,000 has not eased up and buyers continue to flock to showrooms for properties in this price bracket. However, interested buyers often end up unable to get loans as they are plagued by poor credit history, lack of financial documents, insufficient income, etc.
The poor sales will inevitably force developers to postpone or even shelf new launches, further aggravating the issue of short supply of residential properties in the market. The shortage of supply will inevitably push price higher, further worsening the problem of escalating prices.
REHDA understands Bank Negara’s position for more stringent position to bring down the household debt, but association maintains that mortgages are good debts that will experience significant capital appreciation, and the banks should look to reduce debts from other areas instead.
Loan Application Fallen
However, the Associations of Banks in Malaysia (ABM) questions whether the impression of banks being difficult is in fact legitimate. After all, providing loans and credit to customers is the commercial banks’ core business and it makes little sense of banks to kill their own business stream by needlessly rejecting loans.
Chuah Mei Lin, Executive Director of ABM, added that the low take up rate is not solely due to high rejection rate. The fact is that total housing loan applications has fallen from the RM 19.5 billion in August 2014 to RM 11.7 billion by February 2015, a decline of some 40%.
In fact, many banks are experiencing pressure on their net profit growth due to the trend. Analysts believe that a round of interest rate hike in the second half of the year will further reduce sales of new launches by between 5% and 10% compared to 2014 figures.
Widen Economic Pressure Cited
MIDF Research recently released a report suggesting that the tighter lending policies are not significant reasons for the slowdown in the real estate market. Instead, the wider economic downturn and weak consumer confidence are cited as the root cause for the weakening demand.
That said, the government’s on-going economic transformation plan and development expenditure of 48.5 billion ringgit outlined in Budget 2015 are expected to be positive factors that will support the banking industry in recovering in the Q4 2015.
Low Doubtful and Bad Debts
At 87.9% of the GDR Malaysia’s household debt is one of the highest in the world and the associated risks are continually highlighted by the World Bank and international financial institutions. Despite the bleak warnings, Malaysians can take some comfort in knowing that the debt repayment remains robust and Non-Performing Loan ratio is currently only at 1.1 %.
This means that despite the high debt level, Malaysians are able to service their loans. Thus one of the biggest risk factors of a real estate bubble is kept well within check. It is also interesting to note that the ratio of household debt to financial asset stands at 211.4% currently; this means that every ringgit borrowed is backed by financial assets worth RM 2.11.
Still, there is no guarantee that the situation will not change as about 27% of the borrowers are in the low-income group with gross earnings of less than RM 3,000 a month. There is also a steady rise in the number of bankruptcy under the age of 35; 4,100 cases in 2012, 5,423 cases in 2013, 5,497 cases in 2014 and 948 cases in Q1 2015.
Cooling Measures Partly Responsible
Taking a leaf from the US sub prime mortgage crisis, Malaysia and several countries in the region reacted to the housing boom by implementing a series of cooling measures designed to slow down the market.
The first wave came on January 1, 2010 when the government imposed the RPGT of 5% for properties held less than 5 years. True enough, the market took a slight dip following the implementation but returned with gusto by the H2 201p Bank Negara then raised interest rates, but the relatively low cost of borrowing continue to fuel investors and the prices marched forward.
The next few years saw the government increasing the cooling policies by raising tax rates, interest rates, dropping Loan- to-Value Ratio, not allowing DIBS, etc. As it stands today, there are numerous shackles on the real estate market and these are contributing to the lacklustre performance.
Focus on Increasing Financial Viability
Like any issues worthy of discussion, there are opposite views on the issue and it is impossible to point to a single factor as the cause.
For the general home buyers, what is more important is to focus on one’s financial position before taking on any loan commitments. While it is true that properly prices are expected to continue to increase, and some home buyers might be pressured by the common saying “if you do not buy now, you can forget about buying in the future”, it is more important to clearly assess if the property is indeed within one’s means rather than risk getting into insolvency.
Remember that there are few things worse than driving oneself into a corner as a result of over stretching one’s means.
For foreigners ,you can check our property investment guide in Malaysia for foreigners post .