Saturday September 25, 2010
COMMENT By THEAN LEE CHENG
EARLIER this year, a relative of mine managed to sell his Bukit Sentosa house after four years. Its closest town is Rawang. He decided to relocate back to Petaling Jaya. But property prices have gone up so much that he now has to rent. In his late 40s, he hopes he does not have to go on renting. But even if he were to get a suitable place, there may be problems with financing because of his age. This relative belongs to a group of people who will be retiring soon but who do not yet have a roof over their heads. He is what developers and bank officers would call “a genuine house buyer.”
With property prices going up since the second half of last year, what are his chances of having his own home? Dicey. Therein lies the problem in today’s property market. On one hand, there is the low interest rate. On the other is easy credit. Yet both are not helping him.
On the flip side, it is encouraging many to speculate. These two factors – low interest rates and easy financing – are supported by various schemes that are being promoted by developers. Among the most popular is the 5/95 scheme, or variations of it, which started early last year. A buyer merely pays 5% of the price of the house and does not have to pay anything until he takes the keys. All interest payments are “absorbed” by the developer (Psst! The interest is priced into the value of the house). Some schemes do not require mortgage payments until the sixth year of purchase.
One developer requires a downpayment of only RM5,000 and no more because it also offers a 10% rebate, which buyers can “use” on signing the sale and purchase agreement. No payment is required until completion of the property and this RM5,000 is used to pay for utility deposits and maintenance deposit. Whatever is left is “refunded” to the buyer. Such schemes encourage speculation.
While Singapore has banned them, developers here are still rushing to launch their projects using this form of financing. Early this week, there were talks of increasing down payments to 20% or even 30%. While this will not weed out speculation completely, it will serve as a deterrent. Such a move will also help the banking sector indirectly.
Out of every loan approved by banks today, one-in-three to one-in-two is a property-related loan. This compares with one-in-five prior to the 1997/98 Asian financial crisis. With such a huge exposure to the property sector, in the event prices become unsustainable, the banking system will be adversely affected.
At the beginning of the 21st century, US banks gave loans to home buyers who would normally not have been given credit. These borrowers were allowed to buy houses by paying slightly more than normal rates, often with floating interest rates that rise and fall with the general market. The relaxing of credit standards led to ever-increasing house prices. Many bought homes they could not afford, but assumed that the rising property market would help to cover their loan commitments, which would allow them to refinance later on, once the value of the house climbs up.
When the bubble burst, house prices fell and so did the banks. This became what is currently known as the US subprime mortgage crisis. With today’s easy credit and these 5/95 and 10/90 schemes, something similar seems to be happening here in Malaysia. There is also the absence of housing between the RM250,000 and RM300,000 price range. Even a studio apartment of about 650 sq ft can cost about half a million ringgit.
Developers justify their penchant for building high-end launches with the rising cost of building materials and the desire for lifestyle living. Not every one is seeking after that dream home. Certainly not that relative of mine.
Assistant news editor Thean Lee Cheng thinks it’s time to nip speculation in the bud.