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Relaxed lending criteria will not address access to affordable housing

For many years, the National House Buyers Association (HBA) has been warning that Malaysia is going to face a potential housing crisis in the form of a “homeless generation”, where an entire generation or even generations of prospective house buyers, from the lower to middle-income segment and our younger generation comprising the Millennials, will not be able to buy their dream homes.

This foreboding premonition has proven to come true - Bank Negara Malaysia (BNM) 2016 Annual Report states that “Since 2012, the increase in house prices in Malaysia have outstripped the rise in income levels. Consequently, prevailing median house prices are beyond the reach of most Malaysians.”

In simple terms, this means that the average Rakyat cannot afford to buy a property based on his current income. This is prevalent in all the major states as shown below:

If left unchecked, this housing crisis can bring about various social problems such as an increase in crime rates. It is imperative for the government to take immediate measures to address this issue.

Various parties have come out with suggestions on how to address the issue of accessibility to affordable housing. Predictably, the Real Estate and Housing Developers Association (REHDA) opines that the main reason why the Rakyat cannot buy properties is because banks refuse to give them loans. REHDA have asked for Banks to be more lenient in their lending criteria to allow more people to be able to buy their dream homes.

At first glance, it may appear that REHDA’s proposal has some merits as it helps people who cannot afford to buy their dream homes to get the necessary financing required. However, REHDA’s proposal is very detrimental in the medium to long term and will only compound the problem that property prices are too expensive in comparison to income levels.

Encourage developers to price new launches even higher

The current problem faced by house buyers is that property prices are too expensive in comparison to their current income levels. As a result, there will be some prospective borrower who will have their loan applications rejected simply because the Banks feel that the credit risk is just too high as the loan amount applied is excessive in comparison to their current income levels.

The solution is not for the banks to relax the lending criteria by “closing one eye” but to find a way to lower property prices so that it is more affordable to the average Rakyat. Relaxing the lending criteria will only encourage housing developers to price their properties even higher and worsen the situation for both current and future generation of house buyers.

According to the Khazanah Research Institute, the Malaysian all-house price had grown at a CAGR of 3.1% from 2000 until 2009. However, between 2009 and 2014, it grew at a CAGR of 10.1%, which is almost 3 times more than the growth from 2000 to 2009. By relaxing lending criteria, the steep rise in property prices is expected to continue.

Will cause the prices of existing completed properties to increase too

When it has been known that banks are relaxing their credit criteria, owners of existing completed properties, especially the property speculators and investors club will also follow in developers’ footsteps in increasing selling prices. This will worsen the current situation as prices of both new and completed properties will increase at an accelerated rate.

Property prices have a very strong ‘push and pull’ effect. When prices of new properties increase; this will cause a spike in nearby completed properties. It can also ‘push and pull’ up prices of completed properties and new launches in surrounding areas and this effect will continue to spread. Hence, new property prices in the prime areas such as Damansara will eventually ‘push and pull’ up properties prices as far as in Semenyih and Seremban.

Higher property prices means higher cost such as legal fees, stamp duty

There are many ancillary costs in purchasing a property such as the sale and purchase agreement, loan agreements and the stamp duty for the transfer of the property and the loan agreements. All these costs are normally charged as a percentage based on the property value. When house prices increase as a result of relaxed lending criteria, house buyers will have to bear higher ancillary cost too.

Less or little savings for emergencies

When house buyers take on a loan amount that is beyond their means, they will have to cut back on other areas such as savings for a rainy day. Borrowers will have very little or no savings for any unforeseen emergencies such as an accident or prolonged illness. Thus those faced with high debt obligations could be driven to financial ruin should any emergency strike.

Basic essentials of living affected

When such a high percentage of household income is committed to servicing housing and car loans, very little is left for other basic living essentials. The Rakyat will be forced to cut down on meals, clothing, entertainment, healthcare necessities, etc. Therefore, the other sectors of our economy will suffer, leading to an unbalanced economy. The only benefiting parties are banks, developers and the associated agents.

Banks owe duty of care to depositors

Banks are in the business of taking deposits and giving loans, hence banks would never deny financing to credit worthy borrowers. Financing is the bloodline of any country and without financing by banks, Malaysia’s economy will come to a complete standstill. BNM and the Association of Banks Malaysia have released data to prove that banks have given and will continue to give financing to those who deserve it.

The primary source of funds for banks to disburse loans come from the customers’ deposits. Ultimately, if the banks go bust because too many borrowers have defaulted on their loans, the depositors will also lose their money. Hence, banks must exercise a great duty of care to protect these funds by ensuring that only credit worthy borrowers get the financing that they deserve.

Prevent potential sub-prime crisis

It is important to learn from other countries’ mistakes and the sub-prime crisis in the USA is an important lesson to be learnt. In layman terms, the three recipes for the sub-prime crisis were as follows:

(i) Overpriced properties;

(ii) Less than credit worthy borrowers; and

(iii)Economic slowdown

When either of the above happens in isolation, the effects are still manageable. However, when combined together, it caused the biggest global financial and economic crisis since the Great Depression of the 1930s. Based on BNM 2016 Annual Report, the median property prices in Malaysia have already met the first criteria as home prices are beyond the reach of most Malaysians. Malaysia is currently experiencing an economic slowdown as evident by the drop in global oil and commodity prices and a drop in our local currency against other major currencies. This actually means Malaysia has ticked 2 out of 3 boxes which sparked the sub-prime crisis in the USA.

By calling for banks to relax the lending criteria, REHDA is courting potential financial disaster as it will tick the third and final box for a potential subprime financial crisis. Although Malaysian Banks are in a much stronger and more resilient position since the Asian Financial Crisis of the late 1990s, a subprime crisis in Malaysia could potentially devastate the domestic banking sector and trigger a wide spread economic recession that could potentially spill over to the entire ASEAN region. Hence, it is imperative that banks do not relax their lending criteria, especially during difficult economic conditions.

HBA’s advice for aspiring house buyers:

Buying a house is not as easy as it was just 10 years ago. Due to rising cost of living and escalating house prices, it has become much more challenging for the current generation to buy their first or dream homes. Aspiring house buyers must be prepared to make sacrifices and forgo certain luxuries such as the latest gadgets and the RM10 coffee at cool hipster cafés.

They should always try to set aside at least 10% - 20% of their monthly pay as savings for the purchase of their first home and other unforeseen emergencies before indulging in any luxury purchases. 

Don’t buy a car until you buy your first house

With the completion of the Mass Rapid Transit (MRT) from Sungai Buloh to Kajang, public transportation is expected to improve. Coupled together with other rail projects such as the LRT Extension and future MRT extensions, it has become feasible to commute to work using public transportation.

HBA would advise all aspiring house buyers not to buy their first car until they can afford to buy their first house. This is because with an existing car loan, the amount of housing loan that such aspiring house buyers can take will be greatly reduced. The hirepurchase (of a car) will ‘eat into’ the instalments’ repayment liquidity. If aspiring house buyers really need a car, it is advisable to get a cheaper but reliable second-hand car or a ‘handme-down’ car from their parents or older siblings.

Comfortable debt service ratio

Among the reasons given by the Association of Banks for the reasons for rejecting housing loan applications was the high debt service ratio (DSR). This means that the applicant’s existing level of borrowings and repayment is high compared to the applicant’s income. Banks use DSR to determine how much an applicant’s income is being utilized to pay off debts and if he/she can afford to take on an additional loan;

Most prospective house buyers do not know what is the maximum DSR allowed by banks. Prospective borrowers must be mindful not to take on too much borrowings in relation to their income levels and HBA would recommend that prospective borrowers adhere to the following DSR guidance on the assumption of monthly gross income of RM5,000:

(i) Any single monthly loan repayment cannot exceed RM1,666 (1/3 of monthly income). For prudence sake, HBA recommends limiting to only RM1,000 if possible (20% of monthly income).

(ii) All combined monthly loan repayments cannot exceed RM2,500 (1/2 of the monthly income. For prudence sake, HBA recommendation to keep to RM2,000, if possible (40% of monthly income)

Conclusion

The current problem is that house prices are too expensive in relation to buyers’ income and many are seeing their loans being rejected. However, the solution is not to relax lending guidelines but to find ways to lower property prices. The relaxation of lending guidelines will surely worsen the situation and speed up the road to a “Homeless Generation” that HBA has been warning about for in years.