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Malaysia heading to a 'Subprime Crisis' if developers turn moneylenders, experts predict

Yesterday, the Urban Wellbeing, Housing and Local Government Ministry announced the introduction of an initiative that enables property developers to give out loans to buyers at an interest rate of between 12 and 18 per cent. Yesterday, the Urban Wellbeing, Housing and Local Government Ministry announced the introduction of an initiative that enables property developers to give out loans to buyers at an interest rate of between 12 and 18 per cent.

Putrajaya is risking a subprime crisis if it lets developers assume the role of housing loan creditors who are allowed to charge quadruple the interest rates offered by banks, the National House Buyers Association (HBA) warned.

In a statement to the Malay Mail Online late last night, the HBA urged the government to reconsider the scheme, saying the country’s economy could suffer should a property bubble occur as a result of the “ridiculous” initiative announced yesterday.

“Being a licensed moneylender also known as a licensed ‘Ah Long’ is capital intensive and housing developers, to sustain their business, would continue to price their products at ridiculous and unsustainable prices, this can accelerate a housing bubble like what happened to the US during the ‘Sub-Prime Crisis’.

“HBA humbly appeals to our prime minister who is also the minister of finance to intervene in this ridiculous proposal (bad idea) as it not only does not address the root cause of high property prices, which is due to excessive speculation, but encourages the developer to even price their properties higher and give loans to undeserving borrowers,” it said.

Economist Dr Yeah Kim Leng said the scheme had the makings of a property and financial crisis as developers would have to venture into unfamiliar territory as they deal with buyers who may default on their loans.

“The key is the developers: Whether they can finance the new market segment; that kind of financial risk so it is very, very niche and of course it will boost the property market in terms of increasing demand, but there is also the risk of delinquencies.

“It will seed the next crisis if we do not proceed cautiously, especially to ensure we are not creating another unregulated shadow banking system,” the Sunway University Business School professor of economics said.

Axis REIT Managers Bhd head of investments Siva Shanker also predicted dire consequences for the economy if the government goes ahead with the scheme.

“I think this will spiral and the debt ratio will become higher. The lower and middle classes who need real help are being penalised. The rich who can get bank loans will be borrowing at 4 per cent and the poor who may not get bank loans will have to pay 18 per cent,” he told Malay Mail Online in a phone interview.

Regardless of the type of property or the location, no property purchase would appreciate in value enough to be able to exceed the value of the 18 per cent loan, he stressed.

 

Bailout?

Given the high interest rates of between 12 and 18 per cent that the developers would be allowed to charge, the HBA feared the government might have to one day rescue developers when buyers default on their loans.

The association pointed out that Malaysians are already struggling to pay their mortgages.

“Property developers will be driven by greed to approve loans to borrowers who do not meet their minimum lending criteria just to close the sale and there will be a very high chance that these borrowers will default on their loan, especially given the high fixed interest rates of 12 per cent to 18 per cent.

“There may be a possibility that eventually housing developers may approach the government for bailout money, claiming that this loan scheme was a form of ‘National Service’,” it said.

 

Alternatives

Unlike the HBA, Siva did not think Malaysia would experience a subprime crisis at the levels faced by the US in the mid-2000s, expressing confidence that the government would have learnt from the superpower’s mistakes.

However, he felt the government would do better to brainstorm for other ideas with stakeholders to help Malaysians afford their own homes than proceed with this latest plan.

He suggested the government implement other forms of financial assistance to complement the current system rather than allow developers to provide loans to buyers.

“Rather we should relax our lending laws a bit. Banks may consider ways to become less stringent.

“We need to help first-time buyers, young couples and the lower, middle class maybe by offering high 100 per cent loans instead of 80 per cent or maybe have longer repayments,” he said.

Another consideration was for the government to revive the Developer Interest Bearing Scheme (DIBS) abolished in 2014 due to excessive property speculation and enforce stringent regulation this time around.

“It didn’t work last time because it wasn’t properly regulated. If they regulate it this time, it will really help first-time buyers,” Siva said.

Yesterday, the Urban Wellbeing, Housing and Local Government Ministry announced the introduction of an initiative that enables property developers to give out loans to buyers at an interest rate of between 12 and 18 per cent.

Eligible developers can now apply for moneylenders licences to provide home financing to property buyers. The licence would be issued by the Ministry under the Moneylenders Act 1951 (Amendment) 2011.

Its minister Tan Sri Noh Omar added that the interest is capped at 12% a year for borrowers with collaterals, and 18% for those without.

According to him, the scheme is open to others besides first-time homebuyers. He said the scheme could offer up to 100% home financing for between 10 and 20 years.

"Buyers who wish to finance the remaining portion of a house not provided by the bank, can also seek financing from this scheme," Noh said.

This is a win-win situation, he said. While people can buy homes, developers will also find a new and recurring income stream.

Ultimately, the move is intended to assist Malaysians who are unable to get a full housing loan from banks or those who may only be given a partial housing loan.

The number of unsold units in both residential and commercial properties also rose by 16 per cent in the first quarter of this year, according to the National Property Information Centre (NAPIC).

The Real Estate and Housing Developers Association (REHDA) Institute chairman Datuk Jeffrey Ng attributed the increase of unsold homes to Bank Negara Malaysia’s strict policies on banks to rein in growing household debt.

The central bank’s annual report for 2013 — the most recent figures available — showed household debt levels overall have increased to 87 per cent, a steady climb from 60 per cent in 2008. Of that figure though, more than 40 per cent of household debt went into loans for property purchases.

 

News Source: The Malay Mail Online, 9 September 2016

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