The central bank, Bank Negara Malaysia (BNM) pulled a surprise move last month when it lowered its overnight policy rate (OPR) for the first time since 2009. The key interest rate saw a cut of 25 basis points from 3.25% to 3.0%.
Citing heightened external risk as well as a weaker-than-expected domestic sector, the central bank voted to reduce the interest rate at which banks pay to loan each other money overnight in order to boost economic growth.
So, what does a reduction in borrowing rates mean to Malaysians? Two questions were posed to industry experts.
1. How would the drop in the OPR rate affect the property industry? What does it mean for potential purchasers and for those currently servicing property loans?
2. How would this move work to restore Malaysian consumers’ sentiment and what is your outlook for the short-term effects on the country’s economy?
Q1: Developers should welcome the OPR cut with open arms as it means more profits for their existing products in the market. It may not necessarily translate to a higher sales volume as the approval of home loans are still subject to banks’ strict lending guidelines and the need to contain the nation’s high household debt level.
Property investors who have raked in considerable property loans will rejoice as they will benefit from savings in monthly repayments. Even though a few commercial banks have reduced their base rate (BR) and base lending rate (BLR) in correlation to the drop in OPR, the quantum of reduction may not necessarily be the same.
Banks’ instalment rates may be lower with nominal adjustment as they would still need to meet their net margins. Most banks will also have a strategic game plan in store, as many are anticipating that there will be another round of OPR cuts this year.
There is an upside for landlords in terms of rental yields as low-interest rates could artificially inflate the housing market, leading to higher rental rates. Meanwhile, renters will suffer. Potential purchasers will be encouraged to invest in properties as saving is not as attractive when there is a drop in interest rates. Conversely, qualified borrowers will benefit from the lower cost of borrowing.
Q2: BNM’s play will serve as a direct stimulus to the domestic economy as the lower interest bearing rate from fixed and saving deposits will push people to spend more instead of saving. As purchasing power is directly proportional to household income, the low (and middle) income group will not benefit much as they are less likely to have mortgage loans whereas the more affluent will be at the winning end.
This is evident from almost 70% of EPF contributors in the country maintaining their existing contribution each month instead of opting for lower statutory contribution percentage introduced early this year.
The short-term outlook is good. Fiscal and monetary policies will help to keep the country’s economy robust although its impact could take months to unfold. Savvy investors will take a position to enrich their portfolios. Many will still prefer to maintain their wait and see attitude while the other half of the group will remain unperturbed by the news as they believe the economy will still be ‘okay’ moving forward.
Q1: Malaysia has the highest household debt in the region. Our household debt to GDP ratio has risen to 89% in 2015 from 86.8% the year before. This ratio has almost doubled between 2008 and 2015. The move to reduce the OPR is seen as the Government’s move to address Malaysia’s slowing economy and reducing exports, in light of increased downside risks to global growth from repercussions of Brexit.
This move, however, impacts negatively on the already high household debt levels in Malaysia and is expected to result in even higher debt levels in the months following this adjustment. Coupled with rising inflation due to GST and the weakened ringgit, the reduction in OPR is a dangerous gamble with longer-term effects that are potentially damaging.
Given that there does not seem to be any easing of the financial pressures weighing down the economy, especially with credit, the property industry is not expected to experience any material rejuvenation as banks are expected to remain cautious with credit and lending. This is especially so as the OPR reduction will contribute to the drop in deposit rates and put more pressure on local banks’ net margins.
Over the recent years, added controls have been introduced to curb speculative property buying. Local banks have established policies for reduced loan margins for subsequent property purchases, and the government increased Real Property Gains Tax for early property disposals.
It is, therefore, logical that the constitution and profile of property buyers and their investment and ownership intentions will largely remain unchanged. Whilst the OPR reduction will be a welcome move to those already planning to buy property, and those that are currently servicing property loans, it is not expected to create any substantial impact on the transactions that are already being entered into or are expected to be entered into.
Q2: As long as income levels remain at their current levels, sentiment will not drastically change overnight. Within the short term, whilst there may be positive reactions felt in the capital markets and the performance of the Ringgit, the gloomy long-term effects that come with increased debt levels will continue to weigh heavily on our prospects for long-term growth.
Q1: This is certainly a good news for the property industry. In fact, I had previously predicted a drop in the OPR rate somewhere in Q2 or Q3 of 2016 and I am glad to see that it has materialised. This move is much needed to ensure that the economy remains on a steady growth path.
New loan applicants will not be affected as banks will adjust their spread accordingly to maintain the current effective lending rate (ELR) at about 4.45-4.65% for residential loans. On the other hand, homeowners who have existing monthly mortgage payments will have a reason to rejoice as banks are expected to adjust their BR and BLR in tandem to the reduction in OPR.
Q2: BNM’s move was well received by the majority; the share market and value of the Malaysian ringgit rebounded right after the announcement.
Nevertheless, I personally feel that there is still room for improvement – the OPR and the statutory reserve requirement (SRR) should be lowered further in order to increase liquidity in the market to further boost economic activities.
Q1: It would have a mildly positive impact on the property market, i.e: buyers’ borrowing costs will reduce slightly as the monthly loan repayments will see a reduction, where its percentage will depend on the amount of the loan. Most major banks in the country have already reduced their BR by 20 basis points following the OPR cut.
Now, for the same amount of money, a potential purchaser can buy a slightly higher-priced property or have a slightly shorter repayment period.
Q2: It will lower the costs of doing business and increase the disposable income of the people as they are paying slightly less for their home loans. This, in turn, will encourage consumer spending. In short, BNM’s move is timely as the economy have been slowing down due to weak consumer and business sentiment.
However, the impact of the drop in the OPR is not significant as the amount of reduction in the mortgage payment is very minimal. The more pressing issue is the current uncertain socio-economic condition of the country that is affecting the consumer sentiment, the tightening of credit by the financial institutions and the huge oversupply situation of mammoth proportions of the various types of properties. This will have the bigger impact on the property market.
Mah Sing lauds BNM’s move in reducing the OPR rate, as cited by the central bank, “An accommodative lending environment is key to improving sentiments and Malaysia’s economic growth, which is fueled by domestic demand”.
This cut will most likely have a positive impact on house buyers who were previously on the fence, as they can now invest in an appreciating asset while enjoying lower monthly repayments. Mah Sing will benefit from the improved consumer sentiment especially since we have 6 new launches in the second half of 2016; namely Lakeville Residence in Kuala Lumpur, Cerrado in Southville City, Ferringhi Residence 2 in Penang and Bandar Meridin East in Johor, M residence 2 in Rawang as well as D’sara Sentral in Sg Buloh.
Most importantly, the cut will aid in home ownership growth among Malaysians and we hope to see more economy-friendly and positive measures from the central bank and government, especially in the upcoming budget. Hopefully, more measures will be introduced to ease the burdens of first-time homebuyers. As financial imbalances have receded, there is also the possibility of the easing of property measures over the next few months.
This article was first published in the iProperty.com Malaysia August 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!