3 Tighter Rules for Property Sector? (Sept 2013)

Prior to Budget 2014 (to be tabled next month), speculation has rift up on a few proposal to tighten the rules, especially on property sector. Following the outcry from public stating the alarming high property prices, measure should be taken to tackle the issue before bubble was formed.

The Bubbling Biz...

Among the measures being proposed were:

1. Non-other than Real Property Gain Tax (RPGT)
   
   
   
   
2. Higher Stamp Duty:
   ~ 5% of purchase price for 3rd property
   ~ 7.5% for 4th property
   ~ 10% for 5th property onward
   
   
3. Loan-to-Value ratio reduce to 60% for 3rd property onward
   
   

While the above info need to be ascertained further, some banks already implemented their in-house ruling. What's that? It was to limit the maximum term for refinancing of property to 10 years. Yes. Sooner or later, all of the banks will follow.

* Please note that the above 3 rules need to be ascertained further. Stay tune!

Latest BNM measures to Curb Excessive Household Debt (July 2013)

Hot from oven. Bank Negara Malaysia (BNM) today announce some measures to address the alarming household debt among Malaysians. As reported, household debts have continued to increase at a strong pace, averaging at an annual rate of 12% over past 5 years. While this has been supported by positive income and employment conditions, in the more recent period, there has been a growing trend in the offering of financial products that are not in the long-term interest of consumers.

What does this mean?

This includes extended financing tenures of up to 45 years for house financing and 25 years for personal financing!!! Wow... Is it too long the tenure? While this may reduce the monthly repayments, in the long run, this increase the overall debt burden of households. If we don't stop this kind of practice, it will encourage excessive debt accumulation by households and increase the vulnerability of this sector.

Hence, BNM has to take actions...

The implementation of a set of measures aimed at avoiding excessive household indebtedness and to reinforce responsible lending practices by key credit providers. These measures, which take effect immediately, complements the earlier measures introduced since 2010 to promote a sound and sustainable household sector.

What are the measures?

1. Maximum tenure of 10 years for financing extended for personal use;
2. Maximum tenure of 35 years for financing granted for the purchase of residential and non-residential properties;
3. Prohibition on the offering of pre-approved personal financing products.

Who will be affected the most?

For sure, borrowers (excessive one) will be short-handed. However, those good quality borrowers will not be affected. Meanwhile, the hands of financial institutions once again being tighten further. It will definitely impact the loans growth, but with a more quality growth. Property sector will face some minimal impacts, given most of the loan approved is within 35 years of financing.

For Finance Malaysia, this is good news for our country's financial sector. Excessive household debts, coupled with poor quality loans, will endangers the financial system. Worth to highlight here is the pre-approved loan is being banned now. Long time ago, Finance Malaysia is very uncomfortable with such offerings, with the intention to "indulge" bank clients to borrow. Now, we are relieve. Do you agree?

What is Statutory Reserve Requirement (SRR)?

Everyone is buzzing about SRR lately, since Bank Negara Malaysia's statement which stated its intention to raise SRR in the near future. Actually, what is SRR? And, what is the effect of higher SRR imposed? Why BNM using SRR right now? Finance Malaysia hopes to clear everyone's doubt and would appreciate if you can share this out.

What is SRR?

Statury Reserve Requirement is a monetary policy instrument available to Bank Negara Malaysia (BNM) for the purposes of liquidity management. Effectively, banking institutions namely commercial banks, merchant/investment banks and Islamic banks are required to maintain balances in their Statutory Reserve Accounts (SRA) equivalent to a certain proportion of their eligible liabilities (EL), this proportion being the SRR rate.

Why BNM uses the SRR as its "tool"?

Since SRR is available to BNM to manage liquidity and hence credit creation in the banking system, it was used to withdraw or inject liquidity when the excess or lack of liquidity in the banking system is perceived to be large and long-term in nature. Currently, BNM believes that our banking system is lack of liquidity, thus it may raised the SRR to "store" more money in banks.

Effective 1 March 2009, the SRR rate for banking institutions is 1% of EL. As of 1st September 2007, the EL base consists of ringgit denominated deposits and non-deposit liabilities, net of interbank assets and placements with BNM.

Previous adjustments to the SRR rate

What is the effect of higher SRR?

As explained above, higher SRR means that banks in Malaysia will have to keep more money as their reserve. This translates into lower loans growth for banks. Normally, banks wiould imposed stricter loan approvals for borrowers, because less funds are available for lending.

Normally, higher SRR translates into lower profit growth for banks. Banking stocks are the hardest hit. But, raising the SRR from a record low of 1% is unlikely to have any significant impact on credit growth. Finance Malaysia see this as an opportunity to accumulates banking stocks if they are battered down because of higher SRR.

Source: OSK Research

Source: OSK Research

Source: OSK Research

Source: OSK Research

Source: Bank Negara Malaysia

Related Posts:

Motor Insurance to cost more starting 2012?

Extractions from BNM monetary policy statement (Jan 2011)

How BNM OPR hiking affecting the market? (March 2010)

My First Home Scheme: Home of Trouble Ahead?

Once again, to address the affordability issues of properties, MyFirst Home Scheme (My1st) was launched by government on 8th March 2011. Thanks for addressing the problem faced by young Malaysians working adults. But, does it really worth to even think about the scheme?

Of course, owning a house at young age is a good start to family planning. In fact, we're living in a society where buying a new house tights closely to starting a family. But, this is not necessary a MUST to everyone of us. We must do proper planning before committing for such a long-term loan with such huge amount. Buying a house is not buying an iPad or iPhone.

Only apartments are likely with less than RM220,000 price tags in Klang Valley now

Highlights of My First Home Scheme...

• For those earning less than RM3,000 monthly
• Working in private sector
• Confirmed employees with a minimum of 6 months in the job
• Joint applications are allowed (both in private sector and are family members)
• 100% loan financing for first house purchasing
• Eligible houses: Between RM100,000 and RM220,000
• Both under construction or completed properties
• Repayment period of up to 30 years
• Monthly loan repayment must be < 1/3 of applicants' monthly gross income
• 25 participating banks / financial institutions

Burning questions to participating banks...

1. Does the participating banks offering the same rate as currently practiced?
2. Does the banks really allocate sufficient funds for such loan?
3. Would the bank perform stricter credit checks since many borrowers are young and categorized as higher risk group?

Burning questions to borrowers...

1. Are there any houses out there you still think that is not overvalue? Still berbaloi?
2. Assumed that you found one, does it fit into your desired picture? Safe surrounding?
3. Assumed that you also found one, are you quick enough to snap it?

"Trouble Ahead"?

Assuming that loan rates as BLR-2.2% (BLR currently is 6.30%) and a 100% loan amount of RM220,000, the monthly loan repayment is RM1,063. If an eligible guy take the loan with maximum salary of RM3,000 allowed, the take home pay after EPF deduction was RM2,670 only. This translates into 40% of net income!

Example calculations of monthly loan repayment

Do not forget the legal fees, stamp duty, fire insurance, MRTA, cukai pintu, cukai tanah and renovations fees! I think most of our fresh graduates will buy a new car first. Assuming that the car loan installment is RM500 monthly, this would add up to 58% of net income!

To make trouble bigger, please take note of the changing interest rate environment, which means the BLR would possibly revised upward in the future. Then, your loan repayment will be adjusted higher accordingly. Can you afford your loan repayment then?

Related posts:

3 Wrong Perceptions on Malaysia Properties

70% Loan to Value (Nov 2010)

Why China Raised Interest Rate? And, what's the effect?

2011 Malaysia Outlook: Sunshine to Sunset

By Finance Malaysia,

Driven by better economy prospects, Malaysia successfully escape recession two years ago, particularly March 2009. Strong GDP growth and numerous government's initiatives is the main reason why local market experiencing a spectacular run-up since then. Today, our KLCI break another record high, by closing at 1551.89 points. So, what is the outlook for Malaysia in 2011?

Maybank expects KLCI will hit 1,700 mark in 2011

KLCI

The Malaysia Index will continue to perform in line with the overall economy. More IPO will be issue. More merger & acquisitions activities will be seen. KLCI will be driven by the following factors:-

• Improving sentiment
• Follow through momentum from all time high
• Hot capital inflows
• Improving liquidity
• Boost by plantation and oil & gas heavyweights, such as IOI, Sime and PetroChem

Preferred sector(s)...

• Finance sector will continue to do well in line with the economy
• 2011 will be a "Grammy Awards" show for construction sector, where government rolling out its multi-billion projects
• Another show is from oil & gas sector, organized by Petronas
• Property sector should continue chalking up sales with great demand

Sunshine to Sunset sector(s)...

Please take note that all is not so bright in 2011. Some of these sectors could face some turbulence in 2nd half of 2011. That's why I called it "Sunshine to Sunset".

• Once high-flyers in difficult times, glove sector could be facing another whirlwind quarters with excess capacity and high input costs in the second half.
• Besides glove, manufacturing sector would struggle because of electricity tariff hike imposed by TNB, speculating after Chinese New Year.
• Technology sector will be a sunset sector next year due to stronger ringgit.

Bond market

Local bond market will boom, in conjunction with the projects awarding sessions and government's ambition to make Malaysia an Islamic financial hub. Local bond market will do well in the first half, before Bank Negara Malaysia resume its interest rate hiking policy later.

3 wrong perceptions on Malaysia's Properties

In Malaysia, property investment is gaining momentum since last year. And, the property sector seems unstoppable with record breaking sales. New launches are fully taken up within few hours. Speculators are becoming greedier than ever. Calming down, figuring out, is it so attractive after all? Let's have a look at the 3 big wrong perceptions…

Wrong perception #1: 
Malaysia's properties still attractive?

No doubt, many analysts and researchers comment that the local market price is still low if comparing to regional markets, such as Singapore and Hong Kong. This was wrong because we cannot simply compare with islands, where land is limited. We cannot simply compare with China, where billions of people chasing for limited supply of houses.

Wrong perception #2: 
KL Developers are going high-end?

Yup… KL developers are focusing at launching those high-end residential units. But, do not come into conclusion just that. First, we must look into the locations of these new launches, especially those at golden triangle. Locations play a vital role of setting the price of properties. Second, the cost of acquiring a particular land, and the cost of constructing sure will add to the price where buyers have to bear. Third, I noticed that many super high-end units are located on hills top. Difficulties to get the relevant approvals and moving machines up there was included into the selling price of course. Though, I can't deny there are developers trying to mark-up the price, as buyers think that the costlier the better.

The Pearl @ KLCC

Wrong perception #3: 
Malaysians household debt is high because of house loan?

Generally, house loan could easily be our biggest "earning-eater". House installments eat into our monthly salary. While there is good debt and bad debt, I categorized property as good and car loan as bad debt. Malaysians high household debt is caused by the high car price, which is not worth to have if comparing with a house. And, my previous article "Proton loves Perodua to avoid extinction?" highlighted the problems of local car industry which directly affecting our daily lives.

70% Loan to Value

On 3rd November 2010, Bank Negara Malaysia wishes to announce with immediate effect the implementation of a maximum loan-to-value (LTV) ratio of 70%, which will be applicable to the 3rd house financing facility onwards taken out by a borrower.

Financing facilities for purchase of the 1st and 2nd homes are not affected and borrowers will continue to be able to obtain financing for these purchases at the present prevailing LTV level applied by individual banks based on their internal credit policies.

Why?

The measure aims to support a stable and sustainable property market, and promote the continued affordability of homes for the general public. 

At the national level, residential property prices have increased steadily in tandem with economic development and the rise in income levels.  This aggregate growth trend remains largely manageable and has not deviated from the long term trend in residential property prices.  In the more recent period, however, specific locations, particularly in and around urban centres, have experienced faster growth, both in the number of transactions and in house prices. This is further supported by an increase in financing provided for multiple unit purchases by a single borrower, suggesting increasing investment activity that is of a speculative nature.

The targeted implementation of the LTV ratio is expected to moderate the excessive investment and speculative activity in the residential property market which has resulted in higher than average price increases in such locations. This has also led to increases in house prices in surrounding locations, thus contributing to the declining overall affordability of homes for genuine house buyers.  This measure therefore remains supportive of the objective of encouraging home ownership among Malaysians which continues to be an important national agenda.

Finance Malaysia:

A conservative move by BNM, to avoid dampening the whole property market, and at the same time taking pre-cautious measure to "deflate the mini property bubble". As FM mentioned before, Government should introduce a higher Real Property Gain Tax (RPGT) which could effectively curb excessive speculation. But, such move is not popular in view of the upcoming general election which could be held as soon as first half of 2011.

FM DO NOT think that the latest movement by BNM will have any effect on the market. This is because one could buy his/her 3rd house using his/her child or spouse name instead. Maybe this is an advantage of having many children?

Source: BNM website