It is not feasible and somebody must have told the Minister the wrong facts. It is obvious that the Minister of Urban Wellbeing, Housing & Local Government was ill-advised by parties with vested interest.
HBA views with grave concern on the statement by the Minister of Urban Well-being, Housing and Local Government, YB Tan Sri Noh Omar that eligible housing developers can now apply for moneylenders licenses to provide loan facilities of up to 100% to property buyers.
Instead of assisting housing buyers to get a ‘soft loan’, it seems that house buyers are dragged into deeper debts unwittingly. Such a ‘scheme’ will only bring more harm than good and we will attempt to elaborate why.
The effective interest rate for a conventional housing loan, from Banks and Financial Institution, ranges from between 4.6% to 5% depending on various factors, such as amount borrowed, the risk profile of the borrower, duration of the housing loan and type of property. It must be noted that the interest rate for housing loans are based on the ‘reducing balance’ as the interest rate is calculated based on the actual principal amount outstanding.
The Minister was quoted to have said that the “interest rate for loan taken under the scheme varies from maximum 12% with collateral and up to 18% without collateral.” This interest is more than double than what is typically offered by banks and will greatly burden the borrowers of such a ‘scheme’. As it is, many borrowers are already struggling with housing loans of 5%, taking a housing loan with interest of 12% is just plainly asking for trouble.
Developers offering such a ‘scheme’ must also clarify whether the interest rate offered are based on a ‘reducing balance’ or is actually a fixed rate loan which is permitted under the Moneylenders Act, 1951. This is because loans given under the Moneylenders Act such as personal loans and hire purchase, the interest to be repaid is fixed upfront and does not reduce as the principal is being repaid over the tenure of the loan.
Hence, such fixed rate loans quoted at say 12% for a tenure of 20-years, the effective interest rate is actually much higher at 16.34%. This is more than 3 times higher compared to a conventional Bank at 4.6% to 5%.
ACCELERATE PROPERTY BUBBLE
Being a licensed moneylender aka 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 USA during the “sub-prime crisis”. Property developers will be driven by greed to approve loans to borrowers who does 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% to 18%.
As more and more borrowers default, this will trigger a domino effect that will burst the property bubble and trigger a larger widespread economic recession for the entire country. House buyers who indulge in this scheme will be facing a double jeopardy in having to ‘service’ 2 loans inevitably – the licensed ‘Ah Long’ loan and the legitimate bank housing loan. Question: How long can he sustain?
HOUSING DEVELOPMENT PROJECT ACCOUNT
The Housing Development Project Account requires all transaction to via the said account under the law. If the developer gives loans to buy its own houses and if it fails to complete the house, what would happen? Will it release the loan amount to itself? Isn’t there a conflict of interest in this scenario? Will they exercise a fiduciary duty of care their customers cum buyers cum borrowers?
PROFITS PRIVATISED – LOSSES NATIONALISED
Banks have invested large amounts of resources in developing the necessary tools to carry out proper credit assessments, collection monitoring, and recovery. Developers simply lack the resources and without the required economies of scale, cannot find the resources to investment in required hardware, systems or training. This means that the chances of default of such borrowers are very high and developers will not be able to face the financial implications if too many borrowers start to default on their loans.
These developers could go ‘belly-up’ and property market being the catalyst engine of growth would affect our economy nationwide. 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 will be another case of “Profits Privatised – Losses Nationalised”.
WAS BANK NEGARA MALAYSIA CONSULTED?
Bank Negara, Malaysia (BNM) has played a central pivotal and important role in ensuring a sustainable financial sector. Banks are strictly regulated and have to comply with various regulations ranging from Financial Services Act and also other laws such as AntiMoney Laundering Act, etc. HBA would like to ask the honorable minister if he has consulted with BNM prior to announcing this proposal and whether BNM has given its blessing as the failure of such a scheme as highlighted above can have wide ramifications for the economy and country at large.
BALANCING THE RISK BETWEEN ‘BUYING” AND ‘RENTING’
Buying and owning a house is a riskier proposition for households compared with renting. Buyers take on enormous debts, sign multi-year loan agreements and become responsible for homeowners’ cost of their homes whilst renting is a much easier undertaking. The Government should, in fact, encourage potential house buyers to rent if they do not even have the ‘up-front seed money’.
Be mindful that foreclosures can devastate a family’s economic and social standing, leaving them poorer instead. Making sure households have sufficient personal financial management skills is more than a supplementary issue. Financiers, local authorities, and communities benefit from homeowners being better informed of their rights and responsibilities as house owners and borrowers. Support for potential house buyers and owners is crucial otherwise they end up ‘house poorer’.
HBA humbly appeals to our Prime Minister who is also the Minister of Finance to intervene in this unfeasible proposal as it does not address the root cause of high property prices which is due to excessive speculation. Even worse, it actually encourages developers to price their properties even higher and giving loans to undeserving borrowers.
This scheme if implemented will even result in higher property prices and further exacerbate the housing crisis that Malaysia is currently facing. The best solution in this current climate condition is for developers to built and buyers to rent first with the options for the house buyers to buy at a later date.
This article was first published in the iProperty.com Malaysia November 2016 Magazine. Get your copy from selected news stands or view the magazine online for free at www.iproperty.com.my/magazine. Better yet, order a discounted subscription by putting in your details in the form below!