By Samantha Joseph
In the second issues piece, we take a look at housing loans and vehicle loans, the two sectors that take up the most amount of financing in households. What are the things that went wrong and how? What is being done about it, and how will that affect the average Malaysian?
_____________________________________________________________________
In August 2010, Zenith Residences went for RM 324 150 for a 710 sq ft two bedroom apartment. Now a quick check on iproperty.com shows that the current subsale going price is RM 460 000 to RM 480 000. That represents a 45% increase in price in three years, or a 15% growth on average.
Earlier this year, real estate services firm C H Williams Talhar & Wong said that they expected housing prices to rise between 10% to 15% for 2013, so the growth mentioned above is on track. Unfortunately, the ongoing problem is that income growth isn’t on track to equal it, leaving many Malaysians with little choice when it comes to purchasing homes and obtaining loans.
How did we end up here?
“When asset prices increases at a faster rate than your income growth, that’s not sustainable,” pointed out Yeah Kim Leng, group chief economist at RAM Holdings.
“Property prices affect our cost of living. If you rent, rental goes up when property prices go up. It’s the same with retail rent. Businesses will then increase their prices to cover the rent hike and pass the burden to the customer,” said Yeah.
“It’s a cost of living problem where income is not able to keep up with costs, and instead of seeing their real income rising, people will see their real income declining. When that happens, their standard of living also falls.”
He suggests that the current situation has a twofold explanation. One is that after the financial crisis in 2010, an excess in bank liquidity and low interest rates on housing loans caused a strong pickup in property prices as people shifted their investments to higher-yielding assets which gave rise to a lot of speculation. At the same time, banks also found that housing loans were lucrative, with low default rates.
According to BNM’s Financial Stability and Payment Systems Report 2012, purchase of residential properties and non-residential properties took up the majority of financing for consumers at 56%. At end March 2013, it was 52.1%.
Is this a matter of obstinacy on the part of the consumer, insisting on purchasing a property in the face of all odds? Or is this a matter of the banks being a little too generous when it comes to approving loans?
According to BNM, it’s both. Their recent measures, they say in response to KiniBiz’s questions, are “pre-emptive responses to developments in the lending market and to reinforce responsible lending practices by key credit providers so as to manage and mitigate the potential risk of excessive household indebtedness”.
Basically acting in the role of parents of children who are unable to control their urges to lend money and borrow money, BNM is putting its foot down in a gradual way.
The 35 year loan limit – pros and cons
By limiting housing loan tenures to 35 years, Bank Negara hopes to make a dent on the madly rising housing prices. This step, which raises questions about its efficiency, has its own pros and cons once implemented.
Although most bank loans are given out within the 35-year tenure anyway, there are banks that give out longer loans, and these are usually based on a ‘forecasting’ of future earnings of the borrower. This step allows those who would, under normal circumstances, not have gotten a loan at all, and increases the risk to both borrower and lender should anything untoward happen.
“The practice of lengthening the repayment period artificially increases the affordability of households to take on more borrowings. Over a longer term, such practice has an adverse implication on the financial and social well-being of a household, for example, increasing and prolonging indebtedness and encouraging over-borrowing,” BNM said.
But are there enough people taking on these loans to make a difference? This has to do with the ultimate goal of BNM’s measures. On one hand, we can calculate the effectiveness based on the fall in the number of loans – and, as analysts have predicted, there will be little impact on loan numbers with this regulation, we might say that this measure is not particularly effective.
But if, like chief economist Lee Heng Guie of CIMB observed, you don’t calculate it through loan dampening effectiveness but instead on the impact of borrower mentality and making them aware of the limits of their finances, it may be more effective.
It is effective in the sense that those who are unable to afford it in the first place will not be able to access properties in a higher price range. If they do still want a property, they will have to downgrade to one that qualifies them for a loan. Essentially, it will force people to live within their means.
“The social consequence of this step is that some people will end up not having access to these loans,” Yeah said. “It is an unfortunate side effect. We might see this particularly in [properties in] the higher to middle priced segments. With a 35-year limit, it would bring down the number of people who qualify.”
Good omens?
Economists expect there to be a dampening in demand as a result of this regulation, and this will cause property prices in certain segments to eventually ease off, which is of course the outcome that everyone has been hoping for.
The proof of the pudding is in the eating though, so we will have to wait and see if there is a drop in prices as a result. The wait as it is might be a long one.
While little can be done about speculators with cash in hand, this step will also help put a cap on speculative buyers who ‘roll’ their properties to purchase other properties through re-mortgaging and taking out long loan tenures.
According to the BNM report, “the number of borrowers with multiple housing loans, nonetheless, has started to rise again during the year (+3.4%), albeit by a smaller quantum, signalling a resumption in demand for housing credit for investment purposes”.
As property prices could go up between 10% to 20% every year, depending on the area, speculators are unlikely to make a loss anyway.
Urban Wellbeing, Housing and Local Government Minister Abdul Rahman Dahlan recently stated that he is in “favour of an increase to 30% because it will help curb speculation” and had been holding talks with Bank Negara on the increase.
While BNM is concerned with keeping enough of the Rakyat’s money in their pockets to avoid the debt rate going up, most Malaysians await the day when property prices goes down rather than the up, up, up of time immemorial. And that would require a combination of regulations that would deal directly with debt as well as speculators.
Among the suggestions to rein in the property prices were to increase RPGT rate and holding periods, remove DIBS, increase the stamp duty on borrowers with multiple homes, and to reduce and limit the margin of financing to no more than 90% or less.
What about car loans?
Steps by BNM cover housing loans and personal loans, but vehicle loans take up an even greater share of financing than the latter at 17.6% (March 2013). Penang Chief Minister Lim Guan Eng has called for BNM to increase regulations for car loans rather than property loans. This call may not have a positive response.
The government has already made clear their position on not reducing excise duty on non-national cars. Yet the artificially inflated car prices is one of the reasons that the twenty-somethings find themselves mired in debt – with the less than stellar public transport system, for some cars are a necessity.
It seems callous not to pay attention to car loans, but can anything be done about it?
In response to KiniBiz’s query on possible measures for car loans, BNM stated that it had already capped the tenure for vehicle financing at nine years since Nov 18, 2011. That seems to be that, as it stands.
CIMB’s Lee Heng Guie agreed that perhaps something can be done: “Maybe the current loan tenure length for transport vehicles could be reconsidered and the margin of financing could be reduced.” At the same time, he believes that the guidelines for giving out loans based on net income were sufficient to protect consumers for now.
Fresh Grad Trap
Nevertheless, there can be regulations on products pertaining to car loans. In the past few years there have been a rise in ‘graduate scheme’ car loans that allow those between the ages of 18 (with a guarantor) to 30 to own a car for 100% financing at a slightly higher interest rate than regular car loans. These loans are marketed to the ‘fresh grad’ crowd, and in some cases even to the undergraduate crowd.
While an increase in interest of 0.2% may not seem like much, when calculating the loan for a Kia Forte, for example, at RM76,000, a regular loan has a total interest paid of RM16,821, while a graduate scheme loan would have one paying around RM23,000 in total interest.
The payments for these schemes are often staggered, so that while the first few years have payments around RM700, the last few years could have payments of RM1,000. That is certainly less than ideal on a salary of RM1,800.
It seems that those who have less, have to pay more for what they have.
It looks like these loans are taking advantage of those who do not know better when it comes to their finances. And while it is certainly the client’s responsibility to ensure that due diligence has been carried out, it is not in the banks’ favour at all to be seen as skimming the line of ethics.
In this case, perhaps, something can be done to make sure that these rather questionable loans are better regulated to ensure the solvency of borrowers.
Yesterday: Malaysia’s household debt situation
Tomorrow: Personal loans and credit cards
You must be logged in to post a comment.