Should DIBS be banned?

By Khairie Hisyam

With largely positive reactions tempered by some guarded caution to news yesterday that Bank Negara Malaysia (BNM) may be mulling curbs on the developer interest-bearing scheme (DIBS), the question remains whether the popular house financing scheme should be banned outright.

KiniBiz spoke to various parties within the property industry for their take on this popular scheme.

‘DIBS fuels speculation’

Some property experts KiniBiz spoke to were strongly in favour of an outright ban, arguing that the scheme fuels speculation as flippers take advantage of the easy entry into purchasing.

“DIBS is a mechanism that facilitates ‘no money down’ on the purchaser and hence a speculator can have multiple bookings with little capital,” said Professor Dr Ting Kien Hwa of Universiti Teknologi Mara (UiTM). “The so-called ‘property gurus’  also encourage ‘no money down’ as a property investment technique.”

Ernest Cheong, senior partner at Ernest Cheong PTL Chartered Surveyors, agrees that DIBS indeed fuels speculative activities in the market. “(It) definitely (does); you are buying into the future (with DIBS),” explained Cheong.

The effects, said Ting who heads UiTM’s Centre for Real Estate Research (CORE), are the artificial inflation of capital values in the market alongside the false impression that there is high demand for high-end properties.

“New launches will benchmark their selling prices to projects with DIBS which show high sales rate indicating high demand. As a consequence, subsequent new launches will reflect the inflated high prices,” said Ting. “Thus the increase in capital values is not due to demand and supply but due to the costs and interests that have been built into the selling prices.”

“When this happens frequently enough and over a period of time, it will give the impression that house prices have indeed increased,” added the professor. “(This) coupled with developers who always claim that the development costs have increased will create an artificially high market pricing environment.”

In the end, he said, the masses will believe that house prices are indeed high and be forced to live with it.

‘The principle is still very good’

On the other side of the coin, arguments in defence of the scheme point out that the scheme is beneficial to help genuine house buyers — an outright ban would deny this group the help.

According to Michael Yam, president of the Real Estate and Housing Developers’ Association (REHDA), the scheme is meant to help genuine buyers by releasing them from having to double-pay both their existing mortgages and the interest for the new purchase.

“If they want to upgrade for instance from a semidee to a bungalow, they would have to pay mortgage and also pay interest — same for those renting while looking to buy their first house,” said Yam, who was among the pioneers of the scheme.

The problem may lie in those abusing the process, said Michael Geh, chartered surveyor and national committee member of the International Real Estate Federation (FIABCI) Malaysia. He urged Bank Negara to look into the potential abuse of the scheme instead.

“Admittedly, DIBS did hike up property prices in the past year, which were supposed to have softened but propped up by DIBS,” said Geh, a chartered surveyor.

“If Bank Negara were to investigate and take action, it should look deeper into the sales process,” added Geh. “The sales process for developer launches at the moment only benefits speculators while real home owners or first-time buyers are sidelined.”

Overall, the consensus on this side of the balance appears that while there are flaws in the execution of the scheme, it is based on a good principle and those who need it should not be denied its benefits because of its abuse by others.

“I don’t know if there is abuse, but (if there are, then) there are ways to tackle this and DIBS can (still) go ahead,” said Yam.

Curbs a bitter pill for the masses?

Another viewpoint centres around the effects of DIBS on the masses —is it a dangerous option for young, aspiring homeowners to have?

According to veteran chartered surveyor Cheong, the scheme tricks younger would-be homeowners into overestimating their affordability level when it comes to purchasing homes. Consequently they may purchase a property which they actually cannot afford.

“You are committing yourself to buy property, ostensibly without having to pay anything for the next three years and only start paying when you take delivery of the house,” said Cheong. “But the interest borne by the developers are actually already priced into your loan.”

“At the end of the construction period, you are already locked-in and committed to take delivery of the house. But who knows what will happen in three years?” added the surveyor, explaining that if the purchaser were to fall on hard times at that time, they may face more problems over their purchase.

“If you cannot take delivery by then, the developers may even sue you for specific performance,” he warned.

The illusion of affordability not only affects genuine would-be homeowners but also those overly eager to jump into property investment, said another market observer.

Easy entry entices many younger, newer investors to take on large property financing commitments while barely earning enough for living expenses. The “frenzy” over property investment is reminiscent of the surge in interest towards stock investment in the 1990s.

“I know (curbs) hurt, I know it won’t be (a) very popular (move), but it’s the only way to stop people just jumping into this without their eyes fully open,” concluded the observer who declined to be named.

Siva Shanker, president of the Malaysian Institute of Estate Agents (MIEA), observes that what purchasers who engage in DIBS often do not realise is that, in all probability, they are not getting anything for free anyway.

“To me, from a marketing point of view, it seems logical that if a developer offers you free interest for two years, the cost of that interest has already been accounted for in some manner in that purchase price,” opined the veteran estate agent.

How will curbs affect the market?

Pros, cons and social effects aside, how will any curbs or even a ban impact the property market itself?

MIEA chief Siva is not overly concerned, saying that any outright ban will only cause an initial slowdown in the primary property market. The secondary market would not be affected, he said.

“Also, many developers do not even have DIBS, only some,” added Siva. “So the effect is not going to be felt really strongly.”

According to Siva, there will likely be a short-term major reaction should curbs or outright ban materialise, therefore affecting sales to some extent. However, life should return to normal in the market in the medium- to long-term.

“People will forget, life goes back to normal and everybody will accept the fact that you have to pay interest,” he concluded.

However, will an outright ban actually be effective in countering the negative effects of DIBS?

Investment blog “Serious Investing” at www.intellecpoint.com argued today that outlawing DIBS altogether, while necessary, may not be enough. In a post today, the blog argued that the core of the problem lies with the banks and property developers themselves, who have always worked hand in hand.

“Some banks are giving 100% loan with low interest rates especially during the construction period,” said the author of the blogpost who declined to be named when contacted by KiniBiz. “Another indigenous scheme which the developers have come out with are rebates.”

“One which I have come across is a newly-launched property put up for sale at RM1.3 million. And if I were to lock in my purchase by say July 31, 2013, I will get a RM100,000 rebate from the purchase price. That is vastly cheating,” explained the blogger. “This basically mean that the price of the house is actually RM1.2 million but the developer has just jacked up the price to RM1.3 million and reduce my minimum upfront payment by 77%.”

The dilemma of Bank Negara, opined the blogger, lies in achieving the perfect balance in terms of the economy.

“The trick of the trade (for central banks) is to slowly cool down the sector,” said the investment blogger. “However as in most central banks, they would want to have what you call a Goldilocks economic results from the steps taken, i.e. not too hot and not too cold, just nice.”

“What they are afraid of is it gets too cold after a certain measure has been put in place. That would again jeopardize the economy.”