Every now and then some Cabinet member or other affects naivety to accept developers’ arguments to reintroduce the ‘Developers Interest Bearing Scheme’ (DIBS). It should be noted that Bank Negara Malaysia had already prohibited and outlawed ‘any form of interest capitalisation scheme’. The economic downturn is seen as a fresh opportunity for DIBS to be reconsidered and mooted by none other than REHDA. This time around, they say it’s only for ‘first time house buyers’.
DIBS – Dubious scheme
DIBS or any other permutation similarly “schemed” cannot be allowed to continue for the betterment of the housing industry as it risks creating a property bubble as the property prices have been artificially increased and they create a snowball effect. This is especially so when the young, unwary and naïve house buyers come on stream. They need more protection than those seasoned players.
DIBS prohibition announced in Budget 2014 had been effective in curbing the unbridled escalation of house prices. DIBS must continue to be prohibited and outlawed and should not be re-instated in any form or substance.
Whatever the economic situation the basic facts of DIBS are the same and made worse by the economic situation: it involves developer’s advancing the expenses of construction and other expenses which is to be collected later as debt from the purchaser with interest element factored it and therefore costing more than originally. By contrast, in sell and build the purchaser has enough money to meet the deposit and actually pays the cost of construction as it is incurred by the developer. The purchaser actually lends money to the developer because at the time of payment of the deposit, the developer would not have incurred any cost of construction because no construction would have begun at the time of payment of the deposit.
Developers now say, and a Cabinet member parrots it, that the scheme helps first-time buyers to own their homes as they do not have to pay for anything initially as the developer absorbs all the expenses, interests and deposit payments (for all time?); and so it is attractive for that reason alone. It thereby stimulates the economy and it helps our businessstarved developers to stay in business and, so the argument goes, their cheap, unskilled labour that they have been depending on to keep in practice may turn to becoming farmers and fishermen again, and lose their abilities, and it may cost a lot more to round them up again when good times return. If it was only a matter of building and selling houses it may be a valid argument. But is it? We shall list out the key reasons why HBA is against the re-introduction of DIBS, even if it is only for ‘First Time House Buyers’.
Any economist worth his salt will say that price is a function of demand and supply. In a situation where demand exceeds supply, prices will increase. Buying a house is a life-long commitment and requires careful planning and hard work from an early age. A house buyer will do all the necessary due diligence and becommitted to a purchase when he or she has to fork out a substantial sum of money. Hence, by reducing the amount of cash outlay that a purchaser needs to make, DIBS will encourage excessive speculation and impulsive purchase. Many first time house buyers may think that they have a chance to make a quick buck by flipping the property on completion without having to pay any money during construction stage. As a result of this increased demand, albeit much being false, house prices will be pushed up across the board, making it more difficult for future house buyers to purchase their dream home.
Progressive interest is not as high as you think
One of REHDA’s contention that DIBS is needed is that many ‘First Time House Buyers’ are from outstation and cannot afford to pay the progressive interest and rent at the same time. However, upon closer scrutiny, this argument does not hold water as the average progressive interest payable is not as back breaking as alleged.
Progressive interest is only payable upon disbursement of the housing loan which is dependent on the stage of completion. We have computed the average interest payable for a mid-level high rise apartment costing RM500,000 that a typical house buyers buys when the developer launches the project.
Based on the table above, for the first 9-mths (in some cases up to 12-mths), there is no progressive interest payable as the stage of completion have yet to be completed. The typical progressive interest for the first 1.5 years to 2-years is not very high as the stage of completion is not at an advanced stage. The progressive interest only starts to get higher in the 3rd year as the property is about to be completed.
By this time, if the house buyer has problems servicing both his current rental and the progressive interest, it either means that:
(a) this house buyer will probably have difficulty to service his full monthly installment which is much higher than the current progressive interest payable or the monthly rental expenses; or
(b) the current rental is excessive in comparison to the house buyers income
It is also worth to consider that the borrower’s income could have increased in the 3rd year when the progressive interest really starts to kick in as it has been 3-years since the borrower’s loan was approved; thus offsetting any difficulty that the borrower may experience to service both his progressive interest and current rental, if any.
There is no free lunch
The typical progressive interest payable during the construction typically ranges between 3.5% to 4.5% of the property price, depending on which unit the house buyer buys and the pace of construction. In our example above, the progressive interest is 3.77% of the property price.
However, based on HBA research data, the difference in property launched with DIBS and without DIBS was as high as say, 20% to 25%. This means that in our example above, a property that only cost RM500,000 without DIBS where the purchaser pays RM18,843.75 in progressive interest would be launched by the developer with DIBS at between RM600,000 to RM625,000. This represents a premium of more than RM100,000 over and above the progressive interest payable.
This artificial increase in selling price will in turn push up prices of existing completed properties and also push up prices of new properties, either with or without DIBS. This will even make it more difficult for future house buyers to purchase their dream home.
DIBS period corresponds with steep increase in property prices
It must be stressed that the period when DIBS was first offered starting from 2009 until it was banned in end 2013 corresponded with the steep rise in property prices. The report by Khazanah Research Institute showed that the Malaysian all-house price index grew steadily at a compounded annual growth rate (CAGR) of 3.1% from 2000 to 2009 and suddenly accelerated at a CAGR of 10.1% between 2009 and 2014.
It is no coincidence that the DIBS period is also the same period that house prices suddenly escalated as DIBS created a false demand which in turn pushed up property prices across the board and resulting in property prices being deemed as ‘seriously unaffordable’ to the average Rakyat. The property market was then incessantly infested with speculators and investors clubs mushrooming.
Pay nothing to own a house?
The argument that purchasers don’t have to pay for anything during construction is specious: attractive to the unwary, the desperate including those who have no hope of ever owning a house; never mind that what he has to pay a little later exceeds his means, justified only by ‘as long as the economy keeps moving’ thinking even if it is on the backs of those who can least afford it.
The expenses, in any form, incurred by the developer will eventually have to be paid back, somehow or another, by the purchaser with ‘premium’. The increased amount ranging from 10% to 20% and some even as high as 25%, will have to be paid by purchasers in exorbitant instalments which they are likely to default which will then fall into the hands of those waiting to prey on the misfortune of others; otherwise the instalments will have to be reduced to stretch over a longer period extend beyond the lifetime of the borrowers.
Paying double interest
Without DIBS sale price is 500K and 90% financing is 450K. Add in DIBS sale price is, say, 550K and 90% financing is 495K. Difference in financing is 45K. Thus, this difference is the DIBS factor – or in other words, the interest being financed. This simply means that the purchaser has now to pay interest on the interest financed. The purchaser is paying double interest!
Not every purchaser borrows the same amount. Is DIBS price across the board? If one needs only 50% financing, does he pay the same purchase price as a 90% financing purchaser? If yes, then he is obviously overcharged. Don’t forget that developers do their costing from the planning stage and factor the interest element into their ‘over-all’ sales price. Be mindful that developers gain ‘interest free’ working capital from higher loan releases because of higher DIBS sales price paid for by purchasers paying interest on DIBS interest.
Laughing to the bank
The chief beneficiaries of the DIBS are the developers – they can flock off their products quickly and the banks/ financial institutions – they can give out higher loans to achieve their monthly target.
One should not lose sight of the basic fact that a roof over one’s head is a compelling, indispensable need of all human beings, in fact all living things. Viewed in that light, not just as another package, it will be clear that other options cannot be availed of if one just cannot afford it; he may still have a roof over his, which he can enjoy without owning it – consider renting. Renting is a minimal risk as compared to buying.
The developer’s scheme has also to be seen as a competitive offering to stave of affordable houses which are in the offing, taking root in Malaysia as a more viable option to the less well off; cheaper to the purchaser and less profitable to the developer.
It is this last frontier that developers have not got their hands on yet. A government that has not resolved the problem of more than 90,000 abandoned and problematic houses and has not found the political will to prevent it happening in future is about to do the public another disfavour to favour developers.
This article was first published in the iProperty.com Malaysia June 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!